This article is an overview of small and medium enterprises (SMEs) in Nigeria.
It provides key insights about SMEs in Nigeria.
SMEs in Nigeria make valuable contributions to the Nigerian economy.
They make about 49.78 percent contribution to the national Gross Domestic Product (GDP).
In addition, SMEs make contributions to the economy in terms of the number of persons they engage in employment and labor.
About 2,889,714 persons (including owners ) are employed by SMEs in Nigeria.
Perceptions about small and medium enterprises in Nigeria start-up difficulties
As entrepreneurship increases worldwide, intent and expectations to start business is highest in developing economies.
Nigeria has the highest proportion of the world’s population who believe they have the skills to run a business.
Nigerians are believed to have positive perceptions about entrepreneurship than people in other parts of the world.
Almost 90% of Nigerian adults think they have the ability to become entrepreneurs.
This belief is not merely an opinion, as research has shown that out of every 100 Nigerian adults, 35 are involved in some sort of entrepreneurial activities.
Despite having positive perceptions about business, many businesses do not last in Nigeria.
Entrepreneurs are believed to be solutions to achieving sustainable economic growth in Africa.
Yet, without enabling environment, small and medium enterprises will continue to face obstacles that limit their potential contributions to their economies.
The breakdown of small and medium enterprises in Nigeria.
According to the latest (2017) enterprise research survey in Nigeria. The total number of enterprises in Nigeria is 41,543,028.
The breakdown of numbers of enterprises in Nigeria are:
- Micro enterprises – 41, 469,947 (99.8 %), most businesses in Nigeria are in the micro enterprise category.
- Small and medium enterprises – 73,081 (0.2%).
Classification of micro, small and medium Enterprises in Nigeria.
According to the World Bank classification of SMEs and the Nigerian MSME policy classification.
Enterprises in Nigeria are classified as:
Key insights about Small and Medium Enterprises in Nigeria.
This section provides key insights about Micro small and medium enterprises in Nigeria based on the MSME survey.
Overview of SMEs in Nigeria major economic sectors.
The major economic sectors with over 80% of SMEs in Nigeria are:
- Education (27%).
- Manufacturing (23.4%).
- Wholesale/Retail Trade (18%).
- Human Health & Social Works (10.4%).
- Accommodation & Food Services (8.4%).
States with highest number of SMEs in Nigeria.
- Lagos (11.5%).
- Oyo (8.4%).
- Osun (4.1%).
- FCT (3.9%).
- Edo (3.7%).
Ownership structure of SMEs in Nigeria.
A breakdown of SMEs according to ownership status are:
- Sole Proprietorship (65.7%).
- Partnership (5%).
- Limited Liability Company (20.8%).
- Faith Based Organizations (5.7%).
- Cooperatives (0.9%).
- Others (1.9%).
Use of professional services by SMEs in Nigeria
Most SMEs in Nigeria do not make use of professional services.
However, among those that use professional services, the most patronised are:
- Accountants and Auditors.
- Business Consultants.
SMEs tend to make use of the services of Business consultants as a one-off activity. For example, for preparing business plans rather than for long term services.
Professional services by SME sectors.
The use of professional services by SMEs in Nigeria according to the major economic sectors:
- In the Education Sector, out of 19,719 SMEs, the SMEs that use the services of lawyers are (12,610). Those that use the services of accountants and auditors (12,734), business consultants (5,635). While those that use none (2,350).
- Also, in manufacturing – out of 17,094 SMEs – those that use the services of lawyers (6,386), services of accountants and auditors (6,247), business consultants (4,879), none (4,868).
- In addition, Wholesale/Retail Trade – out of 13,130 SMEs, those that use the services of lawyers (5,547), services of accountants and auditors (6,174), business consultants (4,190) and none (3,509).
- In the Human Health & Social Works sector- out of 7,596 SMEs – services of lawyers (4,385), services of accountants and auditors (5,075), business consultants (2,504), none (983).
- For Accommodation & Food Services – out of 6,108 SMEs – services of lawyers (3,829), services of accountants and auditors (3,956), business consultants (2,364), none (850).
Number of SMEs with business plan.
The use of business plans by SMEs according to the major sectors are:
- In Education sector – 14,860 out of 19,719 (75%).
- Manufacturing – 9,755 out of 17,094 (57.1%).
- For Wholesale/Retail Trade – 8,324 out of 13,130 (63.4%).
- Human Health & Social Works – 4,530 out of 7,596 (59.6%).
- Accommodation & Food Services – 3,865 out of 6,108 (63.3%).
Number of SMEs with business insurance.
In addition to business plan, the following are the numbers and percentages of SMEs with business insurance. These are the figures among the top sectors in Nigeria.
- Education – 6,650 out of 19,719 – (33.7%).
- Manufacturing – 4,466 out of 17,094 – (26.1%).
- Wholesale/Retail Trade – 4,959 out of 13,130 – (37.8%).
- Human Health & Social Works – 3,276 out of 7,596 – (43.1%).
- Accommodation & Food Services – 2,893 out of 6,108 – (47.4%).
Small business failure in Nigeria.
Reasons for micro small and medium enterprises failure in Nigeria
Despite the growth in numbers of small and medium enterprises in Nigeria. However, more than 50% of businesses fail.
Businesses fail due to barriers like poor education, lack of proper planning, social and cultural norms etc.
The key competence entrepreneurs need are the transferable, multi-functional package of knowledge, skills and attitudes.
Although all individuals need these skills for personal fulfillment and development.
These skills are particularly necessary for business success.
Therefore, they should have been developed by the end of compulsory schooling or training.
Lack of education is not necessarily lack of formal education. It can also mean lack of awareness or a lack of entrepreneurial literacy.
Entrepreneurial literacy is defined as the “possession of skills for analysis, interpretation and understanding of one’s self and others, the social and business environment using all legitimate manners and means of communication and relationship to make informed decisions about enterprises and persons that relate either directly or indirectly with such enterprises”
From the figures above, majority of the enterprises in Nigeria are in the micro sector.
The entrepreneurship spectrum in Nigeria consists of a top end which has a small number of educated and innovative entrepreneurs while the bottom end has the majority, mostly uneducated and unskilled.
Therefore, the Nigerian informal sector continuum is characterized by the bottom end where most of these businesses are not registered.
Many of these entrepreneurs are uniformed and lack awareness of the need to have a business plan.
Some do not understand the need to have business insurance.
Not only that, many lack access to vital information that can help in research and development.
In addition, poor accounting and book-keeping practices also contribute to SMEs failure.
Since often the key person lacks adequate training, there will also be little or no training or development for employees.
Based on the aforementioned, lack of entrepreneurial skills is a major cause of failure of SMEs in Nigeria.
Social and cultural norms.
Social and cultural norms have both positive and negative influence on SME failure.
For example, in some instances the extended family support entrepreneurs with initial capital.
This is a very useful support for entrepreneurs, considering the challenges of getting loans from banks and other sources.
However, in other instances, family obligations negatively impact entrepreneurs and business owners.
For example, in cases where loans meant for business is diverted by entrepreneurs for family affairs.
Such entrepreneurs may divert money meant for business to maintain their large family size, parties and extended family demands.
In addition, social and cultural norms affect the issue of gender and entrepreneurship in Nigeria.
The number of women who participate and succeed in business is limited because in many cases, women are culturally prevented from running competitive businesses.
Also, in some cases, the relatively low education and skill levels of women, limit their access to the various support services.
Many SMEs in Nigeria particularly those in the manufacturing sector fail because of inadequate infrastructure and suport.
Yet manufacturing companies are critical to the growth and development of any nation.
SMEs in the manufacturing sector need good roads to transport goods and to ensure smooth access to market.
Unfortunately, bad roads lead to high transportation costs.
Also, poor roads disrupts linkages across key sectors.
Hence, SMEs hardly enjoy the benefits of economies of scale.
As a result of inadequate infrastructure, many SMEs find it difficult to access cheap raw materials.
This is because of the cost of moving raw materials from cheap areas outweighs the benefits.
Therefore, not only the SMEs lose out. Besides, farmers in the rural areas who are suppliers of raw materials too lose viable market for their produce.
Poor electricity supply
In addition, manufacturing SMEs suffer from poor electricity supply.
They are unable to produce to expected capacity. Consequently, many SMEs rely on alternative power supply such as generators which is not sustainable in the long run.
The main source of initial capital for SMEs tend to come from personal savings.
Many SMEs also rely on loans and gifts from family and friends.
However, SMEs in Nigeria lack access to long-term loans.
Most loans (when available to SMEs) in the Nigerian market are short-term. Yet, SMEs require to long-term patient capital in order to grow and become successful.
Short term loans are often repayable between 12 months. Such loans are useful for running the business (working capital).
However, long term financing is required for projects and acquiring fixed assets such as machinery and other equipment.
Other reasons for SME failure in Nigeria
In addition to the aforementioned reasons, other reasons for SME failure in Nigeria are:
- The concentration of management on the key man and lack of succession planning.
- Market competition.
- Multiple taxation.
- Economic conditions.
- Pandemics e.g. the Covid-19.
- Poor product quality.
- Lack for proper sales and marketing strategy.
Positive aspects of business failure.
In this section, we’ll show why failure is not necessarily a bad thing. Failure has learning points that can help your entrepreneurial journey.
Have you ever failed as a business owner in Nigeria?
You should embrace failure because it is probably one of the most valuable experiences that you will ever have the (mis)fortune to engage in.
A small business failure is a difficult and complex change from the expected and desired result.
Failure happens when an entrepreneur under performs and desired targets are unmet.
A business failure is connected to the way a small business owner conducts his or her enterprise.
That is, apart from external factors already mentioned. Failure is also influenced by your behavior and decision-making skills as a small business owner.
According to statistics 80% of businesses crash and burn within the first 18 months of starting up. Research also shows that about 50% of newly established businesses in European economies failed in the first 5 years.
Though this seems to be bad news; however, studies have also shown that the experience of failure may be crucial for entrepreneurship.
Failure is a learning experience.
Don’t be too quick to judge an attempt as a failure. Though painful, failure can be a source for the improvement of entrepreneurship knowledge and skills after the failure.
Entrepreneurial failure reduces uncertainty and can increase the effectiveness of opportunity recognition.
Small business owners and entrepreneurs who see failure as a learning experience are better able to improve their knowledge, capabilities and experience in seeing opportunities.
In addition, learning will take place when you see failure as a moment not a monument.
Failure is your friend.
Don’t mistake failure for a foe; it is your friend.
Your flop is not your enemy, desist from taking it too serious; otherwise, you’ll get too anxious about every action.
Treat failure as a friend who is there to help you.
By reacting positively to failure, you can laugh and learn from the experience.
Failure is not an end.
Use failure as a springboard to reach higher goals.
Failure is not an end, it is not final.
Every time you take a chance at doing something the probability of failure increases.
As long as you are living and willing to try new things, you will win some, but will still goof somewhere down the road.
Research has shown that failure can improve “entrepreneurial preparedness” for subsequent entrepreneurial activity.
Failure acts as a stepping stone for spotting and exploiting new opportunities.
People who dwell on their failure would probably end up failing again because of the constant thought about the fault, problem or fall.
Do you have a good idea, go after it, get out into the world and win.
Embrace failure as a learning experience. However, no matter how small, concentrate on your success instead of the failure.
Resources for Micro Small and Medium enterprises in Nigeria
Lack of access to useful information to aid decision making is one of the causes of SME failure in Nigeria.
This section presents resources that help entrepreneurship research in Nigeria.
The resources are also useful for entrepreneurs and small business owners who want to carry out research for their businesses.
The Doing Business Report.
The Doing Business Project was launched in 2002 by the World Bank.
The Doing Business survey report is annual and contains information about the business environment.
If you need information about the business environment this report might be useful for you.
Particularly, it can help entrepreneurs to understand how government policies and other indicators can impact doing business in certain locations.
The report contains business regulations rankings across 190 countries.
In addition, the report provides data on selected cities within countries.
The information can help you to compare differences in business regulations between cities within the economy or region that has been ranked.
In Nigeria, data from the two biggest cities – Lagos and Kano are available.
Countries and cities are ranked according to ease of doing business using quantitative indicators such as:
- Starting a business.
- Dealing with construction permits.
- Getting electricity.
- Registering property.
- Getting credit protecting.
- Minority investors.
- Paying taxes.
- Trading across borders.
- Enforcing contracts.
- Resolving insolvency.
- Labor market regulation.
In the Doing Business Report, you’ll get information about the business regulations that enhance business activity and those that constrain it.
For example, how easy are the procedures, time and cost when you want to transfer a property
The National Survey of Micro Small and Medium Enterprises (MSMEs).
The national survey of MSMEs in Nigeria is a National collaborative survey by the Small and Medium Development Agency of Nigeria (SMEDAN) and National Bureau of Statistics (NBS).
Three reports have been published so far in 2010, 2013 and 2017.
The report covers information about enterprises in Nigeria employing below 200 persons (i.e. micro, small and medium enterprises – MSMEs).
It covers all the 36 States of the Federation and FCT.
The key insights that the National Survey of Micro Small and Medium Enterprises (MSMEs) provide about entrepreneurship include:
- Major economic sectors of enterprises and their contributions to the GDP in Nigeria.
- The number of MSMEs in Nigeria according to sectors of the economy.
- States with the highest numbers of enterprises in Nigeria.
- Ownership status of enterprises in Nigeria.
- The main challenges and constraints facing enterprises in Nigeria.
- The contributions of the MSMEs to employment
generation in Nigeria
- Also, the report contains contribution of MSMEs to exports from Nigeria.
- The the number of MSMEs owned on gender basis.
- The report provides knowledge about enterprises in Nigeria.
Entrepreneurs and small business owners can make use of the survey findings, as a guide to doing business in Nigeria.
Global Entrepreneurship Monitor.
The Global Entrepreneurship Monitor (GEM) was launched in 1999.
The GEM annual surveys have been carried out in 99 countries.
Also, Nigeria became a member of GEM in 2010 and the first study was published in 2012.
The key insights that the Global Entrepreneurship Monitor study provide about entrepreneurship are:
- Perceptions and intentions towards entrepreneurship.
- Factors that are likely to influence decision to make entrepreneurship the first career choice.
- Gender roles and dynamics in entrepreneurship.
- GEM also provides insights about the rates of participation in business.
- The reasons for establishing enterprises – Opportunity vs Necessity entrepreneurship.
- Policy implications and recommendations.
The revised classification of Micro Small and Medium enterprises in Nigeria
The revised classification of enterprises in Nigeria. Prior to the 2021-2025 revised National Policy on MSME, there were overlaps and a lack of clarity in terms of MSME (Micro, Small and Medium Enterprises) classification/definition. Two key changes were made in the policy framework to make some adjustments.
What are the two key enterprise classification changes in the revised MSME policy framework?
In order to counter the asset base definition and classification problems, the revised MSME policy framework, has adopted two key changes:
1. The replacement of the Asset Base with Business Turnover.
2. The split of Microenterprises in Nigeria into two sub-groups.
The revised classification of micro, small and medium enterprises in Nigeria – asset base definition change
Why is the asset base definition problematic for classifying enterprises in Nigeria?
The asset base definition that was used previously for classifying enterprises in Nigeria is problematic because of the following reasons:
- Inflation and exchange rate changes.
- Lack of uniform criteria for comparing older enterprises to newer ones.
- Lack of a transparent method to certify and value assets.
- Land is excluded in asset classification which placed agriculture enterprises specifically agronomy at a disadvantage.
- Startups such as fintech and other technology enterprises are able to adopt different methodologies that distorts the traditional asset base and business turnover relationship.
- The new tax incentive/waiver is for MSMEs turnover rather than their asset base.
The revised classification of micro, small and medium enterprises in Nigeria – inflation and exchange rate changes.
The inflation and exchange rate changes affect the value of the Naira and make asset base an unreliable way of classifying or defining enterprises in Nigeria.
The revised classification of micro, small and medium enterprises in Nigeria – productive capacity
Also, the asset base definition creates an uneven criteria for comparing older enterprises to new ones.
This is because more assets and resources are currently needed to create a given output than what was required to create similar output several years ago.
For example, one would need to invest more money now in order to get the same returns a lower of investment would have yielded years ago.
With the asset base definition challenge, the other option in the past was to use employment to group and define enterprises in Nigeria.
This still stands – when there are classification distortions, employment takes precedence.
The revised classification of micro small and medium enterprises in Nigeria – tracking assets
It is more difficult to track assets compared to turnover.
The lack of a transparent or objective way to
certify assets meant that, sometimes larger enterprises could under-report their assets and enjoy some of the benefits meant for MSMEs.
The revised classification of micro, small and medium enterprises in Nigeria – exclusion of land assets
The exclusion of land meant that the bulk of the assets of agricultural enterprises especially those in the rural and sub-urban areas are excluded.
This does not create a fair base for comparison with enterprises in other sectors such as services or manufacturing.
The revised classification of micro, small and medium nterprises in Nigeria – startups
Innovative startups e.g. Fintech companies are able to adopt methodologies that can help their enterprises scale and gain traction in multi-millions of Naira with a slimmer asset base.
The revised classification of small and medium enterprises in Nigeria – tax incentive and waiver
The new tax incentive/waiver targets MSMEs turnover rather than their asset base.
Therefore, it makes sense to define and classify MSMEs on the basis of the former rather than the latter.
The revised classification of micro, small and medium enterprises in Nigeria – the split of micro enterprises into two subgroups
The change from an asset base to a turnover enterprise classification or definition has also made it necessary to revise the micro enterprise category.
In addition to the already discussed reasons above, the micro enterprises category prior to this new change, had the highest number of enterprises in Nigeria.
The revised classification of enterprises in Nigeria – the Nano/Homestead enterprises in Nigeria
The Nano/Homestead enterprises is a new classification added to MSMEs in Nigeria.
The micro enterprises in Nigeria has been split into two to correct overlaps that occur using the Assets Base criterion.
The 2013 MSME survey report shows that within the micro enterprises category, 87.5 % of micro enterprises recorded an annual turnover of N1.2m or less.
However, in the same category, 1.05% earned a turnover of over N12m/annum.
Therefore based on turnover, it makes sense to separate the former (nano enterprises or ultra-micro enterprises) from the latter (the real micro-enterprises).
What is a nano or homestead enterprise in Nigeria?
A nano enterprise is an ultra- micro enterprise also sometimes referred to as mom-and-pop enterprise.They are typically family owned, controlled and operated. Such businesses are informal in nature and are owned by inexperienced investors who casually ‘play the market’. Examples include, street corner shops, automobile repair shops, local resturants etc.
Finally, another distinction between homestead or ultra-micro and the regular micro enterprises is the type of financial aid available through the Government Enterprise and Empowerment Programme (GEEP) for the unbanked and the underbanked.
For the Nano or Homestead enterprises, financial aid comes through TraderMoni where such enterprises can access a maximum of N10,000 and pay back N10,250.
The regular micro-enterprises could receive financial aid of up to N100,000 through MarketMoni but this comes with more stringent conditions.