QUESTION 9: Has your business ever needed advice on certain issues or information concerning your business
5.3 RECOMMENDATIONS
There is no way Nigeria can achieve sustainable funding of small and medium scale enterprises by commercial banks and other agencies such as NERFUND, NIDB etc established for the funding purposes until both the external and internal problems of SMEs are solved. Banks react to the stimulus of the macroeconomic environment and as long as the environment remains conducive, banks will continue to exhibit risk-averse behavior irrespective of the programs put in place to address this problem including the SMIEIS program that was already highlighted. The following recommendations in my opinion will help improve the growth and development of the SMEs:
1. The government should cut down the interest rate since interest rates are not favorable to investors in the sense that the cost of funds could undermine profits and cause a loss of the investment. Interest rates in Nigeria officially are as high as 23.6% and this has a negative impact on
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the ability of small and medium scale industries to obtain credit from the banks.
2. The government should be consistent in its industrial policies so as to enable manufacturing firms to factor tariff measures into their trade decisions.
3. The government should provide adequate infrastructural facilities like electricity, roads and water supply for the SMEs as this will reduce the high cost of doing business. This will encourage banks to fund the SMEs as their investment will be recouped.
4. The government should regard SMEs should regard SMEs as the ‘eggs’
that hatch big businesses. Apart from the adequate incentives in (3) above, the government should support SMEs by bulk purchasing their products and retailing them both for the domestic market and for exports.
5. To facilitate their access to bank credits, the government should be issuing LPOs to the SMEs and payment should be made promptly to the SMEs as this will encourage their growth and the banks can also accept such contract papers as collateral.
6. On the issue of the internal problems of the SMEs like poor management practices, high rate of business failure, poor account standards, shortage of skilled manpower and financial indiscipline, the government should set up small business management assistance agencies manned by highly skilled
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and dedicated workers with the view of tackling these problems. The agencies should complement the provision of credit by insuring its efficient use through training and counseling of the small and medium scale entrepreneurs.
7. The banks should target potential borrowers for its core operations and form them into groups. Then soft loans should be made available to these SMEs, repayable within a specified period before others in that strategic group can benefit from the scheme. The idea is that with this system, a subtle pressure from other SMEs that are members of this strategic core is mounted on the benefiting group to repay so that others can benefit from the scheme. This will no doubt introduce healthy capitalization among SMEs through factoring the credibility of the borrowers.
8. The need for capitalization of the banks cannot be overemphasized as capitalization influences the way banks react to GDP shocks. Also, the credit supply of well capitalized banks is less pro-cyclical. This indicates that well capitalized banks are not risk-averse. Moreover, well capitalized banks can better absorb temporarily financial difficulties on their borrowers and preserve long term lending relationships.
9. If (8) above is achieved, the mega banks such as Union Bank should play a more active role in actualizing the objectives of SMIEIs by setting up separate desks to manage the funds and vigorously pursue the idea as
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with any other bank product and undertaking studies aimed at attracting foreign investors scanning overseas markets and monitoring developments that have implications for the sector.
10. The banks should adopt relationship lending as a dominant bank rule in funding SMEs. This will mitigate the problem of weak asset based collateral. However, this can be more effective if the borrowers show some high level of responsibility, discipline and trustworthiness. According to the CEO of one of the mega banks in Bangladesh, they give loans to SMEs without collateral and realize over 96 percent of their investments (CNN CONNECTS, Sept 05).
I strongly believe if all these recommendations are given serious attention by both the key players’ i.e. the government, the banks and the SMEs themselves, financing the SMEs by commercial banks will be made a lot easier, more effective and the impact will be felt towards the growth and development of small and medium scale industries vis-à-vis the economic development of Nigeria.
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