As earlier noted, SMEs have contributed greatly to the growth and development of many of the developed nations in terms of employment, contribution to GDP as well as export. In a developing nation like ours, SMEs have been recognized as a foundation for achieving rapid economic growth and development through their output as well as employment potentials. However, despite the recognized numerous advantages of SMEs, the contribution of this sector to the overall economic development of the country has over the years, remained low. The main reasons for the low contribution of the sector could be attributed to the various problems being faced by the SMEs in the system. Some of the problems, as noted by the Vision 2010 Committee, include:

• Poor access to credit and other financial support or incentives
• Poor public sector support and policy inconsistency
• Poor account keeping habits, weak financial planning
• Poor infrastructure which significantly increases the cost of doing business
• Inability to hire highly skilled personnel
• Inadequate or lack of research
• Poor linkages among vibrant SMEs, large-scale enterprises and the rest of the domestic sector of the economy generally
• Policy incentives are tilted in favour of large scale industries, etc.
In view of these problems and in recognition of the numerous advantages of the SMEs, the Federal Government has continued to play pioneering and active roles since the 1 970s in stimulating SMEs. Notable past and present measures of creating virile SMEs that are capable of sustaining growth included:
• Provision of strong institutional support
• Ensuring easy access to credit facilities at reasonable rates
• Provision for industrial banks
• Provision of ‘continuous training and research
• Provision of an enabling monetary and fiscal policies, etc.

Some of these measures are further discussed below.
i32.1    The Establishment of the Small Scale Industries
– Credit Scheme (SSICS)
In 1971, the then Federal Military Administration started to provide a more direct form of financial assistance to SMEs. As a first step, government established a Small Industries Development Programme to provide technical and financial support for the SMEs. Later, it established the Small Industries Credit Committee (SICC) to administer Small Industries Credit Fund (SICF) all over the federation. The scheme was operated as a matching grant between the Federal Government and the State Governments and designed to make credit available on liberal terms to enterprises with capital investment outlay not exceeding N 150,000.00. The Fund was to operate as a revolving loan scheme. However, the scheme became progressively starved of hind owing to numerous abuses and it had to be discontinued by the Federal Government in 1979.
13.2.2 The Establishment of Industrial Development Centre (IDC)
This was another important effort of the Federal Government to promote SMEs under the Second National Development Plan (1970-1975). Under the Plan, N800,000.00 was allocated for setting up IDCs in various parts of the country. The establishment of the IDCs no doubt, made it possible for government to provide extension services to the SMEs, especially as it relates to product development, entrepreneurial training, and technical appraisal of loan applications as well as managerial assistance.
13.2.3 The Role of State Governments
Over the years, State Governments have been promoting the development of SMEs through their Industrial Development Centres (IDCs) as well as States’ Ministry of Commerce and Industries. For example, in their annual budgets, certain sum of money are usually set aside by State Governments as an industrial flmd that would help facilitate the development of SMEs in their respective states. In addition, some State Governments have been promoting SMEs through state-owned Finance and Investment Companies. These investment companies were established at various times to specifically render technical advice as well as provide some form of financial assistance to small-scale industrialists.
13.2.4 The Establishment of the National Directorate of Employment (NDE)
The establishment of the National Directorate of Employment in 1986 constituted another channel by which government aimed at promoting SMEs in Nigeria. Through the Directorate, a number of programmes such as Small Scale Industries (SSI), Youth Employment and Vocational Skill Development, etc., were embarked upon to boost employment. Two other schemes that were established under the NDE were the Open Apprenticeship Schemes and the Waste to Wealth Programmes. About 70,000 apprentices were trained in different skills all over the country by the end of 1987.. With respect, to the Waste to Wealth Programme, small scale business operators were trained on how to convert discarded materials such as plastics, jewelry shoes, cardboard, etc to useful raw materials. Under the various schemes, some form of financial assistance was provided to beneficiaries.
13.2.5 Working for Yourself Programme (WFYP)
British Council and the International Labour (ILO), the Federal Ministry of Industries established this programme as a means of improving the skills of business operators. Under the programme, a six week intensive training was conducted in several centers to impart technical skills to business entrepreneurs. Some form of financial assistance is provided to beneficiaries under the scheme.

13.2.6 The Nigerian Industrial Development Bank (NIDB)
The establishment of NIDB in 1964 was aimed at ensuring that credit facilities were provided for medium and large-scale enterprises. It also had the responsibility of funding small-scale businesses with total capital outlay of not more than N750,000.00. The bank could grant loans ranging from a minimum of N50,000.00 to a maximum of Ni 5 million or 15 percent of NIDB’s equity base but not more than 75 percent of the fixed assets of the business being financed. The bank’s loans were usually soft.
13.2.7 The Nigerian Bank for Commerce and Industry (NBCI)
In furtherance of its objective to ensure availability of financial resources to indigenous entrepreneurs, the Federal Government established the NBCI in 1973. The bank was charged with the responsibility of disbursing to SMEs funds obtained from the Federal Government.
13.2.8 National Economic Reconstruction Fund (NERFUND)
The NERFUND was set up through Decree No. 2 of 1989 to provide medium to long-term funds for wholly Nigerian-owned SMEs. Through the NERFUND, SMEs had access to local and external loans over a period of five to ten years. Any entrepreneur who desired to obtain NERFUND loans had to go through a bank which acted as the primary obligor to NERFUND. The NERFUND Decree specified that eligible SMEs must be 100% owned by Nigerians, must have fixed assets plus cost of new investment (land excluded) not exceeding N10 million; in the case of a manufacturing project, not less than 40 percent of the raw materials were to be sourced locally, and a Participating Bank (PB) must accept on behalf of the SME to assume the credit risk.

13.2.9 The Central Bank of Nigeria (CBN)
The Central Bank of Nigeria, as the apex financial institution has, over the years, been playing a leading role in the promotion of SMEs. The CBN, especially during the regime of direct monetary control, was determining the rates for lending to specified sectors of the economy with the aim of encouraging lending to those sectors. The Bank ensured that the lending rates to SMEs were lower than the rates for other sectors of the economy. It also required mainstream banks to make available to indigenous industrialists a certain percentage of their credit portfolio. Recently, a new scheme was approved for the financing of the SMEs. The new scheme referred to as the Small — and Medium – Scale Industries Equity Investment Scheme (SMIIEIS) requires banks to set annually, 10 percent of theft Profit Before Tax (PBT) for the financing and promotion of small – and medium -scale industries in the system. The SMIELS was an initiative of the Bankers’ Committee.
13.2.10 Funding of SMEs Through Multilateral Financial Institutions
In order to accelerate the development of SMEs, some international multilateral organizations like the International Finance Corporation (IFC), the World Bank and the African Development Bank (ADB) have at different times provided foreign capital to Nigerian small and medium scale businessmen. The provision of such foreign finance has been greatly enhanced by guarantees given by the Federal Government.
a. African Development Bank (ADB)
In 1988, the ADB advanced a loan of US $230 million, called the Export Stimulation Loan (ESL), to NERFUND to assist in stimulating non-oil exports. The loan was intended to ameliorate the foreign exchange difficulties confronting Nigerian industrialists and thus make the procurement of some vital raw materials, capital equipment and other inputs a less onerous task. The loan was thus used to support export-oriented agricultural products; and encourage the utilization of local raw materials and intermediate goods by industrial enterprises, so as to conserve foreign exchange.
b. World Bank
In its efforts to accelerate the development of SMEs in the private sector, the World Bank grants loans to Nigeria. For instance, in 1989, the World Bank gave Nigeria a facility of $270 million. Out of this amount, a total of. US $267.7 million was set aside for on-lending to SMEs through eligible participating banks. The money was used to support existing enterprises, restructure and modernize their operations. In addition, the loan assisted in the establishment of new viable investments in the private productive sector and social services.
13.2.11 Other Policy Measures to Reduce the Financial Burden of the SMEs
Through the use of fiscal policy measures, government has also provided incentives that would stimulate the general development of SMEs in the system. Some of the fiscal measures included:
i) Pioneer status or Income Tax Relief Act
ii Import Duty Relief
iii) Capital Allowance to aid capital formation
iv) Tax relief for investments in economically disadvantaged local government areas
v) Tariff measures, effective protection with import tariff to ensure that locally produced goods are efficiently processed and made competitive in both domestic and export markets.
vi) Export promotion incentive, and
vii) Foreign exchange facility

13.3 Size and Performance of SMEs in Nigeria
The task of assessing the size and performance of SMEs in the Nigerian economy is handicapped by:
a. The definition as to what are SMEs in the first place; and
b. Lack of adequate and reliable data on the activities of SMEs.

As pointed out earlier in this chapter, various definitions of SMEs exist and our estimation of their size and performance can be influenced significantly by what definition we adopt. Besides, adequate and reliable data on their activities are required to assess their size and performance. However, such data are not available.
In spite of these shortcomings, our analysis is based partly on data from the Federal Office of Statistics (now National Bureau of Statistics). For the purpose of this analysis, we have restricted our definition of SMEs to number of employees because there is no reliable data on turnover, invested capital and total assets of such enterprises in Nigeria. We have therefore adopted the definition of SMEs as enterprises employing not more than 50 full time workers.
13.3.1 Size of SMEs in Nigeria
Table 1 presents the number of establishments by activity group and by employment size in Nigeria. Using the above adopted definition for SMEs, it is obvious that 96.43 per cent of enterprise in the country are small and medium scale enterprises, employing less than 50 full time workers.
According to the table, there are 58,665 establishments in all the 11 economic activity groups in the country. Considering the distribution of establishments by employment size bands, the group of establishments engaging 5-9 persons recorded the highest concentration with 37,808 (64 establishments. In this class, manufacturing sector takes a controlling share with 11,352 (30.03%) establishments: Other services, Wholesale and Retail Trade followed with 10,512 (27.80%) and 7,522 (19.90%) establishments respectively. Mining and Quarrying takes the rear in this group with only 60 (0.16%) establishments listed.
The class of establishments engaging 50 persons and above (which are regarded as large scale enterprises) constitute only 3.5% of all establish in the country. The proportion of enterprises (96.43%) that are SMEs, indicate the importance of these enterprises in the economic development of Nigeria. Therefore, any development programme that ignores this sector of the economy is not likely to have a significant impact on the economy.

13.3.2 Performances of SMEs
The performance of SMEs can be assessed by their contribution to: ODP, employment, industrial output and export (Pradjan 2001). Unfortunately, comprehensive data on these indicators are not available in Nigeria. The need to build and maintain data on these indicators cannot be overemphasized.
In any case, what is available at the Federal Office of Statistics (now National Bureau of Statistics) are data on the contribution of small scale manufacturing firms to GD (see Table 13.2).

Table 13.2 shows that small scale manufacturing enterprises contributed between 0.69 and 1.08 percent of total GOP between 1987 and 1998, about 14 percent of the total contribution of manufacturing firms to total ODE From the table, it is obvious that the contribution of the SMEs to the nation’s manufacturing sector remains very low in spite of the various efforts of government. This is unlike what obtains in most developed and some Asian countries. For instance, in most countries in Asia, SMEs constitute the major export earners and the bedrock of their industrial sectors. For instance, small scale industries in India contribute 95 percent of total industrial units, 40 percent of total industrial output, 80 per cent of employment in the industrial sector, 35 percent of value-added by the manufacturing sector.
It is perhaps the realization of the potential role in the development process of a nation and the relative ineffectiveness of the past efforts that informed further initiatives from the relevant authorities aimed at stimulating the sub-sector. Examples of these recent initiatives are the bill for the establishment of the Small and Medium Industries Development Agency (SMIDA) sent by the Executive to the National Assembly; and the Small Scale Industries Equity Investment which requires banks to set aside 10 percent of their Profit Before Tax for the financing of SMEs.
13.4 Safety And Soundness Implications Of Funding SMEs Through The Banking System
Banking activities leading to the creation of risk assets usually prompt regulatory authorities concern for safety and soundness of the depositories. This is because such risk assets have risk profile that is either complementary to or compounding existing portfolio risk. The safety and soundness implication of undertaking additional risk assets is therefore better analyzed on the Nigerian Financial Safety-net terms of contribution to overall portfolio risk. This is the analytical work that will be employed in the discussion of the issue of safety soundness of banks extending finance to SMEs.
Basically, under the prevailing regulations, funds from the banking system fl be extended to the SMEs either directly as normal credit or as equity investment under the recent initiative of the Bankers’ Committee. A basic difference between these two sources is the structure of incentives. The risk return profile of the two options is significantly different notwithstanding fact that they are both market driven. In the case of the normal credit
line to SMEs, the risk has a floor while the return has a ceiling. On the other hand while the risk exposure under the equity investment also has a floor, return is open ended The equity option is therefore normally more attractive. This difference in incentive structure i.e. the risk return profile significant, implication for the quantum of resource flow to SMEs, sustainability of this flow and the safety and soundness of the banks. Our discussion will however, be limited to the safety and soundness issue.
Funds to SMEs through the normal credit lines have proven to be grossly jade especially since 1997 following government abrogation of the allocation of 20 percent of banks total credit to SMEs in October 1996. In fact, it is the worrisome dwindling flow of funds from this source that in the main, prompted the Bankers’ Committee’s initiative to support the government efforts at channeling funds to the SMEs. The major factors, responsible for the paucity of funds flowing to the SMEs is the relative unattractiveness of the returns on loans to SMEs and the limited prospect of recovering such loans from collaterals offered which are invariably adequate. The prevailing prudential framework for identifying and providing for delinquent credits has adequately taken care of the nature and magnitude of possible credit risk from this source of fund. Moreover, banks have very well developed internal mechanism for appraising and administering credits to SMEs. This funding source therefore, does not pose any special or extra-ordinary risk to licensed banks overall portfolio risk given the size of fund presently flowing to the SMEs from this source.
The second option of financing the SMEs through equity participation by licensed banks as proposed under the Bankers’ Committee’s initiative is not entirely new. A number of development finance institutions in the country notably the Nigeria Industrial Development Bank (NIDB), have employed this strategy in the discharge of their mandate. Also, licensed banks, within the limit of permissible activities during the era of directed credits, extended some funds to some enterprises (though not only the SME by way of equity participation. The bankers’ proposal of devoting 10% of Profit Before Tax (PBT) of licensed banks to equity participation in SMEs is commendable initiative with a lot of potential benefits to both the banks and the SMEs.
This approach to funding of SMEs appears to have the potential of mobilizing sizeable financial resources for the SMEs on a sustainable basis. Compared with normal bank lending to the SMEs, banks committing funds to such enterprises through equity investment are likely to show greater concern for the success of the SMEs being invested in because of the open-endedness of the derivable returns. Furthermore, as shareholders in the SMEs, investing banks would have representation on the decision-making organ of the enterprise through which the bank’s interest can be protected. This prospect for investing banks to be able to directly protect their investment by influencing decision-making in the SMEs is an important risk-mitigating factor for this financing arrangement. On the other hand, some have cautioned that banks with equity interest in SMEs are likely to feel compelled to unduly extend credit to such firms when they are in financial difficulty and that such credits may become nonperforming. However, it does not seem that such credit could amount to what will come to threaten the safety and soundness of the entire banking system.
An important feature of the Bankers’ Committee’s initiative is the fact that the fund is from bank’s profit before tax which in principle and except for tax liability is an unencumbered earning. Losses arising from investing such unencumbered fund in SMEs will not on their own compound safety and soundness of the investing bank. However, normal appropriation of the profit before tax would have added to the shareholders’ fund and by extension, provided additional capital cushion for absorbing operational losses. The deprivation of this additional capital cushion is the extent to which this funding option could impair the safety and soundness of the investing banks.
13.5 Conclusion
An attempt has been made in this chapter to indicate the place of SMEs in the development process of any economy. In doing this, the chapter observes that what constitutes an SME varies from one country to another and even in the same economic environment, definition varies from industry to industry. However defined, SMEs share some similar characteristic such as angle/family membership, inadequate capital, labour-intensive technology, lack of meaningful delineation between owner’s private fund and business capital. The chapter also indicates that in countries where SMEs are given a primary place in the development process, they are expected to help in the mobilization of local resources, create employment for a large number of employable persons, assist in entrepreneurship and skill development, amongst others. Experience from various countries, developed and developing, attest to the relevance of SMEs in the development process.
The chapter recognizes inadequate finance as one of the major banes of SMEs in the country in spite of various government policies aimed at facilitating financial and technical support for the promotion of SMEs. In particular, the chapter examines the role of some government agencies such as NIDB, NBCI, CBN and Federal Ministry of Finance in encouraging the survival of SMEs in Nigeria. Also, financial assistance from the World Bank, the African Development Bank, and other external donors has been observed to have constituted a major boost to the development of SMEs. In spite of all the previous efforts however, the performance of SMEs in Nigeria in terms of the sub-sector’s contribution to GDP, exports and employment, among others, has been less than satisfactory
The chapter therefore views the recent initiative of the Bankers’ Committee, which requires all licensed banks to set aside 10 percent of their profit before tax specifically towards the finding of SMEs (particularly as equity investment), as a bold step in the right direction, as the initiative appears to have the potential of mobilizing sizeable financial resources for the SMEs on a sustainable basis. However, given the deprivation of additional capital cushion which the initiative necessarily entails, the failure of such SMEs where such funds are invested could constitute a risk to the investing bank.