Economies globally have witnessed inclusive growth through the Micro Small and Medium Enterprises (MSME). So, it apropos that MSME’s are the engine for economic growth. In African countries such as South Africa, Kenya, and our neighbours Ghana, small businesses contribute immensely to their respective economies in the form of innovations, job creation, tax remittance to the government, increase to the gross domestic product (GDP) and so on.
Industry, innovation and infrastructure serves as the basis for this article and it is no coincidence that it is also sustainable development goal 9 of the United Nations Development Program. At the Development Bank of Nigeria, providing access to credit is the primary objective because the financing constraints faced by the MSME segment have stifled inclusive growth in the country.
Collectively, this segment remains the largest employer of labour and based on SMEDAN’s report, there are over 41 million MSMEs contributing to over 50 percentage of Nigeria’s GDP. In the same breath, less than 5 percentage of these businesses have adequate access to credit through the financial system. Perhaps more importantly is the operating environment that businesses in this segment are faced with daily.
Ease of doing business and economic development
In my humble opinion, SDG 9 is perhaps at the heart of the MSME segment of the economy. It is my view that once Nigeria as a country can appropriately provide and deliberately follow/implement a blueprint in the context of providing the anecdote for safe guarding some industries from external competition i.e. textile and manufacturing as well as spurring innovation in other industries such as financial services, mining and quarrying, education and healthcare and certainly the much needed infrastructure development that will reduce the cost of business internally as well as aid in reducing key economic indices such as unemployment.
I sincerely believe other aspects that are wanting in the economy will automatically begin to take shape.
The nexus between ease of doing business and economic development can be explained in six main strands in entrepreneurship literature.
Exports
Asongu & Odhiambo (2018) opined an export-focused economic development strategy is based on market-oriented economic policies that provide enabling conditions for entrepreneurship and conducting business domestically. As such, the domestic business environment should also be competitive by means of cutting-edge technologies and participation in foreign markets.
Foreign reserves that are generated from export surplus are essentially used in stabilising the economy in times of both monetary and fiscal crises. Such stabilisation is necessary in order to attract future investments as well as prevent domestic entrepreneurs and foreign investors already operating in a country on the continent to leave. The economic environment in Nigeria has been predominantly driven by oil exports. Although the government has made some strides in its attempt to diversify away from crude with the Africa Growth an Opportunity Act (AGOA) strategy by primarily focusing on non-oil exports, such as agricultural products, we have witnessed some of the challenges that permit the countries response is hinged on improving innovation and infrastructure deficit.
Living standards
To be sure, doing business in Nigeria can contribute towards the improvement of living standards because entrepreneurs in any business environment pioneer and tailor innovations that enhance the overall living quality for employees, customers and other stakeholders in the community. Such innovations pertain to goods and services that are environmentally friendly as well as the development of smart cities. The underlying view of positive externalities of doing business and economic development is in accordance with literature on the importance of doing business in the delivery of public goods and reduction of poverty.
GDP and GDP per capita
Although axiomatic, doing business provides enabling conditions for increased GDP growth and GDP per capita. To be sure, doing business improves aggregate investments, consumption and exports which are constituents of the GDP. More importantly, the process of doing business employs factors of production such as; labour, land and capital that contribute to value-added goods and services which augment national income, national product and by extension, GDP per capita, especially when the national product is equitably distributed across the population. These associated positive economic externalities from doing business are consistent with a knowledge economy but more importantly with building the operating environment of the country.
Balanced development
Policies of setting-up businesses can be tailored to address concerns of unbalanced regional development in the perspective that entrepreneurs can be provided with incentives to locate and develop their businesses in localities and regions that are less developed. I firmly believe the corresponding positive development externalities associated with the establishment of new businesses which can contribute towards balanced regional economic development include: amelioration of transport infrastructure (e.g. roads, rail linkages and airports), employment avenues, and enhancement of private and public services such as stable electricity, schools, water supply and hospitals.
This cannot be overemphasised given the destabilisation of the north-eastern part of the country. One doesn’t need to imagine the lack of basic amenities residents of these communities are faced with daily because so many Nigerians face these challenges without the added misery of violent insurgency. So, in the spirit of building industries, innovating existing ones and finally improving on infrastructure, it is fitting that a balanced and more systematic approach should be taken.
Wealth sharing and creation
Providing credit that enables business continuity contributes to the creation and sharing of wealth in an economy. This is essentially because, in the establishment of a business, capital is attracted from a plethora of shareholders (i.e. banks, the public and investors) by entrepreneurs. Moreover, the process of creating a business does not exclusively mobilise wealth from the public, but also permits participating investors to share benefits from the transformation of new ideas into production processes with a pool of new capital. Ultimately, the process of business development leads to wealth creation and distribution among shareholders and stakeholders.
Employment opportunities
Naturally entrepreneurship and engaging in business activities provide an enabling environment for employment because the underlying business operations are associated with human capital which is materialised through job creation. Accordingly, job creation may be direct and indirect. On the direct front, it’s a means to self-employment, given that at least one worker or the entrepreneur is needed to manage the business operations. Regarding the indirect framework, many job seekers can be taken on board if the newly established business is characterised by complex frameworks of organisation and value creation. Moreover, the people employed are associated with other elements that increase economic development, notably: consumption in the economy and the payment of taxes.
In the light of the forgoing, improving access to credit for the underserved MSME’s can boost economic development by inter alia: creating opportunities for employment, increasing economic prosperity and GDP per capita, balancing economic development, especially through avenues of the creation and distribution of wealth accruing from economic prosperity and improving living standards. Unfortunately, there are many challenges in conducting business in Nigeria.
Over the past two decades, Nigeria has experienced unprecedented phases of economic liberalisation and implementation of policies designed to improve the ease of doing business conditions and by extension improve industries and infrastructure.
More importantly, this present administration has done commendable work in the same area. Whether it is the turnaround time in business registration or the cost of registering businesses, we have witnessed significant improvement in those areas. However, Nigeria as a country and Africa as a continent has also notoriously stood out from other regions of the world in doing business, which obviously has consequences on the lofty ambitions of unlocking the continent’s potential in the light of Agenda 2063 and the post-2015 sustainable development agenda (DeGhetto, Gray & Kiggundu, 2016).
A weak export sector and a large young population are awaiting opportunities for the creation of new businesses and expansion of existing ones. Accordingly, reforms are needed to address the corresponding challenges to doing business. Based on the experiences in our operations as the DBN, the challenges to doing business can be explained in four main strands. The concerns are expatiated in chronological order.
Issues related to the cost of starting a business and doing business
Although we have made some progress in this area in Nigeria, the cost of starting a business and doing business remains quite high, not only because there are numerous procedures, but also because the process of starting a business sometimes entails corrupt practices. Such high start-up costs entail registration and licensing requirements that are many (Abor & Quartey, 2010). This position is also supported by the broad literature on entrepreneurship in Africa (Eifert et al., 2008; Tchamyou, 2017; Asongu, 2017).
To be sure, the concern extends issues such as: cost of business start-up procedure; procedures to enforce a contract; start-up procedures to register a business; time required to build a warehouse; time required to enforce a contract; time required to register a property; time required to start a business; time to export; time to prepare and pay taxes, and time to resolve an insolvency (Asongu, Nwachukwu & Orim, 2018). The underlying issues pertaining to the starting and doing of business can be addressed by improving institutional and economic governance. Moreover, digitalising the process of creating a business as well as processes surrounding doing business, will substantially curtail the time needed for the improvement and execution of the business dynamics highlighted.
Infrastructure deficit
Cost of doing business remains high in Nigeria and many other African countries because of infrastructure deficit. For instance, here in Nigeria we cannot ignore the inconsistency in the power supply generation across the country. Businesses on average spend more on running generators to ensure production demands are met. However, there is an inescapable trade off with running generators to power one’s business. Businesses often find themselves at a competitive disadvantage with their peers operating in areas where electricity supply is steady.
Beyond power, we all experience the poor transportation systems making the movement of goods and services much more difficult within the country. In the light of the forgoing, encouraging the production and consumption of green energy and discouraging the consumption of fossil fuels (especially through subsidies) are some natural steps in the direction of decreasing incidences of shortages in energy and electricity across the continent.
Lack of access to finance
The lack of access to finance to MSME’s in the country is traceable to a multitude of factors, inter alia: affordability, physical access and information asymmetry between lenders and borrowers, high collateral requirements, inadequate managerial and entrepreneurial skills; application procedures for loans and so on. As a means of addressing this concern, credit reporting agencies have been proposed and are now operational in order to reduce the underlying asymmetric information.
Other issues plaguing the segment include unfavourable interest rates and tenor on loans which the DBN was chiefly established to be a catalyst to resolve. In this regard, there have been some improvement however, more needs to be done. In terms of innovation within the financial services sector, we should begin to TRUST again. Without trust, it will certainly be difficult to conduct business, so it is important to use the essential tools at our disposal to begin lending in a responsible manner. For instance, more utilization of the collateral registry for moveable assets, credit reporting agencies report should have a greater weight on each potential borrower and lastly, we can begin cashflow lending. In other words, let bankers begin to do the work of bankers.
High taxes and indirect taxes
To be clear, high and indirect taxes have been an impediment to MSME’s doing business in Nigeria. Although there is a big misconception on the amount of taxes paid by the MSME segment because of their unstructured nature and perhaps lack of formalisation. However, market operators have complained tirelessly about taxes being levied on their respective businesses at the local, state and federal levels in various forms causing limited growth in their respective businesses.
Perhaps, the Pioneer Status Incentive which was established by the Industrial Development (Income Tax Relief) Act, No. 22 of 1971 and is a tax holiday which grants qualifying industries and products relief from payment of corporate income tax for an initial period of three years, extendable for one or two additional years. I firmly believe better implementation efforts are needed by the relevant authorities to aid growth to the MSME segment. Quite frankly, Nigeria is a country with so many laws on the books, rules and regulations as well as policies that are often not understood and/or implemented. I believe we need strong institutions and not strong men to abide by the rules of the game.
In conclusion, the central thesis of this piece was on the effects of doing business in Nigeria in the context of SDG 9 which entails strengthening industry, expanding innovation and improving infrastructure. Nigeria as we know it is at a precipice which if not carefully managed will have significant consequences for generations ahead. We can pull ourselves off the cliff by deliberately repositioning the economy and remain focused on the agreed upon strategy. In the Nigerian experience, we have started countless initiatives and have moved away from it based on a lack of short-term gain or perhaps a change in government.
We have a new challenge now which in my view has come home to roost. That is, unemployment. Specifically, the youth unemployment which is a monumental challenge that must be tackled. To begin to address some of the obstacles prohibiting gains in the area of industrial and infrastructure development as a nation, we have to first accept the notion that our institutions and infrastructure are fragile and industries are at a competitive disadvantage with other peer countries because right now, in my view, as a country we operate as if the operating environment is conducive for increased foreign direct investment flows (FDI) and so on which is clearly not the case.
On a finale note, I have made an attempt to add to the discourse on development economics in Nigeria and my hope is some of the ideas presented will broaden our understanding of the MSME segment but more importantly critically examine practical steps to resolve some of the obstacles that prohibit growth in the country.
JOSEPH NNANNA
Prof. Nnanna is the chief economist at Development Bank of Nigeria
