NIGERIA: SMALL ENTREPRENEURS THINK BIG

UNCLAS SECTION 01 OF 02 LAGOS 000424

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN EINV ECON NI
SUBJECT: NIGERIA: SMALL ENTREPRENEURS THINK BIG



1. (U) Summary: Small entrepreneurs face many
constraints, but they think big. Increasing interest
in microfinance may expand access to credit and
alleviate a particularly pressing problem. If it does,
Nigerian entrepreneurs may think even bigger. End
summary.


2. (SBU) The Nigerian business environment presents
obstacles almost too numerous to count. Power supplies
are notoriously unreliable, transportation and
telecommunications infrastructure is poor, barriers to
registering new businesses are inordinately high, and
access to credit is insufficient. Small entrepreneurs
face these constraints and more, but they persist in
doing business. According to the Nigerian Ministry of
Industry, small and medium enterprises (SMEs) account
for 10 percent of Nigeria's manufacturing output and 70
percent of industrial employment. They play an
immeasurably large role in the informal economy and
provide income for untold numbers of people.


3. (SBU) GON officials frequently acknowledge the
importance of SMEs in driving economic growth, but
efforts to support small entrepreneurs have been only
moderately successful. The GON's Small and Medium
Industries Equity Investment Scheme (SMIEIS) requires
commercial banks to set aside 10 percent of before-tax
profits for equity investments in industrial
enterprises, but much of this vast pool of money
remains on banks' books. Of the $150 million set aside
since the program's June 2001 inauguration, only thirty-
five percent has been invested. Bank executives say
they lack the expertise to evaluate the
creditworthiness of small enterprises and object to
expectations that they nurture businesses in which they
invest. They are not venture capitalists, they say,
and they simply cannot give small entrepreneurs the
advice and training they need. SMEs have proven risky
investments in the past, and bank executives are
reluctant to purchase equity when they cannot be
certain of returns.


4. (U) Given Nigeria's shortage of commercial
financing, micro and small business owners look to
microfinance institutions (MFIs) for funding. These
are often the only realistic sources of loans for the
smallest of Nigeria's entrepreneurs, many of whom may
need only a few hundred dollars. Some institutions,
like the Community Development Foundation (CDF),have
operated for years and financed hundreds of small
businesses. CDF is funded by international donor
organizations and engages principally in wholesale
microfinance, giving loans of $800 to $35,000 to apex
MFIs whose memberships range from 50 to 500 individuals
or groups. The organization has awarded approximately
$1.3 million in more than 240 loans since its inception
a decade ago, and Executive Director Akin Akintola
reports a 95 percent repayment rate. CDF's experience
shows that micro and small business owners can and will
repay loans, even when wholesale interest rates (at 21
percent) are comparable to existing commercial rates.


5. (U) CDF supplements its loans with grants earmarked
for capacity building programs. These provide
strategic planning and management training and teach
small entrepreneurs how to develop sound business
plans, which CDF executives hope will eventually help
small business owners secure financing from commercial
or community development banks. Akintola believes
capacity building is an important part of microfinance
- it's about more than just money, he says - but the
organization does what it can to reduce loan
recipients' reliance on MFIs and link them with private
sector institutions, the theory being, of course, that
CDF will be able to expand its client base as people
secure financing elsewhere.


6. (U) Ford Foundation and World Bank officials share
Akintola's recognition of the importance of technical
assistance. Both organizations provide wholesale loans
to MFIs, but emphasis on capacity building is growing.
The Ford Foundation's Representative for West Africa,
Dr. Adhiambo Odaga, notes that funding goes
increasingly to programs designed to strengthen
governance and management techniques and spread best
practices. The Ford Foundation's $3 million annual
budget funds technical training and computerization
programs and supports efforts to establish an MFI trade
association, introduce performance standards, and offer
a more limited range of easy to understand products.
These efforts will be supplemented by the World Bank's
recently announced $34 million technical assistance
program. Officials say they hope to provide business
development services, create alternative dispute
resolution mechanisms, and work with the Nigerian
Corporate Affairs Commission to reduce the business
registration process from 41 days to four. With
computerization and continued assistance, they say,
significant improvements are possible.


7. (U) Comment: Increasing interest in microfinance and
capacity building may expand access to credit and
alleviate one of Nigerian entrepreneurs' most pressing
problems. If SMIEIS and other GON support programs are
improved and expanded and if MFIs continue to operate,
entrepreneurs may not have everything they need, but
they may be free of at least one constraint. With
sufficient financing, small business owners can
continue to think big. According to World Bank
officials, catfish and cassava production might be
excellent places to start. End comment.
HINSON-JONES