#1Financial System Strategy 2020 SMEs JAL FINAN SYSTEM STRATEG FSS 2020 2020 FSS 2020 International Conference SME: Issues, Challenges and Prospects. By Prof. Banji Oyelaran-Oyeyinka Director Monitoring & Research Division (UN-HABITAT) Visiting Professor, Innovation. Technology & Development. The Open Universit Banji Oyelaran-Oyeyinka#2FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Introduction ☐ SMEs are a very important part of the Nigerian economy. In countries at same levels of development with Nigeria, SMEs contribute a much higher proportion to GDP than currently observed in Nigeria Compared to other emerging markets, Nigeria has historically shown lack of commitment to building a strong SME sector; These economies have shown consistent commitment to the development of SMEs by implementing: access to finance and financial incentives, basic and technological infrastructure, adequate legal and regulatory framework, and a commitment to building domestic expertise and knowledge In light of recent events in the Nigerian macroeconomic environment, SMEs have compelling growth potential and like other emerging economies are likely to constitute a significant portion of GDP in the near future In this presentation, we will take a look at SMEs in Nigeria, some of the current challenges being faced and present a case for progress for SMEs in Nigeria 2 Banji Oyelaran-Oyeyinka#3FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 SMEs in Nigeria SMEs are broadly defined(¹) as businesses with turnover of less than N100 MM per annum and/ or less than 300 employees Studies by the IFC show that approx. 96% of Nigerian businesses are SMEs compared to 53% in the US and 65% in Europe SMEs represent about 90% of the manufacturing/ industrial sector in terms of number of enterprises, They contribute approx. 1% of GDP compared to 40% in Asian countries and 50% in the US or Europe In Nigeria, SMEs are distributed by clusters within regions 1 Definition sums up several Nigerian institution definitions of SMEs, i.e. Central Bank, Fed. Ministry of Industry, NASME 3 Banji Oyelaran-Oyeyinka#4FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 SME Contribution Manufactured Exports by SMEs Economy Year Definition of an SME (a) % SME manufacture exports Developing Economies Chinese Early <100 employees 56 Taipei 1990s China Early <100 employees 40-60 1990s Korea 1995 <300 employees 42.4 Vietnam Early <200 employees 20 1990s India 1991/199 <Rs 30 M 31.5 2 investment in plant & machinery Singapore Early <100 employees 16 Banji Oyelaran-Oyeyinka 1000#5FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 Oshogbo • Tie & Dye SME Clusters Abeokuta Selected Regional & Sectoral Distribution of SME Clusters BIRNN KEBBI KWARA KEBBI ILORIN OFFA OYO • Tie & Dye SME Clusters OGUN SOKOTO SOKOTO GUSAU ZAMFARA KONTANGORA NIGER MINNIA Kano • Leather SME Clusters KATSINA KATSINA KADUNA KADUNA FCT Lafia JIGAWA MAIDUGURI KANO DUTSE YOBE DAMATURU BORNU KANO JOS GOMBE BAUCHI BAUCHI GOMBE ADAMAWA PLATEAU YOLA JALINGO TARABA MAKURDI Aba • Leather, NASSARAWA OSHOGBO EKITE IBADAN ADO EKITI LOKOJA KOGI COSUN BENUE AKURE EDO IKEJA LAGOS CONDO BENIN CITY ASABA ANAMBRA Lagos • Otigba ICT SME Clusters DELTA ENUGU ENUGU ABAKALIKI EBONYI CROSS RIVERS ABIA IMO Nnewi • Automotive SME Clusters YENAGOA BAYELSA PORT HARCOURT RIVERS UYO AKWA IBOM CALABAR 5 Feather & Fashion SME Clusters Banji Oyelaran-Oyeyinka#6FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Opportunities outweigh Challenges Opportunities SMEs have significant untapped growth potential Strong export and employment potentials Challenges Huge gaps in infrastructure Poor financial support and credit environment High levels of unskilled workforce SMEs in Nigeria are currently distributed along sectors within regions; creating potential operational and cost synergies New growing sectors, such as entertainment and leisure clusters Low-Tech Sectors clusters: Footwear, clothing & garment, agro-processing (cassava, oil palm and other oils. High Tech clusters: ICTs, Telecom, and Biotechnology (agric and health) ☐ Low investment commitment to bring pilot plants to commercial scale 6 Banji Oyelaran-Oyeyinka#7FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Where we Are: Financial Input SMEs require improved financial support Studies show that Nigeria has a low amount of domestic investment through loans vis-à-vis other emerging markets Majority of the loans granted are issued to large corporates and governments Mostly Informal financing Total Loans as % of GDP (BMI, 2006) 19.7 54.3 47.2 104.1 94.0 Nigeria Kazakh Egypt South Africa Eurozone 2005 Survey: Lagos ICT & Nnewi Auto Clusters Sources of Funding Lagos Nnewi Result Private Banks 18% 19% Weak Development Banks 21% 29% Weak Govt. Credit 29% 0% Weak Friends 31% 38% ΝΑ Personal 50% 76% ΝΑ Banji Oyelaran-Oyeyinka#8FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Where we Are: Knowledge Input "It is a lack of investment in human capital, not a lack of investment in physical capital alone, which prevents poor countries from catching up with rich ones. Educational attainment and public spending on education are correlated positively to economic growth" - Benhabib and Spiegel, 1994 Import of physical capital is less costly than the domestic development of human capital and technical expertise R&D as % of GDP # Universities 0.3 2.1 1.8 2.7 Nigeria 75 Singapore 20 Taiwan Korea XX 415 1 XX XX Population (MM) (1) 154 2005 Survey: Lagos ICT & Nnewi Auto Clusters Human Capital Support Lagos Nnewi Result Secondary Education Weak Weak Weak Tertiary Education Weak Weak Weak Weak Weak Weak R&D Training Weak Weak Weak Skilled Manpower Weak Weak Weak 1 2007 IMF estimates 8 Banji Oyelaran-Oyeyinka#9FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 Where we Are Infrastructural Input : "Given adequate levels of investment in human capital, strong correlations exist between the rapid rates of industrialisation over the long term and the investments in physical capital" - Sanberg, 1962(1) Majority of private sector led initiatives outperform public sector led ones GDP/Capita ($) vs. Internet Users (2000) 800 600 400 200 Mauritius South Africa Botswana Gabon Nigeria 0 1,000 2,000 3,000 4,000 5,000 2005 Survey: Lagos ICT & Nnewi Auto Clusters 1 Paraphrased 9 Infrastructure Lagos Nnewi Result Good Good Good Internet Telephone Good Good Good Transport Fair Poor Poor Water Poor Poor Poor Electricity Poor Poor Poor Banji Oyelaran-Oyeyinka#10SYSTEM RATEGY FSS 2020 INANCIA FSS 2020 Ratings of Infrastructure Ratings by Otigba SMEs 120 100 80 60 60 60 40 40 20 20 Assessment of Physical Infrastructure Provision 0 Internet Telephone Roads Water Electricity 10 10 ப ப Bad Fair Good Banji Oyelaran-Oyeyinka#11FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Where we Are: Government Input Vital role of Government in providing an enabling environment for SMEs can't be overemphasized The more successful emerging markets have high rankings as a result of government support in enabling the private sector, and SMEs specifically SMEs surveys show weak overall support from Government Ranking (1) of Countries by Overall Govt. Support USA India Brazil Malaysia S. Africa Tunisia Egypt Nigeria Ecuador Benin Congo 0.0 0.2 0.4 0.6 0.8 1.0 2005 Survey: Lagos ICT & Nnewi Auto Clusters Support Systems Lagos Nnewi Result Govt. Incentives Weak Weak Weak Innovation Weak Weak Weak IT Support Fair Weak Weak Intellectual Property Weak Weak Weak Venture Capital Weak Weak Weak 1 Ranking index is based on overall Govt support through: Financing, Infrastructure, Knowledge, Policy 11 Banji Oyelaran-Oyeyinka#12FS 3.5 INANCIA 4.5 4 SYSTEM RATEGY FSS 2020 Need for Policy Support Constraints Faced By Nnewi SMEs Cluster 3 2.5 2 1.5 1 0.5 0 High Tariffs Custom formal Finance Info on source Import Duties SMES Severely Constrained حالا Multiplicity of Taxes High Rent Security of Lives 12 Banji Oyelaran-Oyeyinka#13FSS 2020 SYSTEM RATEGY FSS 2020 SMEs Constrained Constraints Faced by SMEs Firms in Aba Shoe Cluster Need for Policy Support 3.5 2.5 1.5 0.5 3. 2 1 bbulu 0. High tariff Custom formalities Finance Info on Import soursec Multiplicity High rent security of duties of taxes 13 13 properties Security of lives Banji Oyelaran-Oyeyinka#14FSS 2020 SYSTEM RATEGY FSS 2020 INANCIA Where we Are: Manufacturing/ Industrial Output Manufacturing as % of GDP Manufacturing as % GDP in Nigeria has averaged 3-7% over the last few decades Fierce competition for the Nigerian manufacturing sector come predominantly from Asia Manufacturing amongst Asian competitors account for 30-40% of GDP today SMEs today account for approx. 1% of total GDP and approx. 14% of total manufacturing contribution to GDP Studies show that <20% of SME manufacturers export Majority of exporters are experiencing decreasing levels of exporting due to competitive pressures from Asian counterparts 40 30 20 10 50 40 30 20 14 10 Nigerian levels: 3-7% 0 60's 70's 80's 90's 2000's Korea Taiwan Singapore Industries as % of GDP Nigerian levels: 3-7% 0 60's 70's 80's 90's 2000's Korea Taiwan Singapore Banji Oyelaran-Oyeyinka#15FSS 2020 INANCIA SYSTEM FSS 2020 RATEGY Where We Are ■ In the private sector, there is a two-stage lag behind these other countries in developing capabilities for competitiveness. ➤ Knowledge-resource accumulation is lagging 15-30 years behind depending on which country; There is the more obvious 20-25-year lag in general economic development. 15 Banji Oyelaran-Oyeyinka#16FSS 2020 SYSTEM STRATEGY FSS 2020 INANCIA Very severe Severe Fairly severe Weak severe Not severe The Asian Challenge Effect of Asian Challenge on Otigba Cluster 0.0 5.0 10.0 15.0 percent 20.0 25.0 30.0 35.0 16 Banji Oyelaran-Oyeyinka#17FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 The Asian Chalenge Perception of SMEs Perceptions of Market Access Strategies (%) Design (superior) Quality (high) Price (lower) Asia's Challenge Strategy of Enterprises in Otigba 87.07 12.93 85.10 14.90 90.00 10.00 Reliability in delivery/supply 70.11 29.89 Introduction of new products 87.31 19.69 177 17 Banji Oyelaran-Oyeyinka#18FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 United States Japan Sweden Germany United Kingdom Switzerland France Ranking on Innovation CI Korea, China Spain Spain Belgium Austria Hong Kong, China Netherlands Czech Poland Hungary Indiá Portugal Slovenia Turkey Slovak Greece Croatia Bulgaria South Belarus Ba New Tunisia Tunisia Russian Federation Lithuania Jordan Latvia Costa Rica Jamaica Argentina Egypt, Arab Inder 5% Chile Moldova Venezuela RB Kazakhstan Kyra Satelic Peru Nigeria Azerbaijan Syrian Arab Republic Gabon Panama Ecuador Benin Congo, Rep. 8 Knowledge Index 18 Banji Oyelaran-Oyeyinka#19FSS 2020 SYSTEM RATEGY FSS 2020 Competitiveness rating Where We Are on CI L 0 TCIPI Index in 2003 .2 .4 .8 • Denmark Netherlands. Switzerland United Kingdom Sweden Hong Kong, China Norway Portugal. Korea, Rep. Australia Ireland. Malaysia⚫ • Israel Belgium Spain Italy Germany New Zealand • Austria France Finland China • Greece South Africa • Slovenia Estonia Hungary Croatial Latvia Costa Rica Chile Slovak Republic Poland Philippinesgaria Jamaica Russia Jordan Tunisia Mexico Egypt, Arab RepTurkey RomaniazakhstaArgentina Vietnam. India Colombia Moldova Ecuador Venesa Guatemala Azerbaijan Syria Pakistan Czech Republic ⚫ Thailand • Canada • Japan Bangladesh Nigeria Congo Gabon z Republic 0 .1 .2 .4 .8. Mean TCIPI over 1990-2003 Source: Oyelaran- Oyeyinka (2006) United States. 19 Banji Oyelaran-Oyeyinka#20FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 Africa Compared Africa, East Asia, Latin America FDI Outflows as % of GDP Value Chain Presence 10 FDI Inflows as % of GDP Royalty and License Fees Payments (US$ mil.) Firm-Level Technology Absorption Private Sector Spending on R&D High-Tech Exports as % of Manuf. Exports Patents Granted by USPTO/Mil. People Patents Granted by USPTO Availability of Venture Capital Scientific and Technical Journal Articles / Mil. People Scientific and Technical Journal Articles University-Company Research Collaboration Royalty and License Fees Payments (US$/pop.) Royalty and License Fees Receipts (US$ mil.) Royalty and License Fees Receipts (US$/pop.) Science and Engineering Enrolment Ratio (%) Researchers in R&D Researchers in R&D / Mil. People Total Expenditure for R&D as % of GDP Manut. Trade as % of GDP 20 20 Banji Oyelaran-Oyeyinka#21FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 How To Compete: The China Example Create Enabling Financial Incentives and Policies Tax Policy ■ Four targeted electronics products Development Fund ☐ Exemption of production taxes, half of the income taxes and tariffs of key equipments ■ Pick up 10% of R&D expenses Exemption of importation taxes on significant imported projects Allocation of RMB100 million per year to support technology adaptation, technology and commercialization of the above four products Increase Investment in Infrastructure (2002-03) % Growth of total investments in infrastructure 122 93 87 80 62 52 Iron/ Steel Cement Automobile Textile Coal • • Strong commitment to core industries Increasing investments by almost 80% from the late 90s Increase Investment in Knowledge (RMB MM) Total R&D Investment 7,000 ■ Used as fund for several start ups 6,000 Subsidies ■ Allocation RMB200 million as loan subsidies to support the application of computers 5,000 4,000 3,000 2,000 Licences ☐ Importation licence management on computer and components 1,000 0 1997 1999 2001 2003 2005 221 Banji Oyelaran-Oyeyinka#22FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 Capability to Compete is based on Knowledge and Infrastructure Capacity Following Figures show that wealth generation is: ■ Inversely proportional to employment in agriculture; Positively related to technical enrolment in universities; Positively related to knowledge infrastructure (Internet users) ▪ Internet users are highly correlated with telephone use ■ Internet use is positively related to computer use 22 22 Banji Oyelaran-Oyeyinka#23FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 Figure: Agricultural Labour in GDP and per Capital Income Per Capita Income (2000) in USD 4000.00 3000.00 2000.00 1000.00 .00 0 20 40 60 80 100 23 % Agriculture Labour in 1990 Banji Oyelaran-Oyeyinka#24FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 Figure: Technical Subjects Enrolment in Universities and Capital Income Per Capita Income (2000) in USD 4000.00 3000.00 2000.00 1000.00 .00 .000 .050 .100 .150 .200 Technical Subjects Enrolement 24 224 Banji Oyelaran-Oyeyinka per#25FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 Internet Users Figure: Internet use and GDP per capita in USD (2000) 800 700 600 500 400 300 200 100 0 0 1000 2000 R = 0.6138 3000 4000 5000 GDP per capita (USD) 25 25 Banji Oyelaran-Oyeyinka#26FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 Internet Users Figure: Internet use and telephone density (2000) 1000 800 600 6000 400 200 0 0 50 100 150 Telephone Density 26 46 R² = 0.9346. 200 250 300 Banji Oyelaran-Oyeyinka#27FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 Current Initiatives Poised to Drive Growth Government deregulation of the real sector NEEDS Commissioning of several transport projects CBN led African Financial Corporation initiative Directive to increase National content Development of credit bureau EFCC, NAFDAC, NEITI Creation of free trade zones (Calabar and Lekki) [ ] [ ] 22 27 Privatisation of Government assets Regulatory bank capital allocation for SMEs Banji Oyelaran-Oyeyinka#28FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 But Require Systemic SME Business Framework Key building blocks for an enabling SME business environment include: Basic science and technology Knowledge Base Legal and regulatory structure Basic Physical and technological infrastructure Financial and incentive structures In Nigeria today, significant leadership is particularly required in these areas SME Business Framework IPR/ Patents Technological institutions Labour market Market orientation SME Firm Skilled workforce 28 Regulatory institutions Infrastructure Financing Banji Oyelaran-Oyeyinka#29FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 Systemic Functions for Supporting SMEs 1) Knowledge Support including targeted R&D and Design; 2) Competence building: formal and non-formal training in educational institutions and training of technical manpower in firms and organizations; 3) Supply of inputs, particularly finance for production and innovation and for the development of scientific, technical and managerial manpower; flow of Foreign Direct Investment FDIs, venture capital and loans; 4) Provision of regulatory frameworks and measures, standards and quality functions (such as product quality tests) and provision of incentives to develop new products and services; 29 29 Banji Oyelaran-Oyeyinka#30FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 Systemic Functions for Supporting SMEs 5) Facilitation of the exchange and dissemination of knowledge and information; 6) Stimulation of demand and creation of markets through govt procurement policies; 7) Reduction of uncertainties and resolution of conflicts through appropriate institutions, such as industrial arbitration. Banji Oyelaran-Oyeyinka 30#31FSS 2020 SYSTEM STRATEGY FSS 2020 National Economic System for Production and Innovation Framework Conditions Science Innovation Rules & Regulations policy policy Financial System Intermediaries Human capita Education & Training Firms R&D Firms system Large, small, MNCS, NTBFs, ... Incubators, Mentoring... MARKETS Business support Venture Capital 31 Banji Oyelaran-Oyeyinka#32FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Proposal: Broad Vision 1. Nurture 200 manufactured export SMEs distributed across sectors by 2020 ; 2. SMEs to contribute to increased employment, national income generation and export revenues: raise manufactured exports of SMEs to 10% by 2010; 20% by 2015; and 25% by 2020; 3. Expand domestic oriented SME, through: - - The creation of new and innovative firms; and The graduation of as many informal enterprises as possible into the formal sector. 32 Banji Oyelaran-Oyeyinka#33FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 Recommendations and Proposals (1)Short Time Must Do Now! Basic Infrastructure that is targeted; Designate SME Clusters as Priority Economic Zones (PEZS)for Infrastructure support including power, water and broadband. These include traditional technology clusters: leather works, agro-processing (cassava, oil palm, automotive components etc.. High-tech clusters include ICTs, biotechnology for specific products to solve health and food problems 33 Banji Oyelaran-Oyeyinka#34FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Promote High-Tech Industrial Clusters Establish a framework and A Fund Mechanism to raise the capability of local computer component assemblers; With private actors build high tech parks for hardware and computer software; Build Model technology Incubators within parks; Build on existing institutions such as NIPRID, SHEDCO etc to spin-off SMEs that draw on research from these organizations. Framework to move research into market using SMEs 34 Banji Oyelaran-Oyeyinka#35FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 ◉ Better Systems Coordination Establish a National Foundation for Innovation, and Competitiveness (NAFIC). It will comprise the CBN, Ministries of S&T, Industry, Finance, SMEDAN and NPC and located in the presidency; ■ The NFIC will include representatives of the private sector as well as international and national individuals appointed on their merit; Malaysia, the UK, India and Hong Kong among others have such bodies. 35 Banji Oyelaran-Oyeyinka#36FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 Knowledge of Sector In collaboration with other agencies: Deepen the knowledge of the sector through surveys and studies of SMEs; Organize periodic fora to bring together sectoral SME groups with suppliers, buyers etc.. Organize the Nigeria "SMEs on the Web" Project 36 Banji Oyelaran-Oyeyinka#37FSS 2020 INANCIA SYSTEM RATEGY FSS 2020 SMEs can Replicate Other Success Stories Tremendous growth in the SME sector can be achieved, with the right amount of economic enabling Successful case studies from the banking and telecom sectors show the growth potential inherent in unreformed business sectors Further impetus within the broader Nigerian socioeconomic environment provide a compelling case for the SME sector growth potential, such as aforementioned initiatives driving growth Strong growth in Banking (Agusto report, 2007) Total Banking Industry Loans and Advances (N Bn) 1,396 1,171 846 658 560 2002 2003 2004 2005 2006 Unprecedented growth in Telecoms Mobile phone subscriber base (MM) 35 30 25 22 37 36 0 20 15 10 5 Jan01 Aug02 Mar04 Oct05 Apr07 Banji Oyelaran-Oyeyinka#38FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 ... Nigeria is on the right track, but much still needs to be done to promote SMEs 38 Banji Oyelaran-Oyeyinka In Conclusion#39FSS 2020 INANCIA SYSTEM STRATEGY FSS 2020 2020 39 Thank You END Banji Oyelaran-Oyeyinka