Enterprise Risk Management as a prevention for business failure in Nigeria

Brief overview of the Nigerian business landscape

Nigeria, Africa’s largest economy and most populous nation, boasts a dynamic business environment rich in natural resources like oil, gas, agriculture, and minerals. Its economy features a diverse mix of large corporations, small and medium enterprises (SMEs), and a thriving informal sector.

However, Nigeria grapples with several challenges, including infrastructural deficiencies such as inadequate power supply, transportation and digital infrastructure. Bureaucratic hurdles, corruption, security concerns and regulatory uncertainties also hinder business operations and investment.

Despite its potential, Nigerian businesses must navigate these challenges alongside macroeconomic fluctuations, currency volatility and market competitiveness. Socio-political factors, regional disparities and demographic shifts further complicate the business landscape, posing challenges for both domestic and foreign investors.

The government has implemented various initiatives aimed at improving the business landscape and fostering economic growth. One notable effort is the Ease of Doing Business reforms initiated by the Federal government in collaboration with State governments and relevant agencies. These reforms target key areas such as business registration, property rights, access to credit, and contract enforcement, with the aim of reducing bureaucratic hurdles and enhancing the overall business environment (Ndukwe and Allison 88-96).

These include policies to boost local entrepreneurship and attract foreign investment, offering incentives like tax breaks and establishing special economic zones. The efforts aim to spur industrialization and job creation while diversifying the economy away from oil dependency, with increased investment in agriculture, manufacturing and renewable energy sectors. Additionally, infrastructure development, including transportation networks, power generation and telecommunications, have been prioritized to enhance competitiveness. Despite progress, sustained commitment to reforms, transparency and good governance are crucial to fully unlock Nigeria’s economic potential and create an environment for businesses to flourish.

Prevalence of business failures in Nigeria

Despite its vast potential and abundant resources, Nigeria continues to grapple with a high rate of business closures and bankruptcies across various sectors. This phenomenon not only undermines investor confidence and market stability but also impedes job creation, stifles innovation and hampers overall economic growth (Olubiyi).

Statistics reveal the severity of the problem. According to data from the World Bank, Nigeria has one of the highest rates of business discontinuation globally, with a substantial portion of new businesses failing within their first few years of operation. The World Bank’s Ease of Doing Business Index also highlights Nigeria’s poor performance in indicators related to starting a business, getting credit and enforcing contracts, indicating systemic challenges that contribute to business failures (World Bank Group 1-149), (Emeka).

Furthermore, below are hypothetical examples reflecting common issues faced by SMEs in Nigeria, including limited access to finance, infrastructure deficits, market volatility and regulatory challenges.

GreenLife Farms, an organic vegetable production agribusiness in Oyo State, Nigeria, initially thrived but encountered issues like water scarcity, high transport costs, and limited market reach. These challenges led to operational struggles and reduced profitability, prompting the farm’s closure in 2022.

TechGenius Solutions, an IT start-up in Lagos, Nigeria, provided web development and digital marketing services to small businesses. Despite initial success, the company faced cash flow problems, intense competition from larger firms, and difficulty retaining skilled staff, exacerbated by the economic downturn during the COVID-19 pandemic, leading to its closure in 2021.

FashionCraft Couture, a boutique fashion retailer in Abuja, Nigeria, known for its African-inspired designs, faced hurdles such as increased import expenses, currency fluctuations and shifting consumer preferences towards fast fashion. Despite attempts to diversify its offerings and marketing approaches, the company struggled financially and ceased operations in 2023.

Addressing challenges through targeted support and policy interventions is crucial for fostering SME resilience and growth, as they are essential for Nigeria’s economy and job creation. SMEs, serving as economic drivers, face obstacles like limited finance access, regulatory burdens, market volatility, and infrastructure deficiencies, leading to high closure rates.

Even large corporations in Nigeria face business failures, highlighted by cases of collapse, financial mismanagement, and governance issues. These instances not only incur economic losses but also diminish investor trust and confidence, emphasizing the need for improved risk management practices and regulatory oversight in the Nigerian business environment. Below are some identified reasons for small businesses failure in Nigeria (Olaitan).

1. Inadequate or lack of ideation and research
2. Lack of business roadmap with SMART (Specific, Measurable, Achievable, Realistic, Timebound) goals
3. Wrong investment decisions
4. Inadequate understanding of competition
5. Poor record keeping and accounting practices
6. Failure to adopt modern technologies
7. Inability to identify and focus on core operations or area of competitive advantage
8. Non-effective decision-making process

Enterprise Risk Management (ERM) and its relevance

Enterprise Risk Management is a strategic framework enabling organizations to comprehensively identify, assess and manage risks across all operational levels. Unlike traditional approaches, ERM takes a holistic perspective, recognizing the interconnectedness of risks and their impact on organizational objectives. By embracing ERM, businesses can proactively anticipate threats, seize opportunities and enhance resilience for sustainable growth.

The adoption of ERM signifies a shift in how businesses perceive and manage risk, encouraging them to view risk as an opportunity for innovation and growth. By integrating risk management into strategic planning, businesses can unlock value, enhance competitiveness, and safeguard against disruptions. In complex operating environments, ERM principles foster resilience, agility and sustainability in achieving organizational objectives.

Enterprise Risk Management is the optimal solution for improving business processes. But most SMEs lack formal ERM frameworks and rely on informal risk management practices. A proactive approach to risk management involving a comprehensive ERM framework and robust business processes is critical. The most widely recognized ERM frameworks include the Committee of Sponsoring Organizations of the Treadway Commission (COSO) ERM framework, the International Organization for Standardization (ISO) 31000 standard, and the Australian and New Zealand Standard AS/NZS 4360. Any of these can be tailored to the specific needs of SMEs in West Africa. Adopting a good ERM framework can improve the risk management practices of SMEs and enhance their competitiveness in the global market (Balla).

Enterprise Risk Management is defined by the COSO as a process designed to assure an organization’s stakeholders regarding managing risks that could impact its strategic objectives. The ISO 31000:2018 standard for risk management emphasizes the importance of a systematic, structured and integrated approach to risk management. It identifies the following principles for effective risk management: leadership, stakeholder engagement, risk assessment, risk treatment, communication and consultation, monitoring and review, and continual improvement (Balla).

ERM involves identifying, assessing, treating and monitoring risks, guiding organizations for optimal objective achievement. Alignment with strategy, comprehensive coverage, integration, risk assessment, response, monitoring, review, communication, and reporting are vital in any adopted framework. It fosters a risk-aware culture, promoting collaboration and informed decision-making to effectively allocate resources for risk mitigation. Continuous monitoring and reassessment of risks enable businesses to adapt to changing market dynamics and regulatory requirements in real-time.

ERM frameworks and standards offer a structured risk management approach customizable to meet organizational needs. Enterprises should select framework that aligns with its objectives, risk appetite and culture.

1. Effective ERM practice provides significant advantages for both SMEs and large organizations in Nigeria, enabling them to navigate challenges, seize opportunities and achieve sustainable growth. Implementing ERM enhances SMEs’ risk awareness, enabling them to identify and address various risks such as market volatility, financial instability and regulatory compliance, thereby minimizing their impact on business operations.
2. ERM provides SMEs with insights into potential risks, enabling informed decision-making regarding investments, resource allocation and market opportunities while mitigating threats.
3. By integrating risk management practices, SMEs enhance resilience to external shocks like economic downturns and natural disasters, ensuring business continuity through contingency plans and response strategies.
4. Adopting ERM practices improves SMEs’ access to financing from banks and investors, as effective risk management indicates financial stability and a lower risk level.
5. ERM implementation gives SMEs a competitive edge by enhancing reputation and trustworthiness among stakeholders, leading to increased customer loyalty and market share.
6. ERM enables large organizations to make strategic decisions confidently, aligning risk appetite with strategic objectives, optimizing resource allocation, and pursuing growth opportunities while mitigating threats.
7. ERM improves operational efficiency in large organizations by identifying and addressing inefficiencies, reducing costs and enhancing overall performance through streamlined operations and resource utilization.
8. ERM enhances stakeholder confidence through transparency, accountability and risk management excellence, strengthening relationships with investors, customers and regulators.
9. ERM helps large organizations build resilience against disruptions by developing robust risk management strategies and contingency plans, ensuring business continuity during economic downturns and other challenges.
10. ERM enables large organizations to create long-term value by identifying growth opportunities, innovation projects and expansion into new markets while managing associated risks effectively, driving sustainable growth and shareholder value.

Effective ERM practice provides a wide array of benefits for SMEs and large organizations in Nigeria, such as improved risk awareness, decision-making, resilience, access to finance, competitive advantage and stakeholder confidence. By prioritizing risk management, businesses can navigate challenges, seize opportunities and achieve sustainable growth in Nigeria’s dynamic business environment.

References:

Ndukwe, Oko.J and Allison, Patricia. “Good governance and ease of doing business in Nigeria:   problems and prospects.” International Journal of Academic Management Science Research, vol 5, issue 1, Jan. 2021.

Olubiyi, Timi. “Entrepreneurs: Overcoming business failure concerns.” Business Day,2 June  2020.

(World Bank Group 1-149), “Doing Business: Comparing business regulation in 190 economies.” 2020, documents1.worldbank.org

Emeka, Gibson, “Crucial to Nigerian Economy, Small Businesses Struggle to Stay Afloat.” Voice of America-VoA, 17 August 2023.

Olaitan, Abdulafeez, “8 Reasons Why Small Businesses Fail in Nigeria.” Applied Worldwide Nigeria, 19 October 2022, nigeria.appliedworldwide.com

Balla, Moussa Dioubate. “Enterprise Risk Management (ERM) Framework and Business Process: A Case Study of Small and Medium Enterprises (SMEs) in West Africa.” African Association of Entrepreneurs, 14 April 2023, aaeafrica.org/regional,