Nigeria’s Business Environment in 2011: the Prospects and Challenges for Micro, Small and Medium Enterprises (MSMES) Development

This article unveils the prospects and challenges of Nigeria’s business environment for potential micro, small and medium scale enterprises (MSMEs) and academics. It is essentially an analytical article, but enriched with secondary data from previous studies and surveys on Nigeria. The article discusses the country’s profile and its macro-economic indicators. Other sections address the legal and regulatory requirement for doing businesses in Nigeria,  the enabling environment created for SMEs to thrive by government agencies and presentation of the plethora of problems and challenges facing businesses (small, medium and large) in their genuine quest for profitability and national development.

The roles of industrial associations/support agencies are also show-cased in the paper. The article concludes clearly that Nigeria’s business environment is conducive and investment-friendly despite the various challenges, which on their own open the floodgates to other investment opportunities

Country Profile

Nigeria is a federation of thirty-six (36) states and a federal capital territory in the heart of Abuja; a nation blessed with oil resources, flora and fauna. The name Nigeria first appeared in “The Times” on January 8, 1897, in an essay written to the British Protectorate on the Niger River by Dame Flora Louisa Shaw, who later married Lugard and became Lady Flora Lugard. She recommended the name in her article because it was a shorter nomenclature for describing the territories under the control of the Royal Niger Company. She thought that the term “Royal Niger Company Territories” was too long to be a name, while the appellation “Central Sudan” was also vague and unattractive, though used often by some geographers and adventurers to describe the area. The name Nigeria therefore was an amalgam of the words “Niger” (the country’s longest river) and “Area” (the territories under British influence).

On October 1, 1960, Nigeria gained its independence from the British with great hope, pomp and pageantry. It became a federation of three regions under the leadership of foremost elder statesmen like Nnamdi Azikwe, Abubakar Tafawa Balewa and Obafemi Awolowo to mentions a few. Under the constitution handed down by the British, each of the three regions retained a substantial measure of self-government and autonomy. The federal government was given exclusive powers in defense and security, foreign relations, and commercial and fiscal policies. In October 1963, Nigeria altered its relationship with the United Kingdom by proclaiming itself a federal republic and a new constitution was promulgated to that effect. A fourth region (the Midwest) was established that year. For over fifty years of independence, the country has had its share of prosperity and adversity.

Nigeria according to popular rating is the most populous country in Africa, accounting for about 47% of West Africa’s population, with a growth rate of 2.4% per annum. It is referred to as the giant of West Africa in that; one in every two West Africans is a Nigerian. The country’s GDP is larger than that of all the other countries in West Africa combined. Its GDP is actually larger

Federal Republic of Nigeria, as it is officially called, is located in western Africa on the Gulf of Guinea with a total area of 923,768 km2, thus making it the world’s 32nd- largest country after Tanzania. It shares a 4,047 kilometres border with Benin (773 km to the West), Niger (1497 km to the North), Chad (87 km to the East), Cameroon (1690 km to the East), and has a coastline of at least 853 km on the Gulf of Guinea on the Atlantic Ocean. Nigeria is the most populous nation in Sub-Sahara Africa with a population of 149,229,090 million people and more than 250 ethnic groups. Interestingly, one out of every four black persons is a Nigerian. However, the composition of the population is in the main youthful, with over 58% as young people below 18 years, and an increasing dependency ratio estimated at 87.7%. A large proportion of this population is living in the rapidly expanding urban area, presently estimated at over 42.2% and will likely hit 55.4% mark by the year 2015. Nigeria officially recognises Islam and Christianity as the official religions, but there are minorities that practice traditional religion. The country has more than 250 ethno- linguistic groups, but the three dominant and most influential ethnic groups are the Hausas in the North, the Ibos in the Southeast and Yorubas in the Southwest.

Macro-Economic Data on Nigeria’s Business Environment

Nigeria exhibits the traits of a dual economy: a modern sector heavily dependent on oil earnings side-by-side a traditional agricultural and trading economy. During the colonial era, cash crops were introduced, harbours, railways and roads were developed, and a market for consumer goods began to emerge. At independence in 1960 agriculture accounted for well over half of GDP, and was the main source of export earnings and public revenue, with the agricultural marketing boards playing a leading role. This leading role in the economy has been taken over by crude oil. Table 2 gives more insight into the performance of the economy.

Table 1: Nigeria: Performance of the Economy, 2000 – 2010 
            
 20002001200220032004200520062007200820092010
 
Real GDP Growth3.83.53.537.16.26.95.36.45.3 
(%) 
           
Population Growth2.672.612.542.532.452.372.382.3792.0251.99 
(%)           
Unemployment3.628.028.028.028.04.92.90 %5.804.94.94.9
Rates (%)           
Manufacturing           
Capacity36.142.754.956.0555.755.8853.354.6   
Utilisation (%)           
Inflation Rate (%)6.916.6 14.2013.8016.5013.5010.505.4011.6011.50
         
            
Source: The Central Bank of Nigeria, 2000-2010     

From the table above, Real GDP in 2000, 2001, 2004, 2007 and 2009 were 3.8, 3.5, 7.1 and 5.3 respectively. This indicates a sustainable economic growth in Nigeria. The dividend of real GDP growth has however not been judiciously used for economic development of the country. The capacity utilisation of the economy from 2000 to 2009 fluctuated between 36% and 50%. This has been blamed largely on frequent power outages, lack of funds to procure inputs, fallen demand for manufactures and frequent strikes and lockouts by workers and employers. From 2001 the, there were notable improvement occasioned by favourable government policies on manufacturing geared towards self-sufficiency, employment generation and export promotion.

Nigeria maintains a good profile among the comity of nations. It currently listed among the “Next Eleven” emerging economies, and is a member of the Commonwealth of Nations. The Nigerian is one of the growing economies in the world, with a growth of 9% in 2008 and 8.3% in 2009. In the same token, International Monetary Fund (IMF) remarked that Nigeria is the third fastest emerging economy in the world after China and India, as a result of its growth rates which rose from 6.9 per cent in 2009 to 7.4 per cent in 2010. It is also believed to be the prominent exporter of oil in Africa and formidable regional power in West Africa. The following are the growth rates of major sectors in Nigeria for 2008-2009.

Table 1: Growth Rates of Major Sectors in Nigeria, 2009

Sector2008 (%)2009 (%)
Agriculture6.36.2
Mining and Quarrying-5.9-1.0
Manufacturing8.98.5
Electricity, Gas & Water4.03.6
Construction13.112.9
Wholesale & Retail Trade, Restaurants, Hotels14.011.6
Finance, Insurance, Real Estate, etc.6.86.4
Transport and Communications19.320.9
Public Administration and Defense4.44.5
Other Services10.310.0

Source: African Statistical Yearbook 2010 by African Development Bank

Legal Framework

All business enterprises (small, moderate or large) must statutorily be registered with the Registrar-General of the Corporate Affairs Commission (Registrar of Companies in Nigeria). Therefore, any investor, be it local or foreigner, planning to set up any type of business (be it service-oriented or product-oriented) in Nigeria should take all steps necessary to obtain local incorporation of their companies, as this process would afford the investors many opportunities and incentives apart from the benefit of legality that incorporation confer. Business activities may be undertaken in Nigeria under the following models:

i.Private or Public limited liability company;

ii.Unlimited liability company;

iii.Company limited by guarantee;

iv.Foreign Company/Subsidiary of foreign company;

v.Partnership/Firm;

vi.Sole Proprietorship; and

vii.Incorporated trustees and Representative office.

To formally register any of the above-mentioned business enterprises, the promoters must meet the provisions of Companies and Allied Matters Act (CAMA), 1990. The Companies and Allied Matters Act, 1990 is the principal law regulating the incorporation of businesses. The administration of the Companies Act is under-taken by the Corporate Affairs Commission (CAC) and its functions include:

i. the regulation and supervision of the formation, incorporation, registration, management and winding up of companies.

ii.the maintenance of Companies Registry;

iii.the conduct of investigation into the affairs of any company in the interest of share-holders and the public.

PLETHORA OF CHALLENGES OF NIGERIA’S BUSINESS ENVIRONMENT

Nigeria despite its abundant natural and human resources, which we discussed earlier on as motivators and attraction for local and foreign businesses is faced with some challenges which in the recent years have surged appreciably cause serious set-backs to existing and newly established businesses (large and small). With specific reference to the SMEs, they are faced frequently harassment from the government officials who extorted money from their businesses. In addition, there is paucity of infrastructure including bad roads, water shortage, erratic supply of electricity, and poor telecommunication system. Added to the above discouraging challenge is difficulty accessing bank credits, but the most serious and damaging problem threatening the state of entrepreneurship in Nigeria is a lack of government interest and support for micro, small enterprises.

Furthermore, the Business Environment and Enterprise Performance Surveys (2007) identified fifteen (15) critical challenges facing businesses in Nigeria. These include: access to finance, access to licenses/permit, corruption, courts, crime/theft/disorder, customs & trade registration, electricity, inadequately educated workforce, labour regulations, political stability, practices informal sector, tax administration, tax rates and transportation. The responses of the firms have also been clearly analysed according to operational sizes (small, medium and large).

 Table 3: Critical Challenges Facing Businesses In Nigeria 
 Challenges of SMES in NigeriaNigeriaSmall (%)Medium (%)Large (%)
 (%)
     
 Access to Finance15.5517.0111.523.90
 Access to Land2.852.703.382.85
 Licenses & Permits0.570.580.600.00
 Corruption1.872.131.120.00
 Courts0.000.000.000.00
 Crime, Theft & Disorder2.071.643.404.33
 Customs & Trade Registration1.311.092.230.00
 Electricity63.6362.6665.5078.78
 Inadequately educated workforce0.310.320.320.00
 Labour regulations0.090.070.200.00
 Political instability0.700.790.450.00
 Practices Informal Sector1.050.921.660.00
 Tax Administration0.280.120.493.48
 Tax Rates2.242.112.702.49
 Transportation7.497.886.424.16

Source: Business Environment and Enterprise Performance Surveys, 2007.

The challenges faced by entrepreneurs in Nigeria in comparison with other Sub- Saharan African countries are provided by BEEP/World Bank 2007. These are shown in figure 1 below.


Source: BEEP/ World Bank, 2007

INDUSTRIAL ASSOCIATIONS & SUPPORT AGENCIES IN NIGERIA

An Industrial association can be defined as an association that supports and protects the rights of a particular industry and the people who work in that industry Business (English Dictionary, 2010). Industrial associations in Nigeria lobby and urge governments or its agencies to take stronger action on things affecting their members or their line of interests. Those active in the Nigerian business environment include:

i.National Association Of Small And Medium Enterprises (NASME)

NASME is a private sector organization in Nigeria which brings together Small and Medium Scale enterprises (NASME) fm across the country. It is devoted to networking, capacity building; policy advocacy and promotion of the performance of its member firms and operators. It works consistently to improve the welfare of its members. It was registered in 1996 as a Business Membership Organization (BMO) to coordinate and foster the promotion of Micro, Small and Medium Enterprises (MSMEs) in Nigeria.

ii. Nigerian Association of Small Scale Industrialists (NASSI)

This association was established in 1978 to cater for the needs of the Small Scale business industrialist through the provision of Socio-politico economic support for the members. It is has numerous functions. First and foremost, the body organizes workshops, conferences, exhibitions, trade-fairs, study tours and also provides advisory services to the members. Secondly, it was to provide information on sources of raw materials, market situations, plants and equipments and the required manufacturing standard. Thirdly, the body grants micro credit facilities to members and sometimes stands as sureties for bonafide small and medium enterprise (SME) in their relationship with development finance institutions. Fourthly, the association links up its members with various opportunities and development assistant both at home and abroad. Fifthly, the body serves as the mouthpiece of members in advocacy capacity against unfavourable public policies.

iii.Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA)

NACCIMA was founded in 1960 as a voluntary association of manufacturers, merchants, mines, farmers, financers, industrialists, trade groups who network together for the principal objectives of promoting, protecting and improving business environment for micro and macro benefits. The body performs many functions. One, the body provides a network of national and international business contacts and opportunities. Two, the body promotes, protects and develops all matters affecting commerce, industry, mines and agriculture and other form of private economic activities by all lawful means. Three, the body promotes, support and oppose legislative and other measures affecting commerce, industry, mines and agriculture in Nigeria. Fourth, the body contributes to the overall economic stability of the community. Fifth, it encourages an orderly expansion and development of all segments of community. Sixth, the body contributes to the social, political and economic development of Nigeria.

iv.Manufacturers’ Association Of Nigeria (MAN)

This was formed as a company limited by guarantee to perform important roles on behalf of its members as well as the development of the country. It sectoral groups include food, beverages, and tobacco, chemicals and pharmaceuticals, domestic and industrial plastic, rubber and foam, basic metal, iron and steel and fabricated metal products, pulp, paper and paper products, printing and publishing, electrical and electronics, textile, wearing apparel, carpet, leather and leather footwear, et cetera. The Manufacturers’ Association of Nigeria performs so many functions. The body encourages a high standard of quality for members’ products through the collection and circulation of useful information and the provision of advice. Secondly, it encourages the patronage of Nigerian made products by Nigerians and by consumers in foreign countries. Thirdly, it develops and promotes the contribution of manufacturers to the national economy through government. Furthermore, it provides the manufacturers in the country with information on industrial, labour, social, legal, training and technical matters.

v.Nigerian Employers Consultative Association (NECA)

It is the umbrella organization for employers association of Nigeria and was founded in 1959 with its memberships drawn from the private and public sector employers associations. It performs many roles in Nigeria. Firstly, it promotes and encourages any technical or other forms of education for the development of employees. Secondly, it assists in the maintenance and promotion of good relations between members and their employees. Thirdly, the body encourages the payment of equitable rates of wages and salaries to the employees. Lastly, it promotes influences, modifies or seeks the repeal of legislative and other resources affecting or likely to affect the employers.

vi.Small and Medium Enterprises Agencies of Nigeria (SMEDAN)

This is a “One stop shop” for micro small and medium enterprises development. SMEDAN was established by the SMEDAN Act of 2003 to promote the development of the MSME Sector of the Nigeria economy. Its mission is to

facilitate the access of micro, small and medium entrepreneurs/investors to all the resources required for their development.

SUPPORT AGENCIES IN NIGERIA

Support agencies in Nigeria refer to public and private agencies that provide support for enterprises in areas related to production and product development, financial management, administrative and human resource systems, institutional and organizational design, technology upgrades, and product presentation through marketing materials and product display. The interventions of support agencies are offered through advocacy, workshops, financial support, technical advice and trainings. Some of the support agencies in Nigeria include:

i.Traditional Micro-Finance Institutions

Before the emergence of formal microfinance institutions, informal microfinance activities flourished all over the country. Informal microfinance credit is provided by traditional groups that work together for the mutual benefits of their members. These groups provide savings and credit services to their members. The informal microfinance arrangements operate under different names: ‘esusu’ among the Yorubas of Western Nigeria, ‘etoto’ for the Igbos in the East and ‘adashi’ in the North for the Hausas. The key features of these informal schemes are savings and credit components, informality of operations and higher interest rates.

ii.Community-Based NGOs

Community-based NGOs provide micro credits to their members in order to keep their businesses going, few of these institutions are: Farmers’ Development Union (FADU) Ibadan; Community Women and Development (COWAD) Ibadan; Country Women Association of Nigeria (COWAN) Akure; Life Above Poverty (LPO) Benin; Justice Development and Peace Commission (JDPC) Ijebu-Ode; Women Development Initiative (WDI) Kano; Development Education Centre (DEC) Enugu; Development Exchange Centre (DEC) Bauchi; Outreach Foundation (OF) Lagos; and lastly Nsukka Area Leaders of Thought United Self-Help Organization (NLTNUSHO), Nsukka.

iii.National Directorate of Employment (NDE)

The National Directorate of Employment (NDE) was established to give training opportunities to the unemployed, especially the youth, by providing guidance, finance and other support services, to help them create jobs for themselves and for others. A major problem of the programme has been inadequate funding. Nearly two million people have benefited from the NDE programmes (Ibid).

vii.National Poverty Eradication Programme (NAPEP)

This programme which commenced in 2002, is aimed at poverty eradication and empowerment. There are four major intervention schemes in Nigeria’s current poverty eradication programme. One of them is targeted at youth – the Youth Empowerment Scheme (YES). The brochure describing the YES programme emphasizes that YES is more than an employment scheme as it is aimed at the provision of training opportunities, skill acquisition, employment opportunities, wealth creation through enhanced income generation, improved social status and rural development. It is primarily aimed at the economic empowerment of youth. Despite the massive tax payers’ money appropriated to NPAPEP poverty and destitution is still waxing stronger in Nigeria.

viii.Micro Finance Institutions (MFI)/Micro Finance Banks (MFB)

These are set up to meet the credit needs of the rural and urban poor, artisans, farmers, petty traders, vehicle mechanics, etc. Central bank of Nigeria gave a directive to all erstwhile Community Banks were converted to MFI in December 2006 through recapitalization to meet the new guidelines for setting up of MFI. In Nigeria, there are many MFI or MFB providing easy and cheap micro-credits to small business owners in Nigeria.

ix.Community Banks

This is a defunct financial institution. While operational, the community banks were designed around the informal mutual savings and loan associations operating in rural areas. Organized by the government sponsored National Board

of Community Banks (NBCB), these financial institutions are meant to be self- sustaining and managed by communities to provide credit and deposit banking facilities. These banks use the strong local networks present in many rural areas of Nigeria and community boards are generally drawn from respected leaders within the community.

x.Small and Medium Industries Equity Investment (SMIEIS)

The Bankers’ Committee took a decision that 10 per cent of the funds accruing to the Small and Medium Industries Equity Investment (SMIEIS) would be channeled to micro enterprises through registered microfinance institutions. Under the SMIEIS arrangement, banks in Nigeria agreed to set aside 10 per cent of their pre-tax profit annually for equity investment in small and medium industries. In December, 1999, the Small and Medium Industries Equity Investment Scheme (SMIEIS) was initiated, conceived and designed by the Bankers’ Committee at its 246th meeting. The scheme has not been very successful because it has a lot of conditionalities attached to access, hence the utilization rate of the accumulated fund in only 3 per cent (Inegbenebor, 2006).

xi.Raw Materials Research and Development Council (RMRDC)

This is an agency of the Federal Government of Nigeria vested with the mandate to promote the development and utilization of Nigeria’s industrial raw materials. First mandate is to draw up policy guidelines and action programmes on raw materials acquisition, exploitation and development. Second mandate is to review form time to time, raw material resources availability and utilization with a view to advising the federal government on the strategic implication of depletion conservation or stock piling of such resources. Third mandate is to advise on adaptation of machinery and process for raw materials utilization. Fifth mandate is to provide special research grants for specific objectives and service awards or systems for industries that achieve breakthrough or make innovations and inventions. Fifth mandate is to encourage the publicity of research findings and other information relevant to local sourcing of raw materials.

xii.Nigerian Export-Import Bank

The Nigerian Export-Import Bank (NEXIM) was established by Act 38 of 1991 as an Export Credit Agency (ECA) with a share capital of N50, 000,000,000 (Fifty Billion Naira) held equally by the Federal Government of Nigeria and the Central Bank of Nigeria. The Bank which replaced the Nigerian Export Credit Guarantee & Insurance Corporation earlier set up under Act 15 of 1989, has the following main statutory functions: One, provision of export credit guarantee and export credit insurance facilities to its clients. Two, provision of credit in local currency to its clients in support of exports. Three, establishment and management of funds connected with exports.

xiii.Nigerian Economic Summit Group (NESG)

The Nigerian Economic Summit Group is a private sector think-tank body established to facilitate and carry out all activities that lead to the implementation of acceptable policies for the economic growth and development of Nigeria. The aim of the NESG is to create an enabling environment conducive to good governance, responsible private sector investment and sustainable economic growth. The priority of the NESG is to promote a private sector driven economic growth. The NESG vision is to become “Nigeria’s leading private sector think tank committed to the development of a modern globally competitive economy.

xiv.Nigerian Export Promotion Council (NEPC)

This council was established in 1976 and formally inaugurated in March, 1977 through the promulgation of the NEPC Act. In order to minimize the bureaucratic bottlenecks and increase autonomy in dealing with members of the organized private sector, the act that set it up was amended in 1992 through a decree. It has as it is goal the promotion of the non-oil export sector as a significant contributor to Nigeria’s GDP, facilitates opportunities for the exporters to promote sustainable economic development. If you your production is export- driven go to NEPC.

xv.Federal Institute of Industrial Research, Oshodi

The primary objective of FIIRO is to assist in accelerating the industrialization of Nigerian economy through finding industrial utilization for the country’s numerous raw materials and upgrading indigenous production techniques. Some government agencies, private organisations and non-government international organisations do approach the Institute to carry out innovative research works that would be of benefits to the society.

xvi.Nigeria Investment Promotion Commission (NIPC)

This agency was established in 1995 to co-ordinate, monitor, encourage and provide necessary assistance and guidance for the establishment and operation of enterprises in Nigeria.

xvii.Contribution of Development Partners – UNDP

The United Nations Development Programme (UNDP) is on ground in more than 400 communities in the 36 states of Nigeria including the Federal Capital Territory. It is assisting to build capacity to manage the economy and to fight poverty. One of the four programmes supported by the UNDP is Job Creation and Sustainable Livelihood. Micro credit delivery aims at increasing access of communities to small loans and other productive inputs to empower them and expand their livelihood opportunities. From the foregoing, discussion it clear that industrial associations and support agencies provide monumental assistance for entrepreneurial development in the forms of training, logistics and funding for their members, clients and support-seekers.

Conclusion

The business environment in Nigeria is robust and business-friendly despites some of the challenges mentioned above. The government at all levels are working assiduously at redressing the power problem, multiple tax structure and bureaucratic delays in policy implementation with regards to businesses and corruption. Despite all odds, Nigerians remain “Good People, Great Nation”.

By Mr. Raimi, Lukman
Lecturer, Centre for Entrepreneurship Development (CED),
Yaba College of Technology,
Lagos, Nigeria, West Africa
Phone: 9558389876 (India)