This research work seeks to know the impact of Small and Medium Scale Enterprises (SMEs) and poverty alleviation in Nigeria. That is, seeks to achieve some of the objectives of national poverty eradication programme (NAPEP). Its wealth creation capacity, its job creation and general socio-economic empowerment roles cannot be overemphasized. Agagu (2004) recently highlighted the crucial role of SMEs as serving as a source of income and also providing employment opportunities for others and contributing to economic growth. He describes SMEs as an antidote for rapid socio-economic development. Small scale business has provided almost seventy percent (70%) of employment to able-bodied men and women in Nigeria and in long run alleviate poverty. It encourages indigenous entrepreneurship, regional economic balance through industrial dispersal, including rural areas, moderation of rural-urban migration and production of international goods for use in large enterprises. Thus, the study intend to fundamentally address the factors that necessitate the establishment of small scale businesses; role of small scale business enterprises in the economic development of Nigeria; major characteristics of small scale business enterprises; and problems militating against the smooth operations of small business enterprises in Nigeria.
Small and Medium Scale Enterprises (SMEs) plays a very vital role in the economic growth and development of any relation. In Nigeria, it is now realized that the large scale enterprises left alone would not be able to fast track the needed development and growth challenges that would project Nigeria as one of the first 20 most viable economies in the world by the year 2020. Therefore, it becomes very imperative for the development of the SMEs in order to take care of especially the rural developmental needs and the harnessing of the thought insignificant raw materials into the production of goods that can serve the very urgent needs of the entire middle and lower classes in Nigeria. Nigeria today, currently estimated about twelve (12) million businesses of all sizes located in various parts of the country, out of which, small businesses clearly account for over seventy percent (70%) of industrial employment, (World Bank, 2008).
The National Economic Empowerment and Development Strategies (NEEDS) documents states that the country is totaled on an average growth rate of 10% higher than 3% per annum for most of the decades following the discovery and expectation of all (NEEDS 2004: 28). The slow economic growth and sustainable development has been traced to (NEEDS 2004: 31) to a number of factors. These include macro-economic policy goals, public sector dominance in production and consumption; perverse rent-seeking and corruption facilitated by government being hub of economic activities. Other challenges facing our sustainable human development efforts are infrastructural inadequacy and decay, weak institutional capacity for economic policy management and coordination, unsuitability of public finance at all levels of government. As can be seen, some of these challenges are institutional, while others are due to disharmony between goals and means.
Conceptual and theoretical issues
The dynamic role of small and medium enterprises as engine of growth in developing countries has long been recognized. Its accelerative effect in achieving macro objectives such as full employment, income distribution, development of local technology as well as diffusion and management skills and stimulation of indigenous entrepreneurship, and poverty alleviation have been documented in economic literature. It estimated that SMEs employ 22.0 percent of the adult population in developing countries, like Nigeria (Daniels, 1994).
Despite the realization that SMEs are the growth engine of the nation and policy thrust had hitherto not been focused on its growth and development. The ministry of trade and investment as the coordinating body for the promotion of industrial development is currently developing a new policy to promote SMEs development as a more appropriate strategy for achieving the nation’s targets for industrial self-reliance, employment generation and poverty alleviation. This policy, if implemented, will ultimately support the revival of the manufacturing sector, Clive (2000).
Based on the policy thrust, the new focus will be the promotion of rural industrialization in all the 774 areas councils on Nigeria, through SMEs in order to achieve the followings:
- Resources located industries mostly are agro-based, agro-allied and agric-industries.
- Extraction industries with focus on solid minerals.
- Rural market town industries that would focus on raw materials processing and implement fabrication.
- Traditional primary industries like crafts, cottage enterprises clusters and cottage tourisms.
- Urban periphery industries, depending on urban labour and workers form adjoining villages (Clive, 2000).
The contribution of SMEs on poverty alleviation in Nigeria economically and socio-potentially, For any economy to experience tremendous growth, there must be both large and small firms which play complementary role through backward and forward linkages. The roles of SMEs in our Economy could be seen from the area of employment generation and poverty alleviation. This is because over 50% percent of the labour force in the country has been gainfully employed in SMEs, (Musa, 1999)
Adebusiyi (1997) posited that small scale enterprises provide an effective means of stimulating indigenous entrepreneurship. He further stated that they facilitate greater employment creation per unit of capital employed and also aid the development of local technology. He further says that small scale industries serve as veritable means of increasing efficiency. Through cost reduction and improved flexibility, through their wide dispersal, rural migration and promoting of the use of local resources.
It is thus clear that SMEs are individually and are concert have very crucial role to play in the process of poverty especially in a capital scarce economy like Nigeria. Therefore, the search for this basic, is an ingredient for attaining the above lofty objectives, has been the very concern of Nigeria government over the years (World Bank, 1995).
Theories of poverty
Individualistic Theory: The individual attribute theory is of the view that the poor are the architects of their misfortune. The attributes exhibited by the poor argues Uniamikogbo (1997) are sometimes within a structure of possibilities and limits defined by forces outside the scope of the individual.
The Culture of Poverty: The emphasis on fatalism and resignation by the theory which explains the situation of the poor in colonial or early stages of capitalism suggests that even if the poor as argued in Transition Events in the Dynamics of Poverty (n.d.) have the ample opportunities for improving their welfare, they lack the initiative and diligence needed to take advantage of such opportunities.
Situational Theory of Poverty: The theory holds that people are poor due to the fact that they find themselves in a situation of ‘no’ resource and opportunities for them to advance their welfare. It lays emphasis on the structural conditions that lead to poverty and at the same time focuses on the individual response to the objective situation of poverty (Islam n.d.).
Structural/Marxian Theory of Poverty: It is important to stress that the degree of success or otherwise of the exploiting class depends on the consciousness of those oppressed to revolt as well as their organizational capacity resist exploitation and over throw the mechanisms of the oppressive property system. This theory form the basis of the Nigeria’s anti-corruption crusade which is a direct intervention towards ensuring that corrupt enrichment of public officers is curbed.
Dimension of Poverty
Social dimension of poverty: the social dimensions of poverty include the lack of educational opportunity and the lack of access to good health care.
Political dimension of poverty: the political dimension of poverty exists where civil rights are denied and political power rests in the hands of few people (Oligachy). For example in Nigeria under military regime where power or sources of powers are concentrated in the hands of few individual there was high level of poverty. Under IBB administration billions of dollars oil windfall was misappropriated, because power was only concentrated in the hands of executive due to the fact that in military rule there is no legislature arms of government. In poverty in Nigeria is 54.4 percent. But hitherto i.e. during military rule it is far beyond that percent.
Economic dimension of poverty: although economic dimension of poverty is broader than lack of finance, it includes a lack of employment opportunities and uneven distribution of resources (Journal Of Poverty). Meanwhile defining dimensions and measuring poverty are essential to any discussion of poverty reduction. Defining poverty has traditionally focused only on material and specifically monetary measures of well-being. But key concepts behind poverty evolved considerably in recent years.
In Nigeria, poverty is termed in terms of income community which in sub division among and kindred, is less than 40% of the norm which manifest more in poor infrastructure, poor health, poor nutrition, poor self esteem, low hygienic standards, low intellectual development and lack of capacity to articulate social, economic and social environment and per capita income. There is also attitudinal reflections and counter social trends as incidence of poverty, in many cases, such severe limiting social trends as castes in South East, race in the North and group (ethnic) in South West.
From explanation so far, we deduce that, the recent uprising in the Northern part of Nigeria are as a result of some of these mention dimensions of poverty in the group (Book Haram Islamic Sect) up arms against the government of Nigeria as a result of poverty which causes grief, anger, anguish, worry and exclusion from the society. Poverty ratio in Nigeria between 1980 to 2009 shows that in 1980 28%, 1985 46%, 1992 42%, 1996 65.6%, 2004 54.4% between 2004 to 2009 poverty ratio in Nigeria is less than 50%. According to Dr Magnus Kpakol coordinator of National Poverty Eradication Programme (NAPEP) however, United Nations 2010 human development report which reflected the countries with the lowest human development index shows that Nigeria is the 28th poorest countries of the world.
Multiple dimension of poverty: Income is not the only measurement of poverty, and economic growth alone will not end poverty, escaping poverty depends on improving personal capacity and increasing access to resources, institutions and support. The overall gap between the rich and the poor, globally and within countries, has being growing. The difference in per capita income between the world’s wealthiest twenty percent (20%) and the poorest twenty percent (20%) grew from thirty to one in 1960, to 78 to 1 in 1994. it fell slightly to 74 to 1 in 1999. Poor health, illiteracy, inadequate schooling, social exclusion, powerlessness and gender discrimination contribute to poverty. Poor health diminishes personal capacity, lowers productivity and reduces earnings. A high prevalence of disease and poor health in the country harms economic performance while higher life expectancy, key indicators of health status stimulates economic growth.
The role of SMEs in the creation of employment opportunities and poverty alleviation in the economy has very strong empirical support, Giving an insight into the contribution of SMEs in the economic development in a paper prepared for the round table discussion on making small business finance profitable in Nigeria. Iwe Carpenter, in his book opined that, about 70% SME industries account for development in developed countries.
The SMEs sector in Nigeria has been an area of concentration by present and past administration that policy makers in the public and private sector now lay emphasis on the issues so often. This signifies the realization of the role of a vibrant SMEs sector. Such as job creation, poverty alleviation and foreign exchange earnings and conservation etc. in paper delivered at the eight annual conference of the zonal research unit department of the CBN (1999), the SMEs sector has gone a long way in analyzing economic growth and development in many industries which was virtually built on the backbone of cottage/micro industries. China is considered as the worlds work horse just on its bases of low technology manufacturing activities.
SMEs today account for the bulk of output in most countries. They have also proven beyond doubt to be employment creators in China where SMEs employ more than 50% of the work force. While in Nigeria, SMEs in both the formal and informal sectors employs over 60% of the workforce.
Roles of SMEs on Poverty Alleviation
A cursory glance at the structure of SMEs in Nigeria reveals that 50% are engaged in distributive trade, 10% in manufacturing, 30% in agriculture and the remaining 10% in services. A special feature of Nigerian SMEs is that distributive trade component is generally considered more commercially viable than the manufacturing component hence they attract more funding from banks and other financial institutions (Ibru, 2004).
Obitayo (2000) Stated that globally, the small and medium scale enterprises are noted for their immense contributions to development process and as engine of poverty alleviation, they promote as a critical segment of the manufacturing sub-sector, effective strategy for tackling unemployment, diversifying output and achieving trade and balance of payment, given their nature and characteristics with respect to quick adaptation of technologies, manageable number of workers and reduced capital intensiveness on the other hand for us to known poverty alleviation. Poverty is a complex and multi-dimensional. It is a dynamic process of socio-economic and political deprivation which affects individuals, households or communities viewed in the lack of access to basic necessities of life. In other words poverty is a condition of severe deprivation resulting from lack of access to economic empowerment to acquire the fundamental necessities of life including food, clothing, shelter and basic education health care.
In Nigeria, poverty is one of the main challenges facing the policy makers and it is now one of the macroeconomic goals and objectives of the government of President Goodluck Jonathan. The problem with Nigeria is lack of consistency and non-implementation of government policies to the letter different administrations in Nigeria have adopted their own poverty alleviation programme. Meanwhile, due to its complexity and its corrosive effects on humanity, many journal articles and books have tackled the issues of poverty (Schiller June 6, 2000; Sen 1999; Harrison and Huntington 2000). Poverty destroys aspirations, hope and happiness.
Some of the roles of SMEs in poverty alleviation include:
Employment generation: SMEs have continued to be a steady avenue for employment generation. There are indications that the SMEs account for about 70% of industrial employment in Nigeria. For illustration, the projects approved under the national economic reconstruction fund scheme between 1989 and 1993 estimated for about 13,227 jobs. Similarly, the beneficiaries of the SMEs II loan scheme have created about 40,000 jobs. The total employment generation capacity of the SMEs can only be appreciated in terms of its multiplicative effects on other sectors of the economy (Okonkwo, 2000). The implications of the employment generation on the poverty alleviation are based on the fact that the SMEs will create jobs to the unemployed people thereby reducing poverty.
Income generation to the poor: The encouragement of small-scale industry has been considered important for income generations. This no longer seems justifiable, but there is still a potential in low-cost schemes for the provision of credit and other assistance to ‘micro’ enterprises from which poor people can derive more incomes.
Economic development: Achieving macro-economic stability which shapes the overall investment climate is crucial to the role of SMEs in economic development and ensuring the survival of SMEs. Monetary and fiscal policies designed to achieve macroeconomic stability, especially such as key cost variable as the interest and exchange rates have exerted significant influence on aggregate demand, general price level, saving and investment. A judicious mix of these policies is crucial for macro-economic environment. To achieve macro-economic stability, there is need for the implementation of appropriate macro-economic strategies such as low inflation, more stable and competitive exchange rate, maintenance of suitable fiscal policies, competitive tax rates, strengthens the structural reform including pro-savings policies, to achieve relative high domestic savings and rapid corrective responses to macro-economic problem. Thereby, reducing the poverty Government should give some incentives to SMEs.
Rural Development: One of the coordination activities of national poverty alleviation programme is village economic development solutions. This programme is community based poverty eradication strategy aimed at economically empowering the poor using (SMEs). In the programming engines of growth are being created village by village through the establishment of “Anchor” economic activities especially agro allied processing facilities. For extremely poor families the cash provided emergency assistance, while the conditionality promote long-term investment in human capital for breaking inter generational poverty.
Increased productivity: small and medium enterprises equity investment is another way by which (SMEs) will help in alleviating poverty by increasing productivity.Small and medium enterprises equity investment scheme (SMEES) it is an initiative of the bankers committee. The initiative was in response to the federal government’s concerns and policy measures for the promotion of small and medium enterprises (SMEs) as vehicles for rapid industrialization, and increase in productivity thereby enhancing (SMEs) and reducing poverty.
In other to realize the benefits of promoting small and medium scale enterprise, the federal government has employed monetary, fiscal and industrial policy measures to achieve its desired goals which include:
- Employment generation
- Industrialization of rural area and even development through industrial dispersal. According to the 2009 budget policies, it enunciated policies
That will enhance the national development plans fiscal prudence and seems to encourage agencies to provide financial assistance, training and some infrastructural support to SMEs. Specifically, the government has been active in the following areas:-
- Funding and setting up of industrial areas and estate (to reduce overhead cost).
- Providing local finance through its agencies such as the Central Bank of Nigeria, federal ministry of industries (small-scale industry credit scheme SSICS), Nigeria Industrial Development Bank (NIDB) and Nigeria Bank of Commerce and Bank (NBIC), SMEDAN, etc.
- Facilitating and guaranteeing eternal finance through the World Bank, African Development Bank and other international institutions willing to and capable of assisting SMEs.
- Facilitating the establishment of the national Directorate of Employment (NDE) which also initiates the setting up of the new SMEs.
- Setting up of the erstwhile Economic Reconstruction Fund (NAFUND) which is the source of medium for long-term local and foreign loans for small and medium scale business, particularly those located in the rural areas.
- Industrial Development Centre (IDC): Essentially, IDCs are established to provide extension services to SMEs in areas such as technical appraisal of loan application, training of entrepreneurs, managerial assistance, product development, production planning and control as well as other extension services.
- Small Scale Industries Credit Scheme (SSICS): A basic thrust of government’s financial policy with respect of SMEs in the provision of credit faculties to ensure their development and sustenance, the federal government set up a small industries development programme to provide technical and financial support for SMEs.
- The Nigerian Bank for Commerce and Industries (NBCI): The NBCI was set up by the federal government through Decree 22 of 1973 to provide, among other things, financial service to indigenous business community, particularly SMEs. The NBCI operated as the apex financial institutional body for SMEs. It also administered the SMEs 1 World Bank loan scheme of 41 million US $ secured in 1984.
- The Nigerian Industrial Development Bank (NIDB): The NIDB which was set up in 1964, provided credit and other facilities to industrial enterprises especially medium and large scale ones. Some small-scale enterprises also come under its scope of financing whose terms are relatively soft. An attractive feature of NIDBs financing is policy of equity participation in the paid up share capital of some of the projects financed.
- Central Bank of Nigeria (CBN): The central bank of Nigeria has since 1970 been instrumental to the development and promotion of enterprises particularly in the small and medium scale subs-sector. The CBN credit guidelines require that the commercial and merchant banks allocate a minimal stipulated credit to sectors classified as proffered, including the SMEs.
- World Bank SME II Loan Scheme: In order to promote the establishment of a new generation of viable investment and services as well as improve the quality and range of financial and extension services available to SMEs, the federal government negotiated for a financial assistance package from the World Bank from 1987.
- National economic Reconstruction fund (NERFUND): The federal government through decree 2 of 1989 established the National Economic Reconstruction Fund. The main focus of NERFUND is the provision of soft, medium to long term funds for wholly Nigeria owned SMEs in manufacturing and agro-allied enterprises, mining, quarrying, industrial support service, equipment leasing and other ancillary projects.
- State Government: State governments through their ministries of commerce and industries also promote the development of SMEs. They promote through state owed finance and investment companies which provide technical and financial assistance to SMEs.
- The national Directorate of Employment (NDE): It was establish in 1986, NDE is another channel through which government has promoted the development of SMEs. In January 1987; NDE launched a number programmes to generate self employments.
- International Financial assistance: Government has continued to approach the internal agencies to source needed foreign capital for the SMEs. Such international agencies include World Bank and its affiliate and the African Development Bank (ADB).
- Banks Equity Holding in Companies: In its 1998 budge, the government amended budget Acts section 73 (f) of 1969, which restricted banks from holding equity share in non banking related enterprises.
- The Second Tier Security market: In order to deal with the bias of the capital market which is in favour of large enterprises, the second tier security market (STSM) was established in 1985, to assist small and medium scale indigenous enterprises in accessing funds from capital market for expansion and modernization.
- Other Technical Training and Extension Service Programme: This includes activities of industrial Training Fund (ITF), Raw Material Research and Development Council (RMRDC), Federal Institute of Industrial Research, Oshodi (FIIRO), Project Development Agency (PRODA), and Centre for Management Development (CMD).
History of Small Scale and Medium Enterprises (SMEs) in Nigeria
It is very necessary to always recall our beginning in the modern SMEs activities and various lessons we have learnt in the course of Nigeria’s development in SMEs so as to chart the way forward. Traditional industries in pre-colonial Nigeria included salt making and metal works. Various centre for salt making could be found around lake Chad and Awe in present day Nassarawa state in the Northern part of the country and at Nembe and Ishekiri areas in the south. Similarly, domestic iron-ore and Tin production which was carried out in the Jos, Plateau and Mandara Hills ensured a steady supply pf ore for metal making all over Nigeria, especially in the North (Giwa, 1991).
Apart from these traditional activities, another outstanding feature of Nigeria economy at the beginning of the century was trading activities with Europeans along the coasts which concentrated on purchasing and exporting various agricultural commodities. These included cocoa, groundnut, palm produce and cotton. The period between 1894 and 1918 as been referred to as “Golden age” for the Nigeria trade in agricultural produce (Patrick, 1984) For a very long time, industrial development remained a dream until after the second world – war when Nigeria began to give serious thought to industrialization (Giwa, 1991).
Historically, small and medium scale enterprises had its origin in Eastern Mediterranean (Baumback, 1992). According to Essien (2001), SMEs all over the world are divergent array of business concern involved in economic activities spanning from micro and rural enterprises to contemporary industrial organization that was sophisticated technologies.
Before independence, the business climate was dominated by the multinational companies with vast business experience and strong capital base. Example of such companies includes the Levetis and PZ, who engaged in brining into the country (Nigeria) finished goods from their parents companies abroad (Onuala, 2001). Also before independence, there was no legacy of investment policy on SMEs, by the colonial masters. As a matter of fact, industrial investment was believed to be in exclusive competence multinationals (Bauback, 1983).
The post independence Nigeria government adopted the import substitution, large scale industrialization strategy to accelerate the country’s economic progress. The death of the private sector in the economy forced government to assume the role of entrepreneur herself to off-set the colonial neglect of pre-independence (Essien, 2001). The collapse of oil boom in 1980’s exposed the weakness of the government’s industrialization strategy. Industrial output as well as its contribution to GDP also declined. It was then that interest in small and medium scale enterprises (industries) began to emerge and since become the focus of national industrial policy (Onuala, 2001).
In order to encourage the growth of small and medium scale enterprises after independent, successive government in Nigeria over the years had employed both monetary, fiscal and industrial policy measures at the macro level and financing arrangements at the micro levels, to assist the development of SMEs in Nigeria. for example, the banks to allocate a minimum stipulated credit to sectors classified as ‘preferred’ including SMEs whose allocation increased from 10% inn1970 fiscal year to 16% and 20% of total loans from granted to domestic borrowers in 1980 and 1990, respectively (Nnanna, 2001).
Also, generous tax incentives were offered to investors in industries in the fiscal policy measures of the federal government announced with the federal government annual Budgets. The Nigeria export promotion council was also established by the federal government to assist investors in the export sector. Recently President Jonathan created new ministry called ministry of trade and investment headed by renowned economist Olusegun Aganga. Most beneficiaries of the policies were SMEs (Onuala, 2001).
Conclusion and recommendations
The importance of small scale industries to a nation’s building cannot be over emphasized and Nigeria is not an exception. Small scale industries are the channel through which fast industrial development Nigeria can be achieved. And they are also the backbone of the Nigerian market economy and their proneness for job creation is un-doubtful. But in Nigeria, business environment appears to be un-conducive for sustained survival and growth of small scale industries in Nigeria. As a result, the small scale industries continue to grapple with some problems which are amplified by the unstable economic and political environment. However, small scale industries if properly fashioned holdout in brighter future for the overall economic development of Nigeria.
There are a number of lessons to be drawn from this study. It is clear that if small scale industries in Nigeria are to contribute significantly to the economic growth and development in the near future, a number of positive measures have to be taken. In view of this, and based upon the findings, the study offers the following recommendations:
- Adequate credit need to be made available at a very low rate for small scale industries;
- There is the need to have adequate information on the sub-sector to enhance planning, policy design and evaluation;
The importation of agricultural products particularly food stuff which can be sufficiently produced domestically should be discouraged through fiscal policies while small scale industries should be encouraged to produce consistently on a large scale. The restriction of importation will create the local market for domestic producers;
- The problems of infrastructural deficiencies afflicting the sub-need to be tackled with a view to enhancing the performance of small scale industries in Nigeria. therefore, government should build and maintain good roads, ensure steady supply of electricity, and provide pipe borne water;
- to ensure that small scale industries contributes immensely to employment generation, increased use of local resources, increased manufactured goods, as well as improvement in local technological and entrepreneurial capability, government pay adequate attention in ensuring that the business environment is friendly and conducive; and
- Government should also ensure that macroeconomic environment stability is achieved through proper fiscal and monetary policy co-ordination to reduce rent seeking behaviour among economic agents especially among banks.
- Akinyemi, F. (1989): Financing Small Scale Enterprise for Industrial Development in Nigeria, Journal for Economic and Social Research, Vol. 19, No.2, and December.
- Anyanwu, C.M. (2001): “Efficiency Administration of Credit for Small Scale Industrial Development in Nigeria”, CBN bullion, Vol. 20 No. 3.
- Baumback, B.S. (1992): Performance and Evaluation of Small Scale Medium Enterprise in Nigeria, CBN bullion, Vol. 21 No.4.
- Bello, A. (1995): Self Reliance and Small Scale Enterprises, CBN bullion, Vol. 10, No.2.
- Collier, T. (1998): Small Enterprise Development and the Employment – Output Trade off, London: Oxford Economic Papers, Vol. 35.
- Ekpenyong, B.D. (2003): Fundamental of Project Analysis: An Integrated Approach, Lagos: Dalag Prints and Park Ltd.
- Essien, O. (2001): Small and Medium Industries Equity Investment Scheme (SMIEIS): Pro or Anti Industrialization, CBN Quarterly Report, Vol.29, No.4.
- Giwa, S. (1994): Managing Human Resources for Productivity in Small and Medium Scale Enterprises in Nigeria, Lagos: Adix Press Ltd.
- Nnanna, O.J. (2001): “Industrial Financing in NIigeria: a Review of Institutional Arrangements”, CBN Economic and Financial Review, Vol.39, No.1.
- Obitoyo, K.M. (2001): Creating Enabling Environment for Small Scale Industries, CBN bullion, Vol. 25, No. 3.
- Onuala, R.O. (2001): An Economic History of Nigeria, 1960-2000, Lagos: Methun Publishers.
- Oresotu, F.O. (1990): Industrial Policy and Incentives in Nigeria, Nigerian Journal of Economics and Social Studies, Vol. 9, No. 2.
- World Bank (2004): “Nigerian Diagnostic Review of the Small and Medium Scale Sector (Interim Report).
- Roles of SMEs on Poverty Alleviation