Investment Opportunities in SMEs

In many fast developing countries in Africa, the Micro, Small and Medium Enterprise (MSME) sector is considered as the engine room of economic growth and development. This is owing to its contribution to the GDP, employment and wealth creation. In addition to its strong linkage with virtually all the industries in Africa, the MSME sector in Nigeria for example provides 80% of jobs and related incomes. According to the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), the MSME sector also increases value-addition to raw materials and provides export earnings for Nigeria.

MSMEs consist of businesses that own assets worth less than ₦1billion and employ less than 200 persons, as defined by the Nigerian National Policy on MSMEs. MSMEs, in terms of numbers, dominate Nigeria’s business terrain, owing to the relative small capital requirements and low operational cost associated with small businesses. A survey conducted by SMEDAN in 2012 revealed that there were 17.6 million MSMEs in Nigeria and they constituted approximately 99% of all businesses.

Although the sector’s contribution to Nigeria’s GDP is significantly at 47%, its contribution to employment at 25% is relatively low compared to other developing countries such as South Africa (56%), Ghana (80%), Ecuador (55%) and Morocco (46%). This suggests that the sector is yet to achieve its potential of significantly contributing to job creation in the country.

In a bid to ensure that Nigeria has a virile MSME sector, one that would contribute significantly to national development, the Nigerian government through various agencies such as Nigerian Investment Promotion Council (NIPC), Bank of Industry (BOI) and SMEDAN have embarked on some policy measures to support growing MSMEs in Nigeria.

While the BOI provides financial support to MSMEs, NIPC aims to reduce business registration constraints and supports the creation of small businesses particularly through its Pioneer Status initiative. According to the NIPC, “Pioneer status is a tax holiday granted to qualified industries anywhere in the Federation, especially industries located in economically disadvantaged local government areas of the Federation.” The grant of Pioneer Status is to ensure that the industry makes a reasonable level of profit within its formative years.

In order to qualify for this tax holiday, local businesses are expected to have a capital expenditure of not less than ₦150,000. Currently, there are 69 approved industries that have pioneer status in Nigeria, and are therefore eligible for the tax holiday. Some of these include cultivation, processing and preservation of food crops and fruits, manufacturers of paper pulp, manufacturers of yarn and man-made fibres, deep sea trawling and processing and so on.

Furthermore, the NIPC has also established the One Stop Investment Centre (OSIC), which is intended to simplify and ease the administrative procedures for the issuance of business approvals, permits & licenses and company incorporation. At these OSICs, individuals can register their businesses and enjoy services such as investment information and advice, simplified steps for obtaining business approvals etc.

These initiatives are in addition to efforts by agencies such as Central Bank of Nigeria (CBN) and SMEDAN that are geared towards empowering small business owners financially and enhancing their competencies. For example, CBN recently launched the ₦220 billion MSME fund with the goal of providing cheap financing at 9% to small businesses.  Additionally, the recent establishment of Alternative Securities Market (ASeM) by the Nigerian government will serve as medium through which MSMEs with growth potential can secure funds from investors, similar to the capital market.

The MSME sector is important for the transformation of the Nigerian economy given its potential to increase investments and create jobs largely as a result of its labour intensive nature and low capital requirement, compared to large enterprises. As a result, the sector is becoming a primary focus for the Nigerian government year after year. Investors can also tap into the opportunities that avail in the MSME to make its potential a reality, while securing return on investments given Nigeria’s huge market.