But so little is known about this universe of entrepreneurs: the enablers helping them grow, or the obstacles holding them back. To address this knowledge gap, this month the Economist Intelligence Unit is publishing a new report, commissioned by IHS Towers, that shines a light on this all-important segment of Nigeria, now the largest economy in Africa.
We spent four months looking at ‘life as an SME’, carrying out interviews with companies from a range of sectors including fashion, entertainment and agribusiness, and speaking to large companies who are part of the SME ecosystem, including Cisco and Standard Bank, and experts at Lagos Business School and Nigeria’s National Bureau of Statistics.
The goal was to identify the primary enablers and constraints shaping SME productivity—spanning policy, infrastructure, technology, energy and finance—and to provide ideas to support SME productivity. In particular, we wanted to find out how ‘big picture’ issues like a stuttering electricity supply and bad roads trickle down into the day-to-day life of SMEs, and to look at how enabling forces such as market growth and technological advances are translating into SMEs’ daily lives.
One of the most illuminating interviews was that with Jason Njoku, founder of iRoko Partners, now one of the largest online distributors of African movies and music. The roadblocks iRoko Partners faced make the challenges of being an SME in Europe or North America seem trivial in comparison. Firstly, there was no interest from national banks in early stage funding, and the company launched thanks to a hefty personal investment, followed by venture capital injections from abroad. Even when the company was storming ahead, the banks remained little interested. Despite iRoko bringing in $3-4m, when it applied for a $100,000 overdraft, one bank asked it to freeze a corresponding amount in a UK bank. “I have found the Nigerian banks, in terms of being attractive to SMEs and people in general, a very challenging, inhospitable environment,” says Njoku.
Then come the infrastructure costs, such as the whopping $100,000 Njoku spent on power-generating equipment to compensate for the woeful power supply in the country. Add to this Nigeria’s imports process – costly and opaque – which threatened to starve the company of vital inputs. When Njoku tried to bring IT equipment into Lagos airport from London, a customs official sought to impose a $4,000 spot customs fee, calculated on a mobile phone. There is no online resource through which Njoku or any other business owner can work out what they owe in such situations. “At the moment we are growing our video editing team and I am trying to think about how to bring 20 of these machines into Nigeria. It is a nightmare to think about how to do that.”
Other SME interviews recalled similar travails, such as the sudden closure of two crucial ports in Lagos last December, which prevented goods getting to businesses for Christmas. “We had predicted our numbers for December, we had planned ahead, we had invested, and then the goods could not get to us. Many were left in the open air, getting destroyed,” says Honey Ogundeyi, founder and CEO of online fashion retail site, Fashpa.com. “A business can die because of something unforeseen or unplanned… As an SME you feel everything. It is the difference between driving an SUV and riding an okada [motorbike]. You feel every bump,” says Ogundeyi.
It’s not all bad news, though. Nigeria’s SMEs are a resilient bunch, and are fast adopters of new technologies to help them leapfrog constraints. Cloud computing is becoming popular even in SMEs with few staff. Employees at Maliyo Games, for instance, manage and share large files remotely, according to founder Hugo Obi. He can recruit the best talent from anywhere on the continent thanks to the cloud. “That was not possible when we started”.
Information and communications technologies aid the agility of SMEs by lowering operating costs but also create new business opportunities in areas such as the creative industries, retail and services. “People can afford to buy a mobile phone that, for about $50, has decent memory, and you have access to thousands of apps. Before, that was not the case. This is really good for game developers, because you know that your content has more chance of being seen,” says Obi.
Improving communications also means rural businesses, long isolated from the biggest market opportunities, are able to operate over larger geographies. The next productivity boost will come from increasing broadband penetration and improving mobile network quality. Reducing costs and fees levied on broadband providers and quickening the processes for spectrum auctions could yield major gains for SME productivity.
Nigeria’s recent peaceful elections were a landmark moment in the country’s history. While the list of challenges facing the new administration is long, there is no doubt that improvements to the SME business environment would have far-reaching effects on job creation, income growth and economic diversification, and help to ensure Nigeria’s promise translates into reality.
Source: Adam Green, Financial Times.
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