US embassy cable - 04LAGOS424

UNCLAS SECTION 01 OF 02 LAGOS 000424 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, EINV, ECON, NI 
SUBJECT: NIGERIA: SMALL ENTREPRENEURS THINK BIG 
 
 
1. (U) Summary: Small entrepreneurs face many 
constraints, but they think big.  Increasing interest 
in microfinance may expand access to credit and 
alleviate a particularly pressing problem.  If it does, 
Nigerian entrepreneurs may think even bigger.  End 
summary. 
 
2. (SBU) The Nigerian business environment presents 
obstacles almost too numerous to count.  Power supplies 
are notoriously unreliable, transportation and 
telecommunications infrastructure is poor, barriers to 
registering new businesses are inordinately high, and 
access to credit is insufficient.  Small entrepreneurs 
face these constraints and more, but they persist in 
doing business.  According to the Nigerian Ministry of 
Industry, small and medium enterprises (SMEs) account 
for 10 percent of Nigeria's manufacturing output and 70 
percent of industrial employment.  They play an 
immeasurably large role in the informal economy and 
provide income for untold numbers of people. 
 
3. (SBU) GON officials frequently acknowledge the 
importance of SMEs in driving economic growth, but 
efforts to support small entrepreneurs have been only 
moderately successful.  The GON's Small and Medium 
Industries Equity Investment Scheme (SMIEIS) requires 
commercial banks to set aside 10 percent of before-tax 
profits for equity investments in industrial 
enterprises, but much of this vast pool of money 
remains on banks' books.  Of the $150 million set aside 
since the program's June 2001 inauguration, only thirty- 
five percent has been invested.  Bank executives say 
they lack the expertise to evaluate the 
creditworthiness of small enterprises and object to 
expectations that they nurture businesses in which they 
invest.  They are not venture capitalists, they say, 
and they simply cannot give small entrepreneurs the 
advice and training they need.  SMEs have proven risky 
investments in the past, and bank executives are 
reluctant to purchase equity when they cannot be 
certain of returns. 
 
4. (U) Given Nigeria's shortage of commercial 
financing, micro and small business owners look to 
microfinance institutions (MFIs) for funding.  These 
are often the only realistic sources of loans for the 
smallest of Nigeria's entrepreneurs, many of whom may 
need only a few hundred dollars.  Some institutions, 
like the Community Development Foundation (CDF), have 
operated for years and financed hundreds of small 
businesses.  CDF is funded by international donor 
organizations and engages principally in wholesale 
microfinance, giving loans of $800 to $35,000 to apex 
MFIs whose memberships range from 50 to 500 individuals 
or groups.  The organization has awarded approximately 
$1.3 million in more than 240 loans since its inception 
a decade ago, and Executive Director Akin Akintola 
reports a 95 percent repayment rate.  CDF's experience 
shows that micro and small business owners can and will 
repay loans, even when wholesale interest rates (at 21 
percent) are comparable to existing commercial rates. 
 
5. (U) CDF supplements its loans with grants earmarked 
for capacity building programs.  These provide 
strategic planning and management training and teach 
small entrepreneurs how to develop sound business 
plans, which CDF executives hope will eventually help 
small business owners secure financing from commercial 
or community development banks.  Akintola believes 
capacity building is an important part of microfinance 
- it's about more than just money, he says - but the 
organization does what it can to reduce loan 
recipients' reliance on MFIs and link them with private 
sector institutions, the theory being, of course, that 
CDF will be able to expand its client base as people 
secure financing elsewhere. 
 
6. (U) Ford Foundation and World Bank officials share 
Akintola's recognition of the importance of technical 
assistance.  Both organizations provide wholesale loans 
to MFIs, but emphasis on capacity building is growing. 
The Ford Foundation's Representative for West Africa, 
Dr. Adhiambo Odaga, notes that funding goes 
increasingly to programs designed to strengthen 
governance and management techniques and spread best 
practices.  The Ford Foundation's $3 million annual 
budget funds technical training and computerization 
programs and supports efforts to establish an MFI trade 
association, introduce performance standards, and offer 
a more limited range of easy to understand products. 
These efforts will be supplemented by the World Bank's 
recently announced $34 million technical assistance 
program.  Officials say they hope to provide business 
development services, create alternative dispute 
resolution mechanisms, and work with the Nigerian 
Corporate Affairs Commission to reduce the business 
registration process from 41 days to four.  With 
computerization and continued assistance, they say, 
significant improvements are possible. 
 
7. (U) Comment: Increasing interest in microfinance and 
capacity building may expand access to credit and 
alleviate one of Nigerian entrepreneurs' most pressing 
problems.  If SMIEIS and other GON support programs are 
improved and expanded and if MFIs continue to operate, 
entrepreneurs may not have everything they need, but 
they may be free of at least one constraint.  With 
sufficient financing, small business owners can 
continue to think big.  According to World Bank 
officials, catfish and cassava production might be 
excellent places to start.  End comment. 
HINSON-JONES