BY Stephen O. Obajaja – LLB (Benin), LLM (Lagos), BL


The role and importance Small and Medium Enterprises play in the development of nations has been well documented and is beyond doubt now that any emergent economy must have a viral and sustained SME sub sector which were critical to the development of most of the countries in East Asia which we fondly refer to today as the Asian Tigers or Dragons.

The significant role SMEs play in development is acknowledged universally. Even in countries such as the United State’s, where big corporations are dominant, SMEs still play enormous role in the country’s economy. In the US, of the 6, 200, 000 small businesses, 5, 400, 000 employ less than 20 employees each. Small businesses employ 72, 000, 000 people. In Asia, small enterprises make up more than 90 percent of the industries in Indonesia, Philippines, Thailand, Hong Kong, Japan, Korea, India and Sri Lanka. They account for 98 per cent of the employment in Indonesia, 78 per cent in Thailand, 81 per cent in Japan and 87 per cent in Bangladesh. It is they (SMEs) rather than big businesses that wrought the famed Asian economic miracle. Since 1960, the eight highest performing Asian economies – Japan; the “Four Tigers” – Hong Kong, the Republic of Korea, Singapore, and Taiwan, China; and the three newly industrializing economies of South east Asia, Indonesia, Malaysia, and Thailand have grown more than twice as fast as the rest of East Asia, roughly three times as fast as Latin America and South Asia, and twenty-five times faster than Sub-Saharan Africa.

This is possible because SMEs enjoy a competitive advantage over large enterprises in servicing dispersed local markets, its labour intensive nature, income generating possibilities, capital saving capacity, potential use of local resources and reliance on few imports, flexibility, innovativeness and strong linkages with the other sectors of the economy.


There is no universally accepted definition of SMEs. SMEs are usually defined differently based on regional or country context. Definitions in countries lack uniformity and reflect the relative development of the respective economies. Even donor agencies, government agencies and ministries across countries, research institutes, agencies, private sector institutions, etc. use different definitions. For instance in the United States of America, the small business administration defines ‘small business’ as any business with less than 500 employees. The latter figure may represent medium to large enterprise in the African context. In Mauritius, SMEs are defined as manufacturing enterprises which use production equipment with an aggregate CIF value not exceeding 10 million rupees. Unlike other African countries, South Africa uses an elaborate categorization of survivalist, micro enterprises, small enterprises, medium enterprises and large enterprises. The micro and small enterprises are further sub divided into small micro and very small micro enterprises. Survivalist enterprises represent activities by people unable to find paid jobs or get into the economic sector of their choice. Small enterprises, which constituted the bulk of established businesses, have from 5 to 50 employees. They are often owner managed or family controlled businesses and are likely to operate from business or industrial premises, are registered and satisfy other formal registration requirements. Medium enterprises often employ up to 200 persons and have capital assets, excluding property, of about 5 million Rand. In Namibia, the government defines small businesses in the manufacturing sector as those with employment of less than 10 persons, turnover of less than N $ 1, 000, 000 and with capital employed of less than N $ 500, 000. In all other businesses, small business is defined as one which employs less than 5 persons, whose turnover is less than N $ 250, 000 and capital employed less than N $ 100, 000. In the context of SMI Credit Guarantee Scheme Loan  in Nigeria, SMEs are taken to be “enterprises in manufacturing activities or related service industries, as officially defined by the National Council on Industry (NCI). A small scale industry is an industry with a total capital base of N 1.5 Million and not more than N 50 Million with total cost ( including working capital but excluding cost of land, and/or workforce of 11 – 100 workers). A medium scale industry is an industry with a total capital employed of over N 50 Million and not more than N 200 Million, (including working capital but excluding cost of land and/or workforce of 101 – 300 workers. Thus, as could be surmised from the foregoing examples, there is hardly a uniform definition of SMEs.


The relevance of SMEs has been recognised in many developing countries, including Nigeria. In most of these countries, SMEs are specifically promoted by the Government to achieve the supply of potential entrepreneurs, create employment opportunities, mobilize local resources, and mitigate rural-urban drift and to distribute industrial enterprises.

As indicated above, SMEs as primarily expected to serve as a bedrock of supply of promising entrepreneurs who would be ready to take calculated risk to explore new ideas or favourable market development. In most developing countries, unemployment is the greatest threat to economic growth and development. Hence, the proliferation of virile SMEs could be an antidote to large scale unemployment in these countries. This could be especially helpful in mitigating rural urban drift, a burgeoning socio economic problem in the developing economies. This is because most of the enterprises in the rural areas are small scale in nature and an increase in their chances of survival could spell their greater ability to sustain the trust of rural dwellers.

In addition to the above, the promotion of SMEs is expected to ensure the structural balance between large and small industrial sectors, as well as rural and urban areas. SMEs are expected to ensure the supply of high quality parts and components, and intermediate products, thereby minimizing dependence on imported materials. Thus, SMEs would not only encourage indigenous technology but also promote the establishment of import substitution industries. They are expected to produce for exports thereby generating additional foreign exchange and hence help to strengthen the National currency and the balance of payment position. Finally, apart from ensuring effective mobilization of resources, SMEs are expected to ensure better use of scarce financial resources and appropriate technology. 


Although SMEs are vital to the economy, the sector is constrained by multifaceted problems that threaten its survival. Foremost among these constraints is the problem of limited access to deposit and credit facilities and other financial services provided by formal lending institutions. Institutional lenders often perceive lending to SMEs as too risky, because the entrepreneurs lack sufficient capital base and adequate collateral to guarantee loan. Second, lenders are of the view that small and medium entrepreneurs have no performance antecedents on which to evaluate their credit worthiness. They see small entrepreneurs as unstable, especially because most often enter and exit the market and often lack the incentives to remain for a tangible period of time, and are, as a result, risky borrowers. Third SMEs business performance is usually poor as a result of low education, managerial and entrepreneurial skills. Even in cases where government intervenes to stimulate investment in SMEs, institutional investors are reluctant to embrace such development, primarily because SMEs are under capitalized and have no asset base sufficient enough to guarantee loans. Fourth, access of cheap funds from capital market through the issuance of debenture and equity instruments are constrained by high transaction cost. For these and other reasons, SMEs financing is usually restricted to private equity and retained earnings, such that meaningful growth and expansion are usually inhibited by lack of external financing. The end results include a credit gap for SMEs and micro businesses (especially long term credits whenever it exists), higher real interest rates and enormous differentials in financial costs for small, medium and micro investors.


Over the years, the federal government has taken various steps, including monetary, fiscal and industrial policy measures to promote the development of SMEs. Specifically, the government has been active in the following areas:

  1. funding and setting up of industrial estates to reduce overhead costs;
  2. establishing specialized financial institutions, including the Small Scale Industry Credit Scheme (SSICSs), Nigerian Industrial Development Bank (NIDB), Nigerian Bank for Commerce and Industry (NBCI) to provide long term-credit;
  3. facilitating and guaranteeing external finance by the World Bank, African Development Bank and other international financial institutions;
  4. facilitating the establishment of the National Directorate of Employment (NDE), which also initiated the setting up of new SMEs;
  5. establishment of  the National Economic Reconstruction Fund (NERFUND) to provide medium to long-term local and foreign loans for small and medium scale businesses, particularly those located in the rural areas; and
  6. provision of technical training and advisory services through the Industrial Development Centers.

Ultimately these initiatives fell short of stimulating the growth or ameliorating the capital needs of SMEs.

In order to reposition financial institutions in stimulating investment in and growth of SMEs, government has undertaken various reforms, which include:

  1. The Bank of Industry (BOI) was created in 2000 after the merging of the former Nigerian Industrial Development Bank, Nigerian Bank of Commerce and Industry and NERFUND to assist SMEs in accessing public funds at affordable interest rates.
  2. The Nigerian Agricultural Cooperative Bank, Family Economic Advancement Programme (FEAP) and the Peoples Bank were merged in 2000 to create Nigerian Agricultural Cooperative and Rural Development Bank (NACRB) to channel long-term funds to agricultural and industrial development in the rural areas of Nigeria.
  3. The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) was established in 2003. SMEDAN has the mandate to initiate, articulate and coordinate public sector initiative on SMEs and to collaborate with the private sector in meeting government’s goals and objectives regarding SMEs.
  4. The Small and Medium Industries Credit Guarantee Scheme (SMICGS) was established through the 2004/05 Monetary and Credit Guidelines. It is a public sector driven initiative by the federal government to provide guarantee in respect of loans granted by any bank for industrial purposes. It is also to mobilize capital from the banking sector, by encouraging banks to lend to small businesses, which have viable projects and good prospects of success.
  5. Small and Medium Industries Equity Investment Scheme (SMIEIS). SMIEIS is a product of collaborative effort between the Central Bank and the Bankers Committee launched in 2001 to accelerate the development and growth of SMEs in Nigeria. Under this Scheme, Banks operating in Nigeria are required to set aside 10% of their profit before tax (PBT) annually and invest same as equity in SMEs. Such investment may be in the form of ordinary or preference shares. Each participating bank will also be expected to monitor, guide and nurture enterprises financed under the scheme. To ensure easy administration of the scheme, each participating bank is required to have Small-Scale Industries (SSIs) Unit which will have responsibility for appraising and making recommendations on the relevant SSI proposal. To monitor compliance, banks are required to render quarterly returns and give full particulars of acquisitions of shareholding in any SSI to the CBN within 21 days of the acquisition.
  6. The National Policy for Development of Micro, Small and Medium Enterprises (MSMEs) 2007. The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in collaboration with the United Nations Development Programme (UNDP) launched the National Policy for Development of Micro, Small and Medium Enterprises (MSMEs) in 2007 upon the approval of same by the Federal Executive Council on May 9, 2007.

 This is meant to be a widely accepted policy document that would guide the development of micro, small and medium enterprises (MSMEs) as all attempts at entrepreneurial developments before now were made in an ad hoc and haphazard manner due to absence of a road map and there was no co-coordinating agency of the Government such as SMEDAN to provide leadership in development initiatives.
The policy addressed issues such as broad strategy for MSME development and key policy and programme areas. The key programme areas included institutional, legal and regulatory framework concerning business registration, land/property rights and land use planning, contract enforcement and dispute resolution and then tax administration; the second programme area is technology, research and development whilst the third programme is extension and support services; others are marketing, infrastructure and finance. 

The policy also identified Special Target Enterprises (STE) for quick – win attention. These enterprises are in the following categories: micro food processing, cottage arts and crafts; textiles and clothing; wood processing and furniture; leather and leather products; basic metal, metal fabrication and engineering; solid minerals; electronic and information technology; building and construction related enterprises; oil and gas related goods and services; entertainment enterprises; women-owned enterprises; special enterprises for physically challenged people, including people living with HIV – AIDS.


Inadequacies in the legal framework continue to provide barriers for SMEs. These include inadequate property rights, bankruptcy laws and leasing contracts. As much as the courts try, in a tough environment, laws are not interpreted with consistency and there is inadequate enforcement of existing laws and commercial contracts. The credibility and efficacy of the judicial system has been questioned by many in the past and many of the SME respondents involved in the mapping exercise carried out by the World Bank as part of its 2002 assessment mission also expressed these sentiments. In general, the business community perceives the judicial system as slow, corrupt, and not to be trusted. Knowledge of commercial law is low. Collateral redemption is very difficult and it can take more than one year to move a case through the court system.
The Federal government is seeking to deal with all these issues on a broad basis and has limited capacity to aspects of these issues particularly as they affect SMEs. Better coordination is needed between various governmental agencies. In this context, the World Bank MSME project (with its efforts to integrate tax and business registration processes and procedures; reduce company registration transaction costs; develop alternative dispute resolution mechanisms; introduce improvements to the secured transactions frameworks; and improve the regulatory framework for leasing) comes at a particularly opportune time.


The legal and regulatory framework is not supportive of SME finance and growth. Issues related to legal and business environment impediments to SME finance and growth are still being addressed.

Law and regulation establish the basis for the successful operation of an SME regime so that SMEs and financial institutions may have confidence in raisingneeded capital and granting the necessary funds. SMEs will only grow if basic legal protections are available to provide both domestic and foreign investors with confidence to invest. Investors need to be assured – or at least have a minimal level of confidence – that their funds will not be lost as a result of fraudulent practices or as a result of most of the problems associated with SMEs as we have highlighted above, and that they will be able to participate fairly in benefits that may arise from the success of the business.

Taking into account the typical characteristics of many emerging markets, the obstacles to development that they face, and the difficulty of competing with global markets, policy makers should focus on the development of a set of rules that can provide capital to small and medium sized domestic companies, and the related reasonable legal and regulatory framework. Legal and regulatory reform should not seek to replicate the regulatory environment in more developed countries but, instead, should concentrate on what is “necessary” rather than what would be “nice.” Most important is ensuring legal certainty, and providing clearly expressed and readily understandable regulation that is accessible and easy to comply with and to enforce, especially given resource and other constraints. In considering what laws and regulations should be introduced to stimulate access to capital and the growth of SMEs, there is a need to have regard to the stage of development of SMEs in Nigeria in order to ensure that the laws will be a good fit in the existing legal framework and cultural environment.

It is not essential to introduce rules that reflect international best practice in one step if the rules are not relevant for the efficient conduct of SMEs in the country or if the state of our SMEs is not sufficiently mature to absorb them. It is important for the country to develop a program of reform that will facilitate development by striking a balance between changes that are necessary in order to move towards best practice and not making too many changes that impede reform and development. It is desirable to promote a program that will permit relevant actors in public and private sectors to move in the same direction at the same time over a reasonable timeframe that adapts to the current circumstances. It is a matter of balancing the desire to foster entrepreneurial activity against the need to adequately protect investors in the SME subsector of the economy. It may also be relevant to consider regional differences where laws are to be harmonized to promote regional initiatives and ensure that new rules will dovetail readily with the rules of nearby countries where linkages or alliances are likely to be forged in the future.

Legal matters and issues in relation to the development of SMEs are multifarious. The solution must necessarily be multi dimensional as most economic issues and variants affect SMEs the same way SMEs affect these issues and variants. Examples of these multifarious issues are the revision of banking regulations, power sector reform, pension reform, strengthening of microfinance banking, strengthening macroeconomic policies and microeconomic foundations, adding value to existing efforts, adapting best practice models that work, harnessing business initiative and market imperatives, leveraging, mobilizing and maximizing resources, focusing on and promoting sustainability.

The Government has tried to address these issues in several ways but as much as these initiatives are commendable, they are a drop in the ocean compared to what we need to do to compete if indeed ours will become one of the biggest 20 economies by 2020 or if we must halve poverty by 2015 in accordance with the Millennium Development Goals of the United Nations. Ours is indeed a race against time and a vicious one at that.

There need to be a serious overhauling of all legal benchmarks and incentives which defines and drives SMEs in this country taking into consideration our local circumstances and strength as SMEs as an engine of growth focuses on local imperatives whilst drawing on and utilizing international best practices across the world.

Government intervention and regulation cannot and must not be discountenanced as a judicious and prudent use of this in East Asia ensured the growth of SMEs and its fostering of the development of these Asian economies.

Laws and institutional frameworks could target specific industries and areas where Nigeria and indeed our SMEs have competence and comparative advantage so they can compete effectively and effectually in the global market.

Entrepreneurs and entrepreneurial spirit and technical know how on the part of our small business owners will be critical to the success of the SMEs as any legal framework must adequately address this. SMEs have high mortality rates because they are largely small, usually family owned and owner managed. Nothing is wrong with this in the long run if this entrepreneurial spirit is properly harnessed as many of America’s multi national corporations as we know them today started in people’s garages, kitchens and college dormitories. This American entrepreneurial spirit was celebrated by President George W. Bush in his year 2006 State of the Union Address.

Therefore we must have laws that encourage entrepreneurs to keep at it, innovate, take risks whilst at the same time assuring them minimum protection should they chance on hard times in the course of making SMEs work and thereby developing the Nigerian economy in particular and the nation in general.


Empirically, rapid economic growth has been identified as the single most important factor in reducing poverty, while the best agents for spreading the benefits of this growth more evenly is SMEs.

The Government support for SMEs development must be one fostering an efficient and enabling environment for enterprises to thrive. An appropriately designed and efficient legal and regulatory regime will help increase access to finance for SMEs. The regulatory regime should be cost effective and strike an appropriate balance between, on the one hand, laws and regulations that may be too restrictive to achieve supply of capital and, on the other, those that may be so relaxed that investors feel that there is an unacceptable level of risk and don’t care to venture into SME financing.
The legal and regulatory regime should be streamlined and made uniform as much as possible. The law must take into consideration reliable information and data on SME operations and challenges.

Any appropriate legal regime must necessarily embody the revision of banking regulations, power sector reform, pension reform, strengthening of microfinance banking, strengthening macroeconomic policies and microeconomic foundations, adding value to existing efforts, adapting best practice models that work, harnessing business initiative and market imperatives, leveraging, mobilizing and maximizing resources, focusing on and promoting sustainability.

Finally, the law must promote the use of private alternative financing options such as asset securitization, equipment leasing, pension funds, mutual guarantee schemes and venture capital.

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Asmelash Beyene; Enhancing the Competitiveness and Productivity of Small and Medium Scale Enterprises (SMEs) in Africa: An Analysis of Differential Roles of National Governments through Improved Support Services.

Ezeayom Lillian Sharon; The Concept of SME and the Problems of Securitisation of Loan by Commercial Lenders.

Felice B. Friedman and Claire Grose; Promoting Access to Primary Equity

Markets A Legal and Regulatory Approach.

John O. Sanusi; Overview of Government’s Efforts in the Development of SMEs and the Emergence of Small and Medium Industries Equity Investment Scheme (SMIEIS).

The East Asian Miracle (A World Bank Policy Research Report) Oxford University Press, 1993.

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