SMALL AND MEDIUM INDUSTRIES EQUITY INVESTMENT SCHEME

SMALL AND MEDIUM INDUSTRIES EQUITY INVESTMENT SCHEME

INTRODUCTION

As is the case in most other developing nations, the Nigerian small and medium scale industrial (SMI) sector is the key to the future economic prosperity of the country. Indeed, SMIs have even proven to be the core contributor to the national wealth in the better- developed European and Asian economies – where manufacturing and tourism have emerged as the main money spinners. The structures of these two industries are essentially characterized by small businesses. In Great Britain for instance, about 98% of all workers are employed by SMIs. In India, they account for 80% of national employment and 50% of that country’s Gross Domestic Product, GDP (The Nigerian Economic Summit Group, 2002). Locally, the sector’s importance is underscored by its employment generating potentials; income redistribution potentials; promotion of local technology and entrepreneurship; and its ability to transform the rural areas, by stemming the rural/urban migration-drift. Indeed, The Small Scalers (2001) estimates that SMIs contribute 62.1% of Nigeria’s GDP. They also have an employment generation capacity of 58%. The critical nature of a viable SME sector to the nation’s well-being becomes even more apparent in Nigeria’s circumstance, where the population is 140million (Source: National Population Commission, 2006 Census) and the majority of the people reside in the rural and semi-urban areas - where agriculture is the mainstay.

It is against this background that interest is being here shown in examining the strategies that have been designed to develop the SMI sector. While there may be several problems that currently impede the progress of the sector, this paper focuses on the issue of lack of access to capital/finance by SMIs. Specifically, it shall examine the operation of the Small and Medium Industries’ Equity Investment Scheme (SMIEIS) as a strategy for addressing the question of funding of SMIs.

SMALL AND MEDIUM INDUSTRY DEFINED

The concept of Small and Medium Industries lacks a universal definition. It is given various definitions by different agencies, even within the same economy. And, the definitions often are time-sensitive, as they do change according to trends and times. The various indices used in defining the concept often include asset base, annual turnover, capital employed, the number of employees and market share. According to the Nigerian National Industrial Policy Board (NNIPB) in 1989, a small enterprise is one with a total capital base of not more than N200million, excluding cost of land and buildings and with a workforce of not more than 50 persons, while a medium industry is one with a capital base of not more than N300million, excluding cost of land and buildings and employing not more than 250 persons. NERFUND in 1989 defined an MSI as an enterprise with an asset base of not more than N10million, excluding the cost of land. SMIEIS defines an SMI as an enterprise with an asset base not exceeding N200million excluding land and working capital, with a staff strength not below 10 and not more than 300 persons. As there is some unanimity between the definitions attempted by NNIPB and SMIES regarding an important index, capital base, we will consider a small business to be one that has a capital base not exceeding N200million

THE CONCEPT OF SMIEIS ( OR SMEEIS)

SMIEIS was established in 2000, as a voluntary initiative of the Bankers’ Committee (which is made up of representatives of CBN and all the banks) to address the funding needs of the SMI sector. The main objective of the scheme is to promote SMIs as vehicles for rapid industrialization, sustainable economic development, poverty alleviation, and employment generation. The Scheme was designed to address the scarcity of long-term finance, by pooling together funds that were not time-sensitive for the banks (since this fact compels them to lend basically on a short-term basis). An SMI under the scheme is defined as an enterprise with a maximum asset base of N200million, excluding land and working capital and with the number of staff employed not less than 10 and not more than 300.

Under the scheme, all banks in Nigeria are required to set aside 10% of their Profit Before Tax annually and invest same as equity holdings in eligible industries within 18 months, in the first instance and within 12 months subsequently. These industries must be those of the real sector, including agriculture, agro-allied, information technology and telecommunication, manufacturing, educational establishments, services, tourism and culture, solid minerals and construction. The forms of investment in SMIEIS are a direct injection of fresh equity funds; conversion of existing qualifying loans (from debt) to equity; channeling of investment through a wholly-owned venture company or an existing one. To facilitate the operation of this scheme, an enabling environment was first created by the amendment of the Banking Act of 1969, Section 73(f) to subsequently allow banks hold equity interest in non-banking related enterprises

1.      MICROFINANCE BANK

Small scale enterprise is very crucial to the development of a country’s economy, especially countries like Nigeria. Entrepreneurship is the sine qua non to national development, poverty eradication, and employment generation. It is the bedrock of any nation’s industrialization. A number of studies have been carried out on the impact of microfinance on entrepreneurial development. In fact, the academic interest that shows the impact of microfinance on entrepreneurial development is evidenced by the fact that some academic journals have devoted special issues to research establishing this linkage.

Some scholars focused on the mechanism by which poverty is reduced. Amin, Rai, and Topa (2003) focus their article on the ability of microfinance to reach the poor and vulnerable. They focus their article in such a manner because of concerns that microfinance is only serving people slightly below or above the line of poverty, however, the really poor and destitute are being systematically excluded. By contrast, Copestake, Halotra, and Johnson (2001) analyze the impact of microfinance on firms and individual well being. Copestake et all focus on business performance and household income to establish a link between the availability of microfinance and overall wellbeing of the poor.

IMPACT OF MICROFINANCE BANK ON ENTREPRENEURIAL
DEVELOPMENT: THE CASE OF NIGERIA

The issue of sustainable development in Third World countries like Nigeria has been a growing concern to both the government and the private sector. The huge amounts of money the government has been investing in this platform over the years have not yielded any meaningful result. Poverty is a characteristic of Nigerian households or individuals. It has been realized in the recent years that there are limits to which government can singly promote development. Most of the traditional functions being carried out by the government in most countries ranging from the provision of economic development are becoming increasingly difficult to accomplish. Nigeria as a nation has her own peculiar developmental challenges because of maladministration, corruption, infrastructural decay, insecurity of lives and properties, the unstable macroeconomic regime and unpredictable fiscal policies by successive administrations (Fasua, 2006). Thus, both the public and the private sector of the economy and every segment of the society need to be involved in the industrial development process of the country. It is on this basis that government begins to engage in privatization policy with the view of allowing the private sector to participate in the economic development of the nation. Consequently, various governments of the nation begin to find pathways to involve the private sector in the developmental process of their country’s economy. One of the responses to the challenges of development in the developing countries is the encouragement of entrepreneurial development scheme.

IMPORTANCE OF MICROFINANCE BANK

The importance of microfinance to entrepreneurial development made the Central Bank of Nigeria adopted it as the main source of financing entrepreneurship in Nigeria. Despite this, however, finance is still considered as one of the major hindrances to entrepreneurial development in Nigeria (Ubom, 2003). While government and Non-Government Organisations (NGOs) have been engaging a number of programmes and policies to encourage entrepreneurship in the country, Nigeria is still on the list of the poorest countries in the world with unemployment level rising alarmingly. It is, therefore, necessary at this junction to undertake an assessment of the extent to which microfinance can impact entrepreneurial development in Nigeria.

The bedrock of any nation’s industrial development is entrepreneurial activities. Unfortunately, there is uneasy access to the conventional loan from the commercial banks to start up a small or medium scale enterprise. The resultant effect is that the underdevelopment situation of the country is getting worse while the government seems incapable of taming the ugly incidence. The symptom of this situation is a high poverty rate, high unemployment rate, and economic dependence on foreign countries

Commercial banks usually demand collateral security before giving out loans for business purposes. This is a necessary factor in obtaining a loan as collateral security serves as a guarantee for recovering of loans given out by commercial banks in case of repayment default. An average citizen in Nigeria cannot provide such collateral security. This results to the inability of an average Nigerian to access loans from commercial banks. Thus the difficulty of access to loan from financial institutions such as commercial banks constitutes a great setback to entrepreneurial development in Nigeria (Parker, 2006)

Microfinance history in Nigeria

The Nigerian business environment offers many entrepreneurial opportunities. Various programs and policies were being put in place by both the Federal and State governments to encourage entrepreneurial activities. The Nigerian Enterprises Promotion Decree (NEPD) of 1972 which was revised in 1977, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), and National Directorate for Employment (NDE) are some of the means through which Nigerian government aims at encouraging entrepreneurial spirits in the country (Ubom, 2003). The extent to which the Nigerian populace has taken advantage of the numerous business opportunities in the country, however, remains a perturbed issue. This is especially so if one considers the rate of unemployment that keeps increasing over the years in the country. Despite the numerous advantages of being an entrepreneur, an average Nigerian citizen seems to prefer a salaried job which has led to the high unemployment rate in the country. The bedrock of any nation’s industrial development is entrepreneurial activities. Unfortunately, there is uneasy access to the conventional loan from the commercial banks to start up a small or medium scale enterprise. The resultant effect is that the underdevelopment situation of the country is getting worse while the government seems incapable of taming the ugly incidence. The symptom of this situation is a high poverty rate, high unemployment rate, and economic dependence on foreign countries

Government View of the Microfinance Sector

It is important to determine the government’s position regarding the informal sector and microenterprise development, as this affect policy that may influence the behavior of micro-entrepreneurs. Some governments recognize the positive contribution of microenterprises to the economy and may actively include informal sector development in the national plan. However, in many countries, informal sector issues and their relationship to government issues receive little attention. Most policy frameworks favor large manufacturing sector and are biased against the informal sector and small enterprises. Most governments want to encourage the development of business in their own countries. Some governments supplement general policy goals that apply to business with specific policies and programmes aimed at micro and small enterprises. It is helpful if policies are in places that establish a favorable climate for the start-up of small businesses and the growth of existing businesses. Examples are policies that minimize the cost of licensing and registering a business, provide easy access to information about laws and regulations, and facilitate commercial codes. This establishes rules to minimize the cost of doing business by defining the rights and responsibilities of all parties to a transaction.

Objectives of Micro Finance Banks

Selecting a target market to depend on the microservice provider and the perceived demand for financial services. In any country, there are underserved enterprises and households, ranging from the ultra poor who may not be economically active, to small growing enterprises that provide employment in their communities. This range or continuum constitutes the demand size for microfinance services. Often, the supply side does not offer a corresponding continuum service. Microfinance institutions need to supply services that fill the gaps and integrate the underserved group into the market. The goal of microfinance institutions as a development organization is to serve the financial needs of served and underserved market as a means of meeting development objectives. These development objectives generally include one or more of the

following;

· To reduce poverty

· To empower women or other disadvantaged population groups

· To create employment

· To help existing business grow or diversify their activities

· To encourage the development of a new business.

2.   FEDERAL MORTGAGE FINANCE CORPORATION OF NIGERIA (FMFCN)

Introduction

Housing finance in emerging economies

All over the world, the rate of urbanization has soared as more people now live in cities than in rural areas (Boleat and Walley, 2008, Chiquier and Lea, 2009). According to UN (2010), by the end of 2030, two-thirds of the world population will be living in urban centers. The implication of this for an emerging economy like Nigeria is enormous. Therefore the need for an efficient and stable mortgage finance system to enable urban dwellers to acquire decent houses that meet global standards is now of great importance.

While considerable skills and resources have gone into improving the efficiency of mortgage finance systems in advanced economies, the same cannot be said of many developing countries, and this is critical as most of the latent demand for housing finance services over the next 30 years will be in emerging markets (Chiquier and Lea, 2009) because the rate of urbanization is highest in developing countries.

As in other emerging economies, Nigeria is experiencing rapid urbanization and the proportion of the population living in urban areas has increased from 48%in 2008 to 52% in 2011 and it is forecasted to increase to over 40% in the next five years (Boleat and Walley, 2008). Despite various government interventions and huge private sector investments through provision of loans by mortgage finance institutions and commercial banks, and direct construction of houses by both the public and private sector, the housing problem in the country still remains intractable; the housing deficit statistics is increasing rapidly as many of the urban dwellers in Nigeria still do not have access to decent and affordable housing. According to Ademiluyi (2010), the level of production of housing in Nigeria is only 2 dwelling units per thousand people which are grossly inadequate compared to the required rate of about 8-10 dwelling units per thousand people as recommended by the United Nations.

The housing sector plays a critical role in a country’s welfare as it directly affects not only the well-being of the citizenry but also the performance of other sectors of the economy, (Sanusi, 2003). Housing facilitates urban development and promotes socio-economic well-being, and is a vital instrument for personal and national economic development (Chiquier and Lea, 2009). An effective and buoyant housing sector is an indication of a strong programme of national investment; it serves as the platform for and the first step towards future economic growth and social development (Ajanlekoko, 2001). Apart from this, Sanya (2011) asserts that the housing and mortgage value chain encompasses a minimum of 50 separate job functions and thus, having a well developed and efficient mortgage and housing sector will lead to the creation, deepening, and sustenance of numerous jobs for both professionals, and skilled and unskilled employees in the economy. The housing sector in Nigeria is a combination of many interrelated components, which include land, infrastructure, building materials, policies, building regulations and, more importantly, the finance component. Finance in housing delivery is very important because of the huge capital requirement for housing production

The efficiency of mortgage banks and the mortgage sector

The first phase of this research investigated the efficiency of mortgage banks in Nigeria. Findings suggest that, relative to the best performing banks in the system, the average efficiency score of the mortgage banks investigated is between 33% and 49%, depending on the measure of output used. This is rather low in comparison with the 70% average reported for Egypt and other African countries (Poshakwale and Qian, 2011). With the three output variables combined, the average efficiency increased considerably. However, the high variability of efficiency scores observed suggests that individual firms may deviate from this average considerably. Also, most of the inefficiencies observed are due to management practices rather than operations on an inappropriate scale. About 80% of the inefficient banks, however, exhibited increasing returns to scale, especially in 2010. Although these banks were, on average, inefficient over the time period, they are becoming more efficient. For these banks, an adjustment of their scale of operations will probably make some difference to their productivity.

3.   NIGERIA AGRICULTURAL CO-OPERATIVE RURAL DEVELOPMENT BANK (NACRDB).  

The definition of co-operatives is built on four major catchwords; first, they are formed by groups of people, who have a specified need or problem. Second, the organization is formed freely by members after contributing to its assets. Thirdly, the organization formed is governed democratically in order to achieve desired objectives on equitable norms, and fourth, it is an independent enterprise promoted, owned and controlled by people to meet their needs (DFID:2008). It is about peoples’ organization to capture different opportunities in the economy where they can address their economic needs and aspirations. By the same token, therefore, co-operatives can be formed in any sector of the economy of a country such as agriculture, minerals, industries and service sectors.

In Africa, however, the most popular agricultural co-operative mode has historically been the marketing of agricultural produce after small farmers have individually completed their farm production operations. But in some cases, agricultural co-operatives have combined both input distribution and crop marketing

Agricultural Co-operatives in the Context of the African Economy and Politics

In order to understand the role of agricultural co-operatives in Africa, one has to articulate certain general features and dynamics taking place in the economy of African countries today and they are characterized as follows:- First, the African continent continues to be the producer of raw materials but trading with industrialized countries. The latter group of countries has the capacity of rationalization on the economic utilization of imported raw material from the developing world. As a result of this position, Africa continues to occupy a weak bargaining position when it comes to trade negotiations. It is the industrialized countries determining the quantity and quality of raw material they need and not the other way round. produce. This structural position of the African continent puts agricultural co-operatives in much a weaker position relative to the world’s trade. While the Economic Commission for Africa reported a 1 percent participation of Africa in world trade in 2004, it was reported recently in Tanzania that cotton exporters have lost 50 percent on the price of cotton due to shrinking demand for the commodity. World market prices for cotton have recently fallen from 84 cents US per kilogram to 40 cts.US. Secondly, the current development discourse in most African countries is guided by governments, putting too much emphasis on the need and impact of Direct Foreign investments for the development of African economies at the expense of local private agents and co-operatives. But the reality on the ground has been revealed by the Secretary-General of the Economic Commission for Africa, who reported in2004 that Direct Foreign Investment was merely 1 percent GDP of African countries.

Agricultural Co-operative Potential

While such issues militate against the successful performance of agricultural co-operatives, the documented potential role for such organizational frameworks should theoretically be highlighted. Such potential, include overcoming barriers to assets, information services, and markets agricultural commodities through co-operatives (Holloway et al 1999). The management and handling of such organizationally complex issues, calls for an organization such an agricultural co-operative, to stand on behalf of small farmers and transact out the business in a cost-effective manner. Secondly, agricultural co-operatives create the ability for the supply of required agricultural inputs so that the production of commodities is done timely to enhance productivity. They also provide an assured market for commodities produced by isolated small farmers in the rural areas.

Agricultural Co-operatives and Food Security:

Many researchers in food and food policy, have carried out in-depth research on the subject. For example, according to Clover (2003), food security is achieved when all people at all times have physical and economic access to sufficient, safe and nutritious food preferences for an active and healthy life. Food security, on the other hand, means avoiding hunger. (Volumen: 2009) for all. As a global phenomenon, food security for all is the best indicator of food security for the world. This assures food security for national access on a broad average. (Smith et al: 2006). But this form of assurance of access to food for the world is only an average and quantitative indicator of food security. Qualitative measures of access would look into actual access indicators of food energy requirement levels.

Agricultural co-operatives and Rural Development

The existence of co-operatives also has had an impact on the generality of rural development defined in terms of availability and access to amenities that improve the basic conditions of life for the rural people. These include employment creation, rural markets development, enhancement of rural incomes and the improvement of access to social services. Farmers producing crops and marketed by co-operatives are gainfully employed because they can account for their labour input by the revenue they earn during the marketing seasons. Agricultural co-operatives are critical to the general rural development because they provide employment of accountants, bookkeepers, managers, as part of direct employment. But those members earning better revenue through enhanced co-operative prices, have usually invested in income-earning projects such as piggery, chicken projects, and other small enterprises.

SOME CHALLENGING EXPERIENCES OF AGRICULTURAL CO-

OPERATIVES AND LESSONS LEARNED

Agricultural Marketing Co-operatives are currently operating under stiff competition with private buyers including multinational companies. Co-operatives carry out their business using credit from major private banks and prices are not on their side. As such, therefore, they face both, volume and price competition. Over the last twenty years of economic liberalization, some have even collapsed. But some have survived the competition and still operate at the service of small farmers and contribute to poverty alleviation today: One critical question we have to answer today is What are some of the challenging experiences they have come across and what lessons learned?

Challenging Experiences

There are many challenging experiences faced by agricultural co-operatives, but in this discussion, we shall limit to five of them. They include stiff competition sometimes without clear rules, controlling government policy and legislation and leadership, management and governance challenge. The others include member participation and empowerment and the challenge of capital investment in co-operatives.

Bank of Industries

Introduction

In any economic system, the importance of small and medium scale business cannot be overemphasized. This is particularly true, because of the numerous roles they play toward the overall economic and industrial development of the economy. Basil (2005) stated that any effort towards the restructuring of the economy without a particular emphasis on the development of small and medium scale business is not likely to be very successful in the long term. The fact that small and medium scale businesses determine the direction and extent of development of the country’s economy makes them very important organizations. It is also a fact that most of the large scale industries depend heavily on the small and medium industries for their inputs and basic raw materials.

Role of Banks in Economic Growth

One of the important roles of banks is in spurring growth. There has been a debate on the relative effectiveness of banks compared to financial markets in doing this. This debate was originally conducted in the context of German and UK growth in the late nineteenth and early twentieth centuries. Gerschenkron (1962) argued that the bank-based system in Germany allowed a closer relationship between bankers providing the finance and industrial firms than was possible in the market-based system in the UK. Goldsmith (1969) pointed out that although the manufacturing industry grew much faster in Germany than the UK in the late nineteenth and early twentieth centuries the overall growth rates were fairly similar. Levine (1996) used a broad database covering 48 countries over the period 1980-1995. He found that the distinction between bank-based and market-based systems is not an interesting one for explaining the finance-growth nexus.

The Importance of Small and Medium Enterprises in Economic Development

Among the significant roles played by the SMEs are as follows: First, the SMEs provide the training ground for the development and growth of indigenous entrepreneurs. They serve as vehicles for the propagation and diffusion of innovative ideas for far-reaching dimensions. They are more flexible and can easily adapt to changes in the external environment. A second social contribution of SMEs according to Basil (2005) is the transformation of the traditional industry. In both developed and developing countries, the traditional sector has served and continues to serve as the springboard for launching into a vibrant modern sector. Thus a fledging SMEs sector can be a means of achieving a smooth transition from the traditional to the modern industrial sector (United Nations, 1984). Third, SMEs due to their labor intensity and usage of low-level technology is able to garner and use the widely available local labor supply. SMEs assist in the dispersal of economic activities through encouraging the development and modernization of these activities outside the major metropolitan areas. Thus, they are able to stem the tide of rural-urban drift. Another economic role of the SMEs is their ability to mobilize financial resources, which would otherwise be idle or untapped by the formal financial sector (Iornem 2000).

CONCLUSION

Small and Medium Enterprises (SMEs) in Bauchi Metropolis are highly affected by the role the Bank of Industry is playing in the form of credits collected by the SMEs and the utilization of the loans for the purposes they are intended as revealed by the research. The expansion of the power of BOI as the apex institution for the development and promoting of SMEs in Nigeria should be considered with vigor, a well-conceived and coordinated scheme aimed at strengthening and improving the information system and counseling services for wider dissemination and greater effectiveness should also be pursued.

Agricultural co-operatives are important organizations for sustaining food security and rural development in Africa. They provide a critical organizational framework that is theoretically and ethically needed for the mobilization of isolated small farmers for self-directed economic development, independent of state systems. The advent of market liberalization, market competition and co-operative policy and legislation of the 1980s did not fare well with agricultural co-operatives resulting in declining performance. But some

well functioning co-operatives survived the competition, and continue to discover new opportunities where they have a comparative advantage.

The research study examines microfinance banking and development of small business in an emerging economy: Nigerian approach. The role of microfinance banks in poverty eradication, job creation, wealth creation and economic development of the country cannot be over-emphasized. It must be noted that the number of MFBs in Nigeria has increased tremendously, but neither has the poverty rate reduced nor adequate funds were made available to small business operators and owners. Findings from the study show that in spite, of the fact that microfinance has a critical role to play in poverty eradication; it cannot solve all developmental challenges as a result of poverty‘s large scope, multi-dimensional character, and multiplicity of actors

Microfinance institutions are evident tools for entrepreneurship development due to the various services they offer and the role they perform towards the development of the economy. Microfinance institutions world over and especially in Nigeria are identified to be one of the key players in the financial industry that have positively affected individuals, business organizations, other financial institutions, the government and the economy at large through the services they offer and the functions they perform in the economy.

Recommendations

Agricultural co-operatives in Africa are still at the drawing board. More design work needs to be done with the participation of members to arrive at an appropriate size of agricultural co-operatives which can respond to the needs of members This design work, should be part of the policy agenda for governments so that policymakers are not fixed to static traditional models of the co-operative enterprise.

The financial institution need to put more effort in financing SMEs, their role needs to be felt by the SMEs in terms of growth and development