What America Can Learn From the Nigerian Economy

January 7, 2015

One of the strongest indicators of a robust, healthy economy is the prevalence and productivity of small to medium-sized enterprises (SMEs)—companies that usually have anywhere from 5 to 150 employees. In healthy economies, SMEs are the drivers of jobs and income for the middle class. For example, SMEs in Germany account for 78% of employment and 75% of the country’s GDP, while GDP per capita sits at a healthy $45,084. Similarly, the SMEs of the United Kingdom account for 99.9% of all private sector businesses, nearly 60% of all private sector employment, and contribute to the United Kingdom’s per capita GDP of $39,336. SME’s capability for innovation and flexibility, coupled with their ability to bring vitality to the marketplace and hire a majority of the middle class, makes them a crucial factor in a successful economy.

At the same time, the weakness of a country’s SMEs can be an indicator of a fragile economy. For example, in Nigeria, while 87% of Nigeria’s enterprises consist of SMEs, these firms only account for 10% of the country’s employment, 10% of GDP, and 2% of export earnings. And despite a recent slight economic upturn, Nigeria still suffers from a lack of prosperity, high unemployment, and miserable poverty. Nigeria’s struggling SMEs are a major contributing factor to these unfavorable economic circumstances. SMEs are failing in Nigeria largely due to a poor regulatory system, a lack of infrastructure, and a dearth of proper financing.

As the United States continues to sluggishly recover from a recession, is there anything that we, as a superpower, can learn from the current state of SMEs in Nigeria?

Significance of Infrastructure

A recent World Bank study concluded that “adequate infrastructure enhances productivity, higher returns, and higher economic growth rates.” The vast economic impact of poor infrastructure can be seen firsthand in Nigeria. As one economist wrote, “The manifestation [of poor infrastructure in Nigeria] is the deepening poverty, reduce production and reduce life expectancy, eroding patriotism, corruption and public discontent.”  Nigeria’s SMEs rely more upon an infrastructure and are far more sensitive to it than larger Nigerian enterprises are, as they have capital and resources to circumvent the effects of a poor infrastructure.

Think the United States has a far superior infrastructure to that of Nigeria? Think again. The United States’ infrastructure recently received a grade of D+ by the American Society of Civil Engineers. This report card included detailed descriptions of the faltering state of our waterways, railways, ports, highways, roads, and aviation.  The report card highlighted the outdated, inefficient, and overall weak state of our infrastructure and the negative impacts this has on our economy, as it pertains to growth, GDP, and global competitiveness.

Infrastructure is the motor that connects all businesses together and drives an economic engine. In order for our economy to encourage the growth of our SMEs, we must improve upon our outdated and poor infrastructure.

The Banking Regulatory System

SMEs in any economy are considered to be the most vulnerable  to regulation by a governing body, particularly as it pertains to banking and financing. In Nigeria, the single biggest obstacle that SMEs face is an inability to obtain financing through loans. Only 1% of SMEs obtain financing this way and are forced to rely on their own funds or retained earnings. Nigerian banks are extremely apprehensive to distribute loans to SMEs due to a historically low return on investment, a tendency to have more faith in the larger Nigerian firms, and a lack of encouragement provided by the government.

In an effort to alleviate the lack of financing through loans or banks, the Central Bank of Nigeria recently dedicated $200 million towards the restructuring of bank loans in addition to a $200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS). The restructuring of loans is aimed towards fast tracking the development of SMEs and improve the financial position of existing banks. The SMECGS program will guarantee credit4 from banks to SMEs and increase access of promoters of SMEs to credit.

In spite of being part of a much larger economy, United States’ SMEs face an identical struggle in achieving capital.

The impending Basel III requirements to come in 2015, for instance, will soon enforce banks to retain a certain higher percentage of liquidity, thus decreasing the amount of capital available to issue to small businesses.

The Basel Requirements will only exacerbate the struggle for United States SMEs seeking access to capital in the form of loans, thus stunting their growth and global competitiveness.

Still recovering from the 2008 recession, and banks remaining apprehensive to distribute loans, the regulatory Basel requirements pose no help to the financing of United States’ SMEs.

In order to avoid the struggle that Nigerian SMEs face and the impact they have on their economy, the United States must take all steps necessary to ensure the vitality and success of all SME’s. Although it’s only a start, these steps should include renovating and revitalizing our infrastructure coupled with creating a more SME-investing friendly environment.