Small and Medium scale Enterprises (SMEs): Small and Medium scale Enterprises (SMEs) 6th AFRICAN VENTURE CAPITAL ASSOCIATION Conference Dakar, Senegal 2006 Rotimi Oyekanmi CEO, SME Manager Limited


outline: outline Introduction Definition of SMEs Impact on Economic Development Nigerian experience Our Experience with SMEs African Capital Alliance Q&A


Introduction: Introduction


Introduction: Introduction Small businesses contribute substantially to two fundamentals of poverty reduction – job creation and economic growth - The World Bank Group


Introduction: Introduction Small and Medium scale Enterprises (SMEs) are important for successful economic growth and social development. SMEs, properly supported, foster Entrepreneurship – a proven pre-requisite for national economic success.


Introduction: Introduction Public and private policy support of SMEs is most effective when SMEs are part of the formal sector One key objective therefore is to encourage migration of SMEs from informal to formal sector


Introduction: Introduction Nigerian SMEs in informal sector are beyond the reach/help of public or private policy Policies do not provide sufficient support Difficult access to finance Limited access to training in basic management skills


Slide8: To use SMEs to stimulate economic growth and encourage businesses requires SMEs to move from informal sector to formal sector Introduction


Definition of SMEs: Definition of SMEs


Definition of SMEs: Definition of SMEs No universal definition of SMEs SMEs definition is individual country specific and is based on the size and level of development of each respective economy. Definitions commonly use one or a combination of the following parameters: Number of employees Turnover Invested Capital Total assets Definitions are dynamic.


Slide11: SMEs have different definitions by various Government agencies: Total assets excluding land and w/c < N1.5 billion (US$11mln) 10 to 300 employees (this has been dropped) Definition of SMEs in Nigeria


Impact on Economic Development: Impact on Economic Development


Impact on Economic Development: Impact on Economic Development Employment generation: Studies show that SMEs account for a large proportion of employment in many countries. Utilization of local resources: Promote use of local raw materials requiring simple technology. Output Expansion: Contribute substantially to national output in middle income economies


Impact on Economic Development: Impact on Economic Development Promotion of Innovation and Technological Development: All economies have transited from artisan industries to modern industries Developing countries can leapfrog using experience of more developed countries Production of Intermediate Goods: Produce intermediate goods for large corporations Symbiotic relationship between small and large firms.


The Nigerian Experience: The Nigerian Experience


The Nigerian Experience: The Nigerian Experience The Challenge For Nigeria is Economic Development How to create an enabling environment to: Stimulate SMEs to grow and expand Encourage more players to move to the formal sector Assist evolution of businesses from small to medium to large CREATE AN ENABLING ENVIRONMENT TO FOSTER ENTREPRENEURSHIP


Past SME Funding Programs: Past SME Funding Programs Past Programs Major credit programs and specialized credit delivery institutions so far implemented to promote SMEs include: Small-scale industries scheme 1971 Agricultural Credit Guarantee Scheme 1973 Nigeria Agricultural and Co-operative Bank 1973 Nigerian Bank for Commerce and Industry 1973 Small and Medium Scale Enterprises Loan Scheme 1992 National Economic Reconstruction Fund 1994 Family Economic Advancement Program 1997 In addition, specialized banks were introduced: Peoples Bank 1989 Community banks 1992


Past SME Funding Programs: Past SME Funding Programs These programs have been associated with high rates of default attributed to: Abuse of programs in which clearly unviable projects were financed attributed to lack of ownership, corruption, etc. Poor loan processing and credit administration procedures Lack of adequate project monitoring techniques Use of public rather than private resources


SMIEIS Guidelines: SMIEIS Guidelines SMIEIS requires all banks in Nigeria to set aside 10% of their PAT for equity investment in SMEs (revised to 5% from end 2006) SME Definition Total assets excluding land and w/c < N1,500 mln ($11 mln) Qualifying enterprises Limited liability companies Comply with CAMA (1990) Comply with all applicable laws and regulations Render regular returns


Operator’s Perspective: Operator’s Perspective


Slide21: SMEs are traditionally sole proprietorships and are not ready to accept partners Equity Technical SME promoters lack understanding of the difference between loans and equity Inadequate research/market information Our Experience


Slide22: Exaggerated/defective assets valuation to create false impression of high investment by promoters Business concepts and strategies are not well defined nor properly articulated Lack of understanding of the technology, processes and markets Management skills and processes are inadequate Our Experience


Slide23: The entrepreneurs are not ready to take steps to institutionalise the business Infrastructure does not support investments A high level of hand holding is required Inadequate legal infrastructure Contract enforcement difficulties No viable exit options Our Experience


Lessons Learnt: Lessons Learnt


Slide25: Olympic mindset/standard Build trust with entrepreneurs Assist to test the business model (pilot) Good investments Vs. good businesses Institute financial controls/discipline Disburse in phases based on meeting performance milestones VC Operators


Slide26: Ensure market/commitments secured in advance Attract strong and tested management Secure technical competence Better to provide outsourcing services to larger enterprises Focus on current liquidity VC Operators


Slide27: Funds under management Capital Alliance Private Equity (W/A, $35mln) SME Partnership (Nigeria, appro. $30mln) Capital Alliance Private Equity II (W/A, $85mln) Funds (soon to market) Capital Alliance Property Inv. Coy (W/A, $200mln) 35 investments (most with add-on investments) Includes Accion (Microfinance Bank) 5 exits (full and partial) 20 staff (15 core professionals) African Capital Alliance


Slide28: Q&A