Across Organisation for Economic Cooperation and Development, (OECD) countries, SMEs represent around 99% of all firms, are a main source of employment, and generate 50% to 60% of value added on average. Moreover, SMEs are vital for nurturing local communities and driving major transitions in economies and societies.
Globally, small-scale enterprises (SMEs) are defined as enterprises that fall below certain revenue, asset, and employee thresholds. The various countries and states define each threshold. SMEs are identified by thresholds such as the type of business, revenue, number of employees, and the industry in which they fall. The UK definition of SME is generally a small or medium-sized enterprise with fewer than 500 employees. However, some industries are allowed up to 1,250 employees. In the United States, there are more than 31.7 million SMEs.
In Nigeria, the Federal Ministry of Commerce and Industry defines SMEs as firms with a total investment (excluding the cost of land but including capital) of up to N750,000 and paid employment of up to fifty (50) persons.
The Role of SMEs in the Nigerian Economy
The SME sector provides, on average, 50% of Nigeria’s formal employment and 50% of its industrial output. Indeed, there appears to be an agreement that developing SMEs in Nigeria is a step towards building a vibrant and diversified economy (General Statistics Office, 2007). SMEs in Nigeria can exist in the form of sole proprietorships and partnerships. However, some could be registered as limited liability companies and characterized by simple management structure, informal employer/employee relationship, labor-intensive operation, simple technology, the fusion of ownership and management, and limited access to capital. The total number of SMEs in Nigeria as of December 2017 stood at 41,543,028, with components as follows, through micro-enterprises – MEs: 41, 469,947 (or 99.8 percent), small and medium enterprises – SMEs: 73,081 (or 0.2 percent) (NBS, 2017).
The importance of SMEs to any nation especially in Nigeria stems from the fact that SMEs are the engine of growth as they constitute a significant portion of Nigeria’s success and contribute significantly to its GDP. Aside from this, they anchor big businesses and retail outlets and serve as engines for job creation, absorbing a considerable portion of the labor force, especially among the youth. The ripple effect on local communities is evident, fostering economic resilience and stability. SMEs also lay a strong foundation for innovation and technology, propelling the nation towards technological advancements. From technology start-ups to local manufacturing units, these enterprises continually drive progress, making Nigeria a hub of creative solutions. According to the National Bureau of Statistics (NBS, 2023), SMEs contribute 48% of Nigeria’s GDP and employ over 84% of the workforce. The Nigerian government has recognized the importance of SMEs in economic development and has implemented several policies to support their growth and development including making grants and loans available to these enterprises.
Globally, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development important for many governments around the World (International Financial Statistics, 2023). There are about 500 million SMEs worldwide.
However, these SMEs face various challenges. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal small and medium enterprises (SMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global SME lending. In Nigeria, at least, 39,654,385 micro, small and medium enterprises (MSMEs) operated as of December 2020 as against 41,543,028 million that were in existence in 2017, indicating a decrease of 4.5 %. The agricultural and wholesale or retail sectors accounted for the largest proportion of informal micro enterprises (MEs) operating in Nigeria in 2020. In that year, the number of wholesale MEs reached approximately 12.8 million, while for the agricultural sector, the count reached around 14.8 million. Presently, these statistics have dropped significantly due to various reasons including inadequate working capital, stiff competition from larger companies, difficulties in sourcing raw materials, low capacity utilization, lack of management strategies, poor educational background of operators, and huge financial problems.
In conclusion, the potential for SME growth in Nigeria is immense. These enterprises serve as the bedrock of the economy, generating employment, driving innovation, and contributing significantly to GDP. While challenges such as access to finance, infrastructure, and skilled labor persist, the opportunities for growth are equally substantial. By addressing these challenges through targeted policies, fostering a supportive business environment, and leveraging technology, Nigeria can unlock the full potential of its SME sector. A thriving SME ecosystem is essential for achieving sustainable economic development and improving the lives of millions of Nigerians.
References
SMEs: An assessment to its inclusion in Nigeria Trade. World Trade Centre Abuja.
Guidelines for the small and medium enterprises equity investment scheme
SMEs and Entrepreneurship. Organization for Economic Cooperation (OECD)
Catriona Smith (15, JUNE 2023). What is an SME
Microfinance agricultural learning and development centre (16 Aug, 2023)
