BY PROF. AKPAN H. EKPO
Being a keynote address at the Inaugural Bank of Industry Annual Public Lecture, 2nd October,2024, held at Transcorp Hilton Hotel, Abuja, Nigeria.
- Introduction
Small-scale enterprises, now generally known as Micro, Small, and Medium Enterprises (MSMEs), have contributed to the growth and development of all economies in spite of the inherent economic system and philosophy. In the USA and other developed countries, for example, large-scale industries started as small and medium-sized enterprises. All types of businesses, including services, agriculture, trading, transport, and information and communication technology, are home to MSMEs.
In Nigeria, MSMEs have been the backbone of the economy. During periods of economic downturn, MSMEs, especially those operating in the informal sector, have assisted in not only resisting the ‘collapse’ of the economy but have also enhanced recovery. Small enterprises, in whatever form, existed in all areas of the country even before the advent of colonialism. Some of these enterprises have undergone transformations, transitioning from micro to small to medium. There are instances of mergers and acquisitions to form large-scale companies.
The proposal for a coordinating agency for the MSMEs sub-sector originated in 1987, following the recommendation from a World Bank study. It was in 2003 that the National Assembly enacted the Small and Medium Scale Industry Development Agency Act, which created the Small and Medium Industry Development Agency (SMIDA). In December 2004, the National Assembly amended the Act, renaming SMIDA as the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).
President Bola Ahmed Tinubu’s current regime has declared its commitment to fighting poverty and hunger by emphasizing food security as one of the cornerstones of his renewed hope agenda. There is no doubt that MSMEs, which have been contributing to the fight to reduce poverty, will redouble their efforts in that direction.
It is interesting to note that the Bank of Industry (BOI) has over the years contributed to the positive impact of MSMEs by providing financing in various forms. Specifically, Bello (2022) empirically found that BOI financing in the North Central region of Nigeria had a significant effect on poverty reduction in the region.
By providing employment opportunities and generating revenue, MSMEs have the potential to assist in alleviating poverty at the individual and community levels. MSMEs that operate in the agricultural and food industries have a critical role in ensuring food presence, availability, and consistency.
Nonetheless, MSMEs have challenges, especially in the finance space of the economy. Most surveys confirm that access to finance remains the main obstacle in upscaling the impact of MSMEs on the growth and development of the economy. There are several government interventions to assist MSMEs in obtaining various forms of finance—the role of the Bank of Industry is a vivid example.
This paper would examine the impact created by MSMEs and related issues, particularly as they affect poverty reduction and food insecurity in the country. Following the introduction, section 2 discusses conceptual issues and a theoretical framework, while section 3 provides stylized facts on MSMEs, poverty, and food security as well as government initiatives on MSMEs. Section 4 highlights the challenges MSMEs face while Section 5 concludes the paper. We anticipate that our discussion will assist in the formulation and implementation of policies within the MSMEs space in Nigeria.
- Conceptual Issues and Theoretical Framework
From a national policy perspective, we can classify MSMEs based on their size, sector, organization, technology, and location. Understanding the complex interactions between these variables is crucial for appreciating the nature, characteristics, performance, issues, and challenges of business enterprises. When considering policy and planning, size is the most practical criterion for classification. The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the Bank of Industry (BOI) have defined MSMEs by categorizing enterprises according to the minimal requirements of any two of the following criteria: (1) the number of employees, (2) asset value, and (3) yearly turnover.
The typical criteria encompass one or more of the following factors: employment, turnover, assets, and paid-up capital. Nevertheless, definitions of this concept differ among countries in relation to the overall magnitude and organization of the national economy. In order to ensure a consistent national policy, it is imperative to establish a standardised definition that can serve as a shared point of reference for all involved parties. The National Policy on MSMEs utilises a classification system that considers two main factors: employment and assets (excluding land and buildings). This classification is based on a thorough evaluation of different national perspectives on MSMEs’ taxonomy.
| Table 1. Classification adopted by National Policy on MSMEs | ||||
| Indicator/Size of the Enterprise | Micro | Small | Medium-size | |
| Asset value (NGN) | <5M | 5M – 100M | 101M – 500M | |
| Asset value (USD)* | <12k | 12k -243k | 245k – 1.2M | |
| Annual Turnover (NGN) | ≤ 20M | ≤ 100M | ≤ 500M | |
| Annual Turnover (USD) | ≤ 49K | ≤ 243K | ≤ 1.2M | |
| Employees | <10 | 10 – 49 | 50 – 199 | |
| Source: National Policy on MSMEs | ||||
Should disagreements arise regarding the classification of a business based on its employment and asset criteria, the classification based on employment will take precedence. For instance, if a company has assets valued at seven million naira (N7m) but only employs seven individuals, it will be considered a microfirm. The employment-based classification is generally more stable compared to the asset-based definition, as inflationary forces can undermine the latter. We selected these definitions by taking into account all pertinent variables, including international comparisons and the unique characteristics of various sub-sectors and enterprises. Here is a concise explanation of the categories of MSMEs:
- Micro Enterprises
Micro Enterprises are defined as businesses with total assets (excluding land and buildings) that are below five million naira and have a workforce of no more than ten employees. A typical micro enterprise is run by a single proprietor who is primarily assisted by unpaid family workers, with occasional support from paid employees and apprentices. The output value is significantly lower, as indicated by a recent survey of informal firms, which reported an average of N15,000 per annum. The levels of technology and skills are significantly deficient. Nevertheless, the influx of several jobless individuals who have completed their education, including both secondary school graduates and university graduates, presents a significant opportunity for enhancing the technology and expertise within current businesses, as well as for the emergence of new firms that are based on advanced technology. Private resources serve as the primary source of funding, with modest contributions from family members and traditional mutual fund organizations (ESUSU) supplementing it.
The government has limited interaction with individual microenterprises, except for occasional engagement with cooperatives or other officially recognized groupings. Micro enterprises rarely seek and, even less frequently, obtain bank loans. Micro enterprises possess two distinct advantages. They are plentiful and available everywhere. Even a marginal enhancement in their production and output will lead to substantial benefits in employment, income, and productivity throughout the entire country. However, effectively addressing these issues necessitates the application of sensitivity, empathy, and a community-orientated approach.
- Small enterprises
Small enterprises are defined as businesses with total assets (excluding land and buildings) ranging from over five million naira to a maximum of fifty million naira and a total workforce of more than ten but not exceeding forty-nine employees. Small-scale firms, which employ between 10 and 49 individuals, encompass a similar range of enterprise kinds. However, they are mostly centred in the more contemporary and advanced sectors. Although the majority of them are sole proprietorships, a considerable proportion are incorporated businesses. This region has a large pool of highly educated workers and technical experts, as well as improved banking services. It possesses the greatest potential for expansion through the process of fostering, enhancing capabilities, and providing assistance. From an organizational standpoint, they have a strong representation through professional and trade associations.
- Medium Enterprises
These are defined as businesses with total assets (excluding land and buildings) that range from fifty million naira to five hundred million naira. These enterprises typically employ between 50 and 199 individuals. Medium-sized firms represent the formal aspect of Nigerian enterprise. They are mostly focused in a limited number of industries, including manufacturing, transportation, and information and communication technology. These industries are highly organised and interconnected. They possess relatively favourable access to both the government and the financial system. The limited number and narrow focus of these entities make them the infamous “missing middle” of Nigeria’s private enterprise system.
- Food insecurity
The issue of ensuring access to sufficient and nutritious food extends beyond individual countries or regions and gained worldwide attention in 2015 with the establishment of the Sustainable Development Goals (SDGs). Goal 2 aims to achieve zero hunger by 2030 by eradicating malnutrition, ensuring food security, enhancing nutrition, and promoting sustainable agriculture.
Food security, as defined by the United Nations Committee on World Food Security, refers to the condition in which individuals have unrestricted access to nutritious, adequate, and safe food that fulfils their dietary requirements and preferences, enabling them to lead a healthy and productive life consistently.
The highlighted words denote the eight elements of food security. If any of these characteristics are lacking, it indicates a certain level of food insecurity. As the number of missing components rises, so does the level of food insecurity. The Food and Agriculture Organisation (2006) expanded the concept of food security to encompass the availability of essential resources like clean water, sanitation, and healthcare in addition to food. This raised the standard and broadened the discussion on food security to include not only the fundamental aspect of food but also the whole person’s welfare.
The degree of compromise underlying the determinants such as availability, accessibility, cost, and quality determines the severity of food insecurity. We can classify the severity of food insecurity into three categories:
- Very severe: complete lack of physical, social, and/or economic access
- Severe: There is a lack of adequate, safe, and nutritious food.
- Moderately Severe: There is no specific dietary preference or dietary balance identified.
- Poverty
The international community has defined poverty broadly, encompassing both material and service deprivation (such as food, shelter, and basic services), as well as issues pertaining to voice, representation, and power. Simultaneously, it employs narrower income metrics, as outlined in the MDGs, which characterize poverty as the state of subsisting on $1 per day or less.
The MDGs indicated more than 80 million Nigerians as impoverished, with over 50 percent experiencing multi-dimensional poverty due to restricted access to education, healthcare, electricity, and other essential services. Poverty possesses a structural nature. Seventy-two percent of the extremely poor reside in Northern Nigeria, where the primary economic activity is low-productivity subsistence agriculture.
Furthermore, fertility rates exceeding the national average drive population growth, outpacing output growth. Inadequate educational outcomes in the region exacerbate the adverse effects of poverty in the North. Data indicates that approximately 40% of Nigerians reside below the national poverty threshold. A significant number of Nigerians, particularly in the northern regions, experience deficiencies in education and access to essential infrastructure, including electricity, safe drinking water, and improved sanitation (World Bank, 2022). According to the 2022 Multidimensional Poverty Index survey, approximately 63% of Nigeria’s population, equivalent to 133 million people, experience multidimensional poverty.
The National MPI stands at 0.257, signifying that impoverished individuals in Nigeria encounter slightly more than one-quarter of all potential deprivations. Approximately 65% of the impoverished population, totalling 86 million individuals, resides in the North, whereas 35%, equating to nearly 47 million, is located in the South (National Bureau of Statistics, NBS, 2022).
Based on the above discussion, MSMEs are essential in enhancing output, that is, in any economy’s production process. Thus, we can endogenize MSMEs in a general production function as follows:
Where;
Y = total output
K = capital
L = labour
Mse = micro, small, and medium enterprises.
It is hypothesized that an increase in capital, labour, and MSMEs would increase output, all things being equal.
Furthermore, MSMEs have impact on poverty reduction, employment, food security, growth and other relevant economic indicators such as inflation, exchange rate and openness. We can formalize the relationship as follows:
Where:
Pov = poverty
En = employment
Fs = food security
Δy = growth in GDP
X = control variables such as exchange rate, inflation, and openness.
Equation (2) can be disaggregated into:
Where:
M = micro enterprises
S = small enterprises
Mm = medium enterprises.
Given the availability of data or an extensive survey, the above equations can be properly formulated and estimated to ascertain the precise relationship and interaction between MSMEs and the relevant economic variables. Due to the paucity of data, we would rely on stylized facts to discuss the impact of MSMEs on poverty and food security.
3.0 Stylized Facts on MSMEs[1], Poverty and Food Security
The Small and Medium Development Agency of Nigeria (SMEDAN) reported a decline in the number of registered MSMEs in Nigeria between 2017 and 2020. Although their contribution to GDP reduced by 3.5%, there was a corresponding 3.5% increase in their contribution to employment. In 2022, the International Labour Organization (ILO) disclosed that MSMEs contributed 48% to Nigeria’s GDP. Undoubtedly, the sector continues to play a pivotal role in Nigeria’s growth, particularly during this critical period, but its ability to lift people out of poverty and drive growth continues to face familiar challenges.
Micro, Small, and Medium Enterprises play a vital role in Nigeria’s economy, contributing significantly to employment generation, poverty reduction, and overall economic growth. They account for about 80% of employment and over 40 percent of Gross Domestic Product. According to the NBS, the total number of MSMEs as of 2020 stood at 39,654,385 with micro enterprises constituting 96.9% and SMEs making up 3.1%.
Some of the key findings in the 2024 MSME survey are as follows;
- Over 50% of surveyed MSMEs reported that decline in demand for their product or service is attributed to higher retail prices and low purchasing power of customers
- Inadequate access to finance, poor electricity, multiplicity of taxes among others hindered the growth of MSMEs
- Family and friends, bank loans, overdraft and credit lines, remain the top sources of funding for the surveyed MSMEs
- High interest rate, several procedural requirements, and insufficient collateral were the top hinderances to accessing loans for the surveyed MSME’s
- Most of MSMEs in Nigeria pay 1 to 5 taxes with 65% citing VAT as their primary paid tax
- High cost of energy significantly impacted the surveyed MSMEs as over 60% depend on the national grid and alternative sources
- Majority of MSMEs surveyed acknowledge the importance of technology and are harnessing its power to promote their businesses
Nigeria’s Micro Enterprises (ME) accounted for 96.9%, while SME’s accounted for 3.1% of the total number of businesses in the country. MSMEs contributed about 46.3% to the national GDP, accounted for 6.21% of gross exports, and employed over 84% of the total workforce as of 2020. In terms of ownership structure, 96.2% of MSMEs are sole proprietorships, while 3.3% are partnerships, faith-based organizations (0.1%), and others (0.4%). Men owned 67.1% of the surveyed MSMEs, while women owned 32.9%. Also, about 86% of SME owners were between the ages of 20 and 60.
About 67% of the surveyed MSME reported a decrease in the demand for their products or services. When questioned about the reason for the decline, 38% attributed it to the high cost of their products, while 36% cited the low purchasing power of consumers as the primary cause. The decline in demand for their products and services over the past two years is attributed to macroeconomic headwinds such as inflationary pressures, currency depreciation, and slow economic growth.
Furthermore, 12% reported that the decline was due to consumers switching to alternatives, while 10% attributed it to changing consumer preferences. Headline inflation reported in December 2023 stood at 28.92%, driven by increased food prices, naira devaluation, a high import bill, rising energy costs, and logistic costs.
The surveyed MSMEs showed that the top factors hindering their growth include inadequate access to finance, poor electricity, multiplicity of taxes and levies, inadequate manpower, insecurity, and government policies. Funding is an essential enabler of small and medium enterprises’ growth and development. 35% of the businesses surveyed mentioned inadequate access to finance as their number one challenge.
Although the government has instituted development finance programmes such as the ₦500 billion debenture stock approval by CBN and more recently the ₦70 billion MSME Development Fund. The biggest costs to the daily operations of MSMEs are attributed to infrastructure challenges, particularly electricity. According to 21% of respondents, power is a major challenge to their business growth. Myriad challenges, such as deteriorating plant/unit capacities, poor maintenance, inadequate gas supply, limited distribution network, and the commercial viability of Discos operations, overwhelm Nigeria’s power sector. These challenges adversely affect the business environment in Nigeria, leading to significant economic costs for MSME and economic growth.
[1] This section draws heavily from the survey conducted by PWC
There is an unmet demand for credit by Nigerian MSMEs of approximately $32.2 billion, an equivalent of ₦13 trillion. On an aggregate level, demand for credit is highest among micro entrepreneurs and in the agriculture and retail trade sectors. A large proportion of MSMEs seek loans that are less than ₦10 million ($24,700). Micro and small enterprises typically seek for loans less than $2000, while the medium enterprises require larger loans. Private sector lending to micro, small and medium enterprises (MSMEs) in Nigeria remains limited (IMF, 2023).
It is important to state that family and friends remained the dominant source of funding for most MSMEs. In 2022, 38% of the respondents reported that family and friends were the primary source of finance for their business. Some factors driving this trend include a lack of documentation requirements, ease of funding, and flexible repayment. According to those surveyed, bank loans and overdrafts were the second most common sources of funding. Compared to the previous edition of the MSME survey, 26% of those surveyed accessed funding through bank loans and credit lines, such as microfinance banks and deposit money banks.
The other sources of funding have remained low due to unique restrictions on accessing MSMEs’ funds. The restrictions may originate from the demand or supply side. Some demand-side constraints include the inability to fulfil requirements and membership in specific groups. Supply-side constraints include ineffective customer verification systems, manual reporting systems, and a high default rate. The government, through the Federal Ministry of Industry, Trade, and Investment (FMITI), has established three funds totalling N200 billion to support businesses across Nigeria in 2024. The fund aims to support eligible MSMEs across the country to mitigate the high cost of production, marketing, and distribution of products, primarily due to infrastructure deficiencies and other ancillary factors.
High interest rates, several procedural requirements, and insufficient collateral were the top hindrances to accessing loans for the surveyed MSME’s. The average maximum lending rate has grown from 27.8% in 2022 to 28.3% between January and June 2023. The consecutive interest rate increase between January and May 2023 to curb inflationary pressures had unintended consequences for MSMEs’ credit availability.
The increase in the Monetary Policy Rate (MPR) to 18.75% in 2023 from 16.5% in 2022 caused a sharp rise in the maximum lending rate to 28.3%, potentially reducing MSMEs’ ability to access credit. 27% of the respondents reported that the high interest rate was a major barrier in their decision to explore loans from financial institutions. 26% of the respondents said the process required to obtain the loan was long.
This may be due to the country’s poor verification system for MSMEs, which makes credit access cumbersome. Other factors, including insufficient collateral and inadequate documentation, could be associated with the informal structure of most MSMEs in Nigeria, particularly the micro and small enterprises, which are often viewed as too costly and risky to service. Loans and financing to MSMEs remain low relative to the required financing to close the funding gap for MSME’s in the economy. Microfinance banks had disbursed up to $658 million in financing to MSMEs by 2020. Private equity and venture capital firms also financed MSMEs by up to $640 million. Commercial banks are also an important source of funding for MSMEs.
Commercial banks disbursed an estimated $340 million to MSMEs in 2020. As of September 2023, commercial banks committed a total of $285 million to lending to both businesses and individuals. Estimates suggest that commercial banks and microfinance banks disbursed 25% of their loans to MSMEs, with commercial banks exclusively committing funds to medium-sized enterprises. The development and proliferation of other digital financial service providers presents an opportunity for MSMEs, especially with the growing number of digital channels and agent networks. Despite the prohibition on loan offerings for mobile money operators and payment service banks, the platforms, which include unstructured supplementary service data (USSD), offer scalable loan products.
Poor electricity is the second major challenge confronting the MSMEs subsector in Nigeria. In response to this survey, 74% of business owners use electricity from distribution companies as their primary source of energy, while 68% reported using petrol, 21% use diesel, 10% use solar panels, and 7.9% use a mix of all the listed energy sources.
The National Bureau of Statistics (NBS) conducted a survey in 2020 and found that Nigerians receive an average of 6.8 hours of electricity per day, with several areas completely disconnected from the supply. The challenges facing Nigeria’s power sector, such as gas flaring, equipment vandalism, and a poor state of infrastructure, have culminated in an inadequate supply of grid electricity, which raises energy costs significantly for MSMEs.
3.1 Stylized Facts on Poverty
The MDGs categorize more than 80 million Nigerians as impoverished, with over 50 percent experiencing multi-dimensional poverty due to restricted access to education, healthcare, electricity, and other essential services. Poverty possesses a structural nature. Seventy-two percent of the extremely poor reside in Northern Nigeria, where the primary economic activity is low-productivity subsistence agriculture. Furthermore, fertility rates exceeding the national average drive population growth, outpacing output growth. Inadequate educational outcomes in the region exacerbate the adverse effects of poverty in the North. Data indicates that approximately 40% of Nigerians reside below the national poverty threshold.
A significant number of Nigerians, particularly in the northern regions, experience deficiencies in education and access to essential infrastructure, including electricity, safe drinking water, and improved sanitation (World Bank, 2022). According to the 2022 Multidimensional Poverty Index survey, approximately 63% of Nigeria’s population, equivalent to 133 million people, experience multidimensional poverty. The National MPI stands at 0.257, signifying that impoverished individuals in Nigeria encounter slightly more than one-quarter of all potential deprivations. Approximately 65% of the impoverished population, totalling 86 million individuals, resides in the North, whereas 35%, equating to nearly 47 million, is located in the South (National Bureau of Statistics, NBS, 2022).
| Table 2. Nigeria Poverty Profile | |||||
| Area | MPI | Incidence
(%) |
Intensity
(%) |
Population Share (%) | Number of poor (million) |
| National | 0.257 | 62.9 | 40.9 | 100.0 | 132.92 |
| Rural | 0.302 | 72.0 | 41.9 | 69.6 | 105.98 |
| Urban | 0.155 | 42.0 | 36.9 | 30.4 | 26.94 |
| Source: NBS (2022) Multidimensional Poverty Index (MPI) Survey | |||||
| Table 3. Nigeria Poverty Profile: Regional Distribution | |||||
| Area | MPI | Incidence
(%) |
Intensity
(%) |
Population Share (%) | Number of poor (million) |
| National | 0.257 | 62.9 | 40.9 | 100.0 | 132.92 |
| North-Central | 0.272 | 66.3 | 41.0 | 14.4 | 20.19 |
| North-East | 0.324 | 76.5 | 42.4 | 12.7 | 20.47 |
| North-West | 0.324 | 75.8 | 42.7 | 28.4 | 45.49 |
| South-East | 0.183 | 49.0 | 37.3 | 10.5 | 10.85 |
| South-South | 0.250 | 62.6 | 39.8 | 14.8 | 19.66 |
| South-West | 0.151 | 40.0 | 37.7 | 19.2 | 16.27 |
| Source: NBS (2022) Multidimensional Poverty Index (MPI) Survey | |||||
The poverty levels vary greatly among states, with multidimensional poverty rates ranging from 27% in Ondo to 91% in Sokoto. More than fifty percent of Nigeria’s population experiences multidimensional poverty and relies on dung, wood, or charcoal for cooking instead of utilizing cleaner energy sources. Significant deprivations are evident at the national level in sanitation, access to healthcare, food insecurity, and housing. Multidimensional poverty is more prevalent in rural areas, affecting 72% of the population, in contrast to 42% in urban areas (NBS, 2022). The Nigeria Multidimensional Poverty Index (MPI) is 0.257, indicating that individuals living in poverty in Nigeria encounter slightly more than one quarter of all potential deprivations. The value ranges from 0 to 1, where 0 indicates the absence of poverty and 1 represents complete poverty and deprivation.
Multidimensional poverty is more prevalent in rural areas, affecting 72% of the population, in contrast to 42% in urban areas. About 70% of Nigeria’s population resides in rural regions, which account for 80% of the impoverished population. Furthermore, the prevalence of rural poverty is more pronounced, with 42% of individuals in rural areas living in poverty, compared to 37% in urban settings. The 2022 global multidimensional poverty index (MPI), based on 2018 data, showed that 46.4% of Nigerians, equivalent to 90.9 million people, experienced multidimensional poverty. Furthermore, we identified an additional 19.2%, or 37.6 million people, as vulnerable to multidimensional poverty. The average intensity of deprivations in Nigeria, indicating multidimensional poverty, stands at 54.8% (NBS, 2022).
3.2 Stylized Facts Food Security
Food insecurity is becoming a growing policy concern in Nigeria. The country possesses abundant agricultural resources, with approximately 81 million arable and predominantly productive hectares. The principal crops cultivated include maize, cassava, guinea corn, yam beans, millet, and rice (Odukoya, 2020). Although there has been an increase in the production of basic food items within the country, the overall rise in food costs worldwide is having a negative impact on the state of food security.
Climate change, violent disputes, intra-state conflicts, and most recently, the advent of the pandemic, persistently exacerbate Nigeria’s food instability and subsequent malnutrition. Therefore, before the pandemic began, Nigeria initiated policies and programs to tackle food insecurity in order to effectively implement SDG 2.
However, the emergence of the COVID-19 pandemic hindered the achievement of the predetermined objectives of the Sustainable Development Goals (SDGs), particularly Goal 2. Prior to the pandemic, Nigeria was already dealing with a food crisis and malnutrition, with approximately 9.1% of Nigerians experiencing severe food insecurity between 2017 and 2019. Invariably, the lockdown exacerbated socio-economic uncertainties and disproportionately affected the livelihoods of the poor, acting as a social vaccine. This also led to an increase in food insecurity in the country (OSSAP-SDG, 2020).
The IMF (2023) report classifies over 40 percent of the Nigerian population as food insecure. Mekonnen et al. (2021) present comparable findings using the same data survey, contending that approximately 28 percent of the population experienced food insecurity as determined by the expenses associated with a diet that aligns with local food preferences and meets the recommended dietary standards.
The number of people experiencing severe food insecurity in 2022 increased by 5.4 million, reaching a total of 17 million individuals. This is over 9 percent of the population. This sum corresponds to level 3 food insecurity, which is characterized by acute malnutrition. At this point, households can barely meet their food needs by depleting vital livelihood assets or resorting to crisis-level coping mechanisms.
In January 2024, Nigeria experienced a significant increase in food inflation, rising from 33.9% in December 2023 to 35.41%. The prevalence of food insecurity in Nigeria witnessed a substantial rise, escalating from 66.2 million individuals in the first quarter of 2023 to 100 million in the first quarter of 2024 (World Food Programme, 2024). As of March 2024, 18.6 million Nigerians experienced severe hunger, while 43.7 million Nigerians resorted to hunger coping mechanisms classified as crisis-level or higher.
Elevated inflation, interest rates, and exchange rates, along with a high cost of conducting business, have contributed to the current cost-of-living crisis, making food increasingly unaffordable for a growing proportion of Nigerians. Furthermore, they allocate a substantial portion of their household income to implementing strategies to manage food costs. Between 2009 and 2023, the expenses for both essential and luxury items have increased threefold.
From 2019 to 2022, a variety of variables, such as currency exchange rate fluctuations, trade limitations, and the closure of borders, all played a role in causing an increase in food prices. The combined effects of COVID-19 and worldwide wars exacerbated this, leading to an increase in imported inflation. The CBN’s demonetization program, the withdrawal of fuel subsidies, and the unification of the foreign exchange regime significantly exacerbated the inflationary climate in 2023. Multiple factors contribute to the prevalence of food insecurity in Nigeria. Among these factors are the following:
- Pervasive insecurity and terrorism.
Banditry, terrorism, and kidnapping/abduction have significantly contributed to Nigeria’s food insecurity, leading to the abandonment or significant reduction of farming activities by both smallholder and commercial farmers. Additionally, in areas where agricultural production occurs, there are logistical limitations in transporting the products to processing centres or retail markets for distribution to consumers.
- Poor agricultural infrastructure
This refers to year-round farming and processing that aims to increase output, preserve yield across seasons, and ensure stable pricing. Government agencies often fail to coordinate their food policies effectively. This disconnect occasionally leads to significant quantities of perishable agricultural products for which adequate storage and processing facilities are lacking.
- Poor coordination of food policies among relevant government agencies
Furthermore, the alignment of special agricultural funding programs with other value chain activities is inadequate. These factors contribute to the unsustainability of crop cultivation. This disconnect occasionally leads to significant quantities of perishable agricultural products for which adequate storage and processing facilities are lacking. Furthermore, the alignment of special agricultural funding programs with other value chain activities is inadequate. These factors contribute to the unsustainability of crop cultivation.
- Limited scope for agribusiness
There is limited scope for agribusiness due to the lack of viable enterprises conducting significant agricultural activities. In recent years, numerous entities have established plantations, either in response to government intervention in specific value chains such as rice and cassava or due to the identification of opportunities arising from the increasing spatial concentration of the population in urban areas.
- Selected Government Initiatives on MSMEs
- The Microfinance Policy and Regulatory and Supervisory Framework for Nigeria.
The Central Bank of Nigeria (CBN) initiated the Microfinance Policy, Regulatory, and Supervisory Framework for Nigeria in 2005. The policy established the legal and regulatory framework for microfinance banking in Nigeria. The aim is to establish sustainable and credible microfinance banks that can effectively mobilise and allocate funds to the MSME sub-sector. The policy led to the creation of new microfinance banks and the transformation of certain existing community banks into microfinance banks. Currently, microfinance banks have established a financing avenue to tackle the limited access to finance faced by micro and small enterprises in Nigeria.
- The Small and Medium Enterprises Equity Investment Scheme (SMEEIS)
This is an initiative that addresses the Federal Government’s concerns and policy measures, aiming to significantly transform the sub-sector by providing access to adequate and cost-effective funding. Nigeria mandates all commercial banks to allocate 10% of their profit after tax (PAT) for equity investment in small and medium enterprises. As of December 2009, the total amount allocated by the banks under the scheme was $42 billion. Nonetheless, the scheme failed to attain the intended impact, as a majority of SMEs expressed disinterest in equity participation due to concerns over potential loss of control over their businesses. Most borrowers lack the required 60% equity contribution, leading to delays in disbursement due to perceptions of uncooperativeness. Furthermore, many SMEs lack a viable business plan, an effective marketing strategy, or robust accounting systems, and fail to conduct their transactions through the banking system.
- The N200 billion Small and Medium Scale Enterprises Guarantee Scheme (SMECGS)
Initiated in 2010, the N200 billion Small and Medium Scale Enterprises Guarantee Scheme (SMECGS) aims to accelerate sector development, foster industrialization of the economy, and improve credit accessibility for small and medium enterprises and entrepreneurs. The scheme offers guarantees on loans from banks to the sector, addressing the risks that have previously deterred lending to this area. The scheme’s beneficiaries include small and medium enterprises that possess total assets not exceeding $500 million and employ between 11 and 300 staff members. The scheme may provide a maximum guarantee of $100 million in the form of working capital, a term loan for refurbishment or equipment upgrades, expansion, or an overdraft facility.
(iv) The N200 billion SME Restructuring/Refinancing Fund
The government established the N200 billion SME Restructuring/Refinancing Fund through the Central Bank of Nigeria. The Fund’s goal was to refinance or restructure the existing loan portfolios of banks within the sector. The Fund originated from the $500 billion debenture stock issued by the Bank of Industry. The Fund’s primary goal is to increase credit access for small and medium enterprises and strengthen commercial banks’ financial position. The Bank of Industry administers the scheme, allocating funds to participating banks in order to restructure their loan portfolios.
- The N100 billion Cotton, Textile and Garment (CTG) Fund
The government, through the Central Bank of Nigeria, created the N100 billion Cotton, Textile, and Garment (CTG) Fund to provide loans to small and medium enterprises involved in the cotton, textile, and garment value chain. The fund’s primary goal is to revitalize and facilitate the textile industry’s economic recovery, in line with the Federal Government’s transformation agenda to restore the industry’s former prominence.
- The N2 billion NERFUND Facility
The country is currently realigning the N2 billion NERFUND Facility to enhance the MSME sector’s growth and development. The Federal Government has recently allocated $2 billion to the Fund for direct lending to the MSME sub-sector. To facilitate Fund disbursement, NERFUND established a Memorandum of Understanding with SMEDAN and other key stakeholders, allowing clients to submit applications accompanied by viable business plans for effective outreach. The aim is to enhance MSMEs and align them with the economic goals of the government.
- The N5 billion Dangote Fund for MSMEs
The government is collaborating with the private sector to stimulate the MSME sub-sector. One such collaboration is the $5 billion Dangote Fund allocated to the Bank of Industry for the purpose of on-lending to micro, small, and medium enterprises in Nigeria.
- Campaign for Patronage of Made-in-Nigeria Products
The Federal Government’s Buy Made in Nigeria Products Initiative is a commendable program that aims to stimulate the MSME sector. The campaign has created a sufficient market for products manufactured in Nigeria. The initiative has enhanced the market presence and marketing of sector products and services through a revitalized and assertive approach to packaging and quality improvement. The initiative has facilitated market access by increasing MSMEs’ turnover and improving their competitiveness.
- The Role of the Bank of Industry (BOI)
Apart from the various intervention programmes by the government and other agencies, the BOI has been a major contributor of financial resources to MSMEs. Table 4 below shows the trend that increased between 2021 and 2023, perhaps due to the bank’s new initiatives.
| Table 4. Loan Disbursements to MSMEs | |
| Year | Disbursement of Loans (N’ Billion) |
| 2015 | 5.7 |
| 2016 | 8.0 |
| 2017 | 29.5 |
| 2018 | 33.9 |
| 2019 | 53.0 |
| 2020 | 28.77 |
| 2021 | 27.0 |
| 2022 | 69.2* |
| 2023 | 77.2* |
| Source: BOI Annual Reports (Several years)
Note: *Include MSME Survival Fund, BRAVE Program, NG-Cares Program & SEEP Fund |
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- The FGN MSME Intervention Fund
This is a N75,000,000,000 (Seventy-Five Billion Naira) fund for Micro, Small, and Medium Enterprises (MSMEs) in Nigeria. The fund will provide support to eligible micro, small, and medium enterprises, acting as a buffer against the high production, marketing, and distribution costs that primarily stem from infrastructure deficiencies and other ancillary factors affecting MSMEs in Nigeria. Each beneficiary would receive a maximum of N1,000,000 (one million naira). The fund would be disbursed at an interest rate of 9% all-inclusive per annum, with a tenure of 3 years for equipment and working capital.
- Challenges Facing MSMEs
While MSMEs have significant potential to contribute to poverty alleviation and food security, they face several challenges that can impede their impact:
- Access to Finance
One of the most significant challenges facing MSMEs is access to finance. Many MSMEs struggle to obtain credit from formal financial institutions due to a lack of collateral, credit history, and financial literacy. This lack of access to finance can limit their ability to invest in new technologies, expand operations, and increase productivity.
- Regulatory Barriers
MSMEs often face complex and cumbersome regulatory environments that can increase the cost of doing business and limit their growth. In many countries, the process of registering a business, obtaining permits, and complying with tax regulations can be time-consuming and costly for MSMEs, particularly those operating in the informal sector.
- Infrastructure Deficiencies
Inadequate infrastructure, such as poor roads, unreliable electricity, and limited market access, can have a significant impact on MSMEs’ productivity and competitiveness. In many developing countries, infrastructure deficits can increase the cost of production and distribution, reducing the profitability of MSMEs.
- Limited Market Access
Many MSMEs struggle to enter new markets due to a lack of market information, marketing skills, and business networks. This limited market access can constrain their ability to grow and diversify, reducing their capacity to contribute to poverty alleviation and food security.
- Capacity and Skills Development
MSMEs frequently lack the technical and managerial skills necessary to improve productivity and competitiveness. This skills gap can hinder their ability to adopt new technologies, improve product quality, and meet market standards, limiting their growth and impact.
4.1. Nexus Between MSMEs, Poverty Alleviation, and Food Security
MSMEs have the potential to contribute to poverty alleviation in Nigeria, primarily through job creation and income generation. MSMEs serve as the primary source of employment in many developing countries, especially in rural areas with limited formal employment opportunities. By providing jobs, MSMEs can offer a means of livelihood for millions of people, helping to lift them out of poverty. Furthermore, MSMEs frequently employ vulnerable populations, such as women, youth, and the less educated, who might otherwise face exclusion from the labor market.
Additionally, MSMEs can contribute to poverty reduction by fostering local economic development. They can stimulate local economies by leveraging local resources, promoting local investment, and creating demand for local goods and services. This localized economic activity can lead to improved infrastructure, better public services, and increased community welfare, further contributing to poverty alleviation.
However, the impact of MSMEs on poverty reduction is not without challenges. Many MSMEs operate in informal sectors with limited access to financial services, markets, and business development support. This lack of access can hinder their growth and sustainability, reducing their capacity to create stable, long-term employment. Furthermore, MSMEs frequently face regulatory barriers, inadequate infrastructure, and high business costs, which can further limit their ability to contribute to poverty alleviation.
In the same vein, MSMEs play a crucial role in the food and agriculture sectors in Nigeria. MSMEs operate in various stages of the food supply chain, from production and processing to distribution and retail. By enhancing food production and distribution, MSMEs can contribute to food availability, a critical dimension of food security.
Moreover, MSMEs contribute to food accessibility by providing employment and income to local communities, enabling them to purchase food. Small-scale food producers, processors, and traders often make food products more affordable and accessible to low-income households, thereby enhancing food security. MSMEs also promote food utilization and stability. Many small food enterprises focus on processing and preserving food, which can help reduce post-harvest losses and ensure a stable food supply throughout the year.
Additionally, MSMEs contribute to dietary diversity by providing various food products that enhance nutrition. Despite their significant potential to promote food security, MSMEs in the food sector face numerous challenges. Limited access to finance, technology, and markets can hinder their growth and ability to scale up operations. Many MSMEs in the food sector operate informally, limiting their access to formal markets and business development services. Hence, inadequate infrastructure, such as poor transportation networks and unreliable electricity, can affect their ability to produce and distribute food efficiently.
- Conclusion
Micro, small, and medium enterprises (MSMEs) are essential in developing economies, making substantial contributions to employment, poverty reduction, and food security. This paper examined the role of MSMEs in promoting economic growth and development, alleviating poverty, and enhancing food security, while also analysing the challenges encountered by these enterprises in Nigeria. Micro, small, and medium enterprises (MSMEs) possess the capacity to significantly contribute to poverty alleviation and enhance food security. MSMEs contribute to sustainable development goals by providing employment, generating income, and improving food production and distribution.
In order to perform optimally, MSMEs require support to address challenges such as access to finance, regulatory barriers, infrastructure deficits, limited market access, and skills gaps. Addressing these challenges and leveraging the strengths of MSMEs enables policymakers and development practitioners to improve their effectiveness in poverty reduction and food security, thereby fostering a more inclusive and sustainable development going forward.
Despite the presence of numerous development finance institutions, market gaps persist, suggesting that increased outreach and scale could enhance financial intermediation. Key policies encompass (i) the modernization of the development finance regulatory framework to enhance access for MSMEs; (ii) the reduction of financial resource costs; and (iii) the simplification of guarantee terms for credits and loans. Regulatory interventions have the potential to enhance all segments of the credit market, ranging from microfinance to larger corporations.
Microfinance banks may be offered incentives, such as lower capital requirements, to make it easier for them to open branches in economic corridors. This means that efforts to create jobs and reduce poverty must prioritise improving the ability of MSMEs, especially micro-enterprises, to increase overall productivity and incorporate essential skills, particularly for marginalised groups. The objective would be to identify transformative MSMEs and enable their access to business development and financial services, thereby enhancing their competitiveness, facilitating business growth, and generating job opportunities.
It is necessary to utilize well-thought-out strategies to upscale the role of MSMEs in poverty alleviation and food security. Developing targeted financial products and services for MSMEs, such as microloans, credit guarantees, and venture capital, can help improve their access to finance. Additionally, financial literacy programs can enhance the capacity of MSMEs to manage finances and access credit. Regulation framework simplification can streamline regulatory processes and reduce administrative burdens for MSMEs.
Tax incentives and support services can also encourage MSMEs to join the formal sector. Investing in infrastructure enhancement, such as transportation networks, electricity, and digital connectivity, can reduce the cost of doing business for MSMEs and improve their access to markets. Public-private partnerships can also address infrastructure deficiencies. Furthermore, market access via market information systems, trade fairs, and business networks can assist MSMEs in entering new markets. Additionally, capacity-building programs can enhance their marketing skills and ability to meet market standards. By building skills and capacity, technical and vocational training programs can help MSMEs improve productivity and competitiveness. The availability of business development services, such as mentoring, coaching, and advisory services, can support MSMEs in adopting best practices and scaling up operations.
It is crucial to support rigorous research in order to determine the precise impact and interactions between MSMEs and relevant socio-economic factors in the economy. The outcomes of rigorous research would then drive policy formulation and implementation, guiding interventions and/or initiatives aimed at MSMEs.
