The Central Bank of Nigeria (CBN) in its Monetary Policy Circular No. 35 for the year 2001 stated the new initiative that evolved under the aegis of the Banker’s Committee to give impetus to current efforts aimed at ensuring adequate financial assistance to Small and Medium Scale Enterprises (SMEs). This initiative requires banks to set aside 10% of their profit before tax for the financing and promotion of SMEs in Nigeria. Obviously, this scheme adds to the long list of schemes that had been established to give support in various forms to SMEs in recognition of their relevance to the development process. The relevance of SMEs to economic development of our nation is further underscored by the recent bill on the establishment of the Small and Medium Industries Development Agency (SMIDA) sent by the Executive to the National Assembly.
SMEs are particularly relevant in creating employment opportunities, producing import substituting machinery and equipment, mitigating rural urban drift, producing specialized items in small quantities to meet diverse needs, mobilization of local resources as well as stimulation of technological development and innovation, among others. In view of the importance of the SMEs in the development process, this chapter highlights the major efforts taken at various times to stimulate the development of SMEs in Nigeria. It further focuses on the new initiative for financing SMEs in Nigeria through the banking system and indicates some plausible implications for the safety and soundness of the Nigerian banking system.
The rest of the chapter is organized into five sections. Section two explores the concept of SMEs, while section 3 highlights various efforts aimed at facilitating the promotion of SMEs in Nigeria. Section 4 examines the size and performance of SMEs in Nigeria, while section 5 explore 5 the safety and soundness and implications of funding SMEs through the banking system particularly under the new initiative. Section 6 summarizes and concludes the paper
13.1 The Concept Of Small And Medium Scale Enterprises
12.1.1 Definition and Characteristics
There is no consensus on the definition of Small and Medium Scale Enterprises (SMEs) as the terms small and medium are relative and they differ from industry to industry and country to country. The difference amongst industries could be ascribed to the different capital requirements of each business whilst those among countries could arise as a result of differences in industrial organizations of countries at different levels of economic development. What might therefore be defined as SME in a developed country can be regarded as a large scale enterprise in a developing country using the parameters of fixed investment and employment of labour force. It is important to also recognize that definitions change over a period of time and hence even in a developing country what was previously classified as SMB could be regarded as a large scale industry when economies of scale set in during the course of production.
In Nigeria, several attempts have been made to define and classify SMEs and probably due to differences in policy focus, different government agencies apply various definitions. For instance, the Centre for Industrial Research and Development (CIRD) of the Obafemi Awolowo University, Ile-Ife defined Small Scale Enterprise as an enterprise with a working capital base not exceeding N250,000 and employing on full time basis, 50 workers or less. The Nigerian Bank for Commerce and Industry (NBC) (now merged with others institutions to become Bank of Industry) adopted a definition of small scale business as one with total capital not exceeding N750,000 (excluding cost of land but including working capital). The Federal Ministry of industry’s guidelines to NBCL defined a small scale enterprise as one with a total cost not exceeding N500,000 (excluding cost of land but including working capital). The Nigerian Industrial Development Bank (NIDB now part of Bank of Industry) defined small scale enterprise as an enterprise that has investment and working capital not exceeding N750,000, while it defined medium scale businesses as those operating within the range of N750,000 to N3.O million. In 1979, the Central Bank of Nigeria (CBN), in its credit guidelines to commercial banks, stated that small scale enterprises were those with annual turnover not exceeding N500,000, while the merchant banks were to regard small scale enterprises as those with capital investment not exceeding N2 million (excluding cost of land) or with maximum turnover of not more than N5 million.
It is arguable whether these criteria could hold in the present day Nigeria given the higher operational costs as a result of the continuous-depreciation of the national currency and the resultant inflationary impacts. A definition that is close to reality of today is the one adopted by the World Bank. In implementing its programme of $270 million loan assistance to Nigeria’s SMEs, the World Bank defined SMEs as those with fixed assets (excluding land) plus cost of the investment project not exceeding N10 million in constant 1988 prices. This definition was adopted by the National Economic Reconstruction Fund (NERFUND), the agency saddled with the responsibility of financing SMEs. In the Industrial policy for the country, small scale industries are defined as those enterprises with total investment of between N1 00,000 and P42.0 million excluding the cost of capital but including working capital.
Despite the disparity in the comparative definitions of SMEs, the enterprises are bounded by some common characteristics. First amongst these features is that ownership and management are often held by one individual/family and hence decisions are often subjective. Secondly, SMEs require small capital base in general regardless of the industry and the country where• they are based. However, they have difficulty in attracting funds for expansion as a result of which they have to relyheavily on personal sources. Thirdly, the manager/proprietor hardly can separate his private funds from the company’s funds and this contributes to the inefficiency and non-performance of many SMEs. Fourthly, most SMEs operate labour-intensive technology. They find it less easy to shift from one product line to something radically different. In fact most SMEs tie their objectives more closely to the product line than to other matters such as the use of capital. In most SMEs, there is less organizational differentiation, higher employee turnover and higher labour investment ratio.  Finally, the rate of business mortality is high probably due to reasons of low capital, inadequate market information, lack of appropriate technology and low level of operation, amongst other factors.
131.2 Relevance
The relevance of SMEs can never be over emphasized especially in a developing country like Nigeria. In most countries where SMEs are specially promoted by government, the main expected role of these institutions can be summarized as follows:
•    Supply of potential entrepreneurs
•    Creation of employment opportunities
•    Mobilization of local resources
•    Mitigation of rural urban migration
•    Distribution of industrial enterprises
As indicated above, SMEs are primarily expected to serve as bedrock of supply of promising entrepreneurs who would be ready to take chance on the exploration of new ideas or favourable market development. They are expected to assist in further entrepreneurship and skill development. Secondly, SMEs create more jobs per unit of invested capital. In most developing economies, unemployment is the greatest threat to economic growth and development. Hence, the proliferation of SMEs could be an antidote to large scale unemployment in these economies. This could be specially helpful in mitigating the rural urban drift, a burgeoning socio economic problem in the developing economies. This is because most of the enterprises in the rural areas are small scale in nature and increased chances of their survival could spell their greater ability to sustain the rural dwellers.
In addition to the above, the promotion of SMEs is expected to ensure the structural balance in terms of large and small industrial sectors as well as rural and urban areas. SMEs are expected to ensure the supply of high quality parts and components, and intermediate products, thereby minimizing the dependence on imported raw materials. Thus SMEs would not only encourage indigenous technology but also promote the establishment of import substitution industries. They are expected to produce for exports. thereby generate additional foreign exchange and hence help to strengthen the national currency and the balance of payment position. Finally, apart / from ensuring effective mobilization of resources, SMEs are expected to ensure better use of scarce financial resources and appropriate technology.:
13 Experience of Other Countries
SMEs which are usually referred to as Small Businesses in developed economies, have contributed to the growth and development of those economies, especially in terms of employment, contribution to GDP, export, et cetera. For instance, in the United State of America (USA), small business is seen as a means for enhanced economic opportunity, innovation and growth. Also, it is commonly accepted that there is a role in the US economy for independent enterprises that stay small. Historically, these values have been reflected in the legislative and regulatory considerations given to small businesses, as well as in antitrust policies that aim to limit the concentration of economic power (Samolyk, 1997). It is as a result of these concerted efforts that the USA currently has a small business sector that has about 22 million enterprises, generating more than a half of the country’s GDP, employing about 53% of the total private workforce and is responsible for creating vast majority of all new jobs. Of the 3.3 million jobs created in 1994, small scale industrial and business enterprises produced an estimated
Also in China, the number of township enterprises increased from 1.52 million in 1978 to 19 million in 1991. During this period, their employees increased from 28 million to 96 million. They equally employed 22.3% of the total rural labour force.
The greater value addition has even occurred in the developing economies where the SMEs have become the bedrock of development. This is especially true in the Middle East and Asia regions. For instance, in Iran, the Small and Medium Enterprise Sector contributed more than 62% of industrial output and more than 75% of total employment in 1996. Similarly, in Israel, SMEs accounted for 97% of Israel’ enterprises in 1996, employing some 50% of the country’s workforce. Recently, 4,500 new jobs were created in the sector through assistance given to new immigrants. Over 50,000 people have been assisted in opening their businesses and there is a high record of take off success (estimated at more than 70%) of small businesses after one year of operation.
Of greater impact is the contribution of SMEs to the growth and development of the Indian economy. India took advantage of the Industrial Policy Resolution of 1949 and paid more attention to the development of Small Scale Industries (SSIs). Throughout the 1950s and 1960s, the government offered the sector subsidies, reservations and direct support. Over the years, SSIs have grown all over India. The sector comprises of tiny units, small scale industrial undertakings, small scale services and business enterprises, export-oriented units and women entrepreneurs, enterprises all totaling 3.1 million units as at the end of 1998-1999.