W.W. Rostow in his theory of development wrote that for a nation to be fully developed, it needs to go through five major stages of development. These are:

  1. The Traditional society,
  2. The preconditions to Take off,
  3. The Take Off,
  4. Drive to maturity,
  5. High Mass Consumption.

Nigeria as a nation, has gone through the first two stages, the first being a situation where the economy is dominated by subsistence activity where output is consumed by producers rather than traded. Any trade is carried out by barter where goods are exchanged directly for other goods. Agriculture is the most important industry and production is labour intensive using only limited quantities of capital. Resource allocation is determined very much by traditional methods of production.

The second stage is where increased specialization generates surpluses for trading. There is an emergence of a transport infrastructure to support trade. As incomes, savings and investment grow, entrepreneurs emerge. External trade also occurs concentrating on primary products.

The third is where we find ourselves and we have being trying to take off as a nation since the early 80's. If we had gotten it right then, we would have a situation where industrialization increases with workers switching from the agricultural sector to the manufacturing sector. Growth is concentrated in a few regions of the country and in one or two manufacturing industries. The level of investment reaches over 10 percent of GNP. We were getting it right until the late 80s; and throughout the 90s, we decided to try and cut corners. We as a nation did not lay a solid foundation for the banks and other members of the financial sector. We neglected the industrialization of other sectors of the economy and faced the oil industry fully, hence agriculture suffered and other sectors of the economy suffered. Our growth became stunted.

One of the most important part of the economy that was killed was the small and medium scale enterprises. This part of the economy is the driving force of the nation. It's the life blood of any serious economy. It is the easiest way to increase the number of jobs in a society astronomically. The following problems have mitigated against SME's in Nigeria:

  1. Inadequate, inefficient, and at times, non-functional infrastructural facilities, which tend to escalate costs of operation as SMEs are forced to resort to private provision of utilities such as road, water, electricity, transportation, communication.
  2. Bureaucratic bottlenecks and inefficiency in the administration of incentives and support facilities provided by the government. These discourage would-be entrepreneurs of SMEs while stifling existing ones.
  3. Lack of easy access to funding/credits, which can be traceable to the reluctance of banks to extend credit to them - owing, among others to poor and inadequate documentation of business proposals, lack of appropriate and adequate collateral, high cost of administration and management of small loans as well as high interest rates.
  4. Discrimination from banks, which are averse to the risk of lending to SMEs especially start-ups
  5. High cost of packaging appropriate business proposals
  6. Uneven competition arising from import tariffs, which at times favour imported finished products.

The importance cannot be over emphasized. For developing countries, integration into the global economy through economic liberalization, deregulation and democratization is seen as the best way to overcome poverty and inequality. Crucial to this process is the development of a vibrant private sector in which SMEs play a central part. SMEs make up over 90 percent of businesses worldwide and account for between 50 and 60 percent of employment. However, their importance in the development process goes beyond their strength in number. There is a rich body of research on the development contribution of small enterprises. While not entirely without some controversial areas, there would appear to be widespread consensus because SMEs (partly because of the industrial sub-sectors and product groups covered by them) tend to employ more labour-intensive production processes than large enterprises. Accordingly, they contribute significantly to the provision of productive employment opportunities, the generation of income and ultimately, the reduction of poverty. It is through the promotion of small enterprises that individual countries and the international community at large can make progress towards reaching the global target of halving poverty levels by the year 2015.

There is ample empirical evidence that countries with a high share of small industrial enterprises have succeeded in making the income distribution (both regionally and functionally) more equitable. This in turn is a key contribution to ensuring long-term social stability by reducing ex-post redistribution pressure and by reducing economic disparities between urban and rural areas.

SMEs are key to the transition of agriculture-led to industrial economies as they provide simple opportunities for processing activities which can generate sustainable livelihoods. In this context, the predominant role of women is of particular importance. SMEs are a seedbed for entrepreneurship development, innovation and risk taking behaviour and provide the foundation for long-term growth dynamics and the transition towards larger enterprises.

SMEs support the building up of systemic productive capacities. They help to absorb productive resources at all levels of the economy and contribute to the creation of resilient economic systems in which small and large firms are interlinked.

Such linkages are of increasing importance also for the attraction of foreign investment. Investing transnational corporations seek reliable domestic suppliers for their supply chains. There is thus a premium on the existence of domestic supporting industries in the competition for foreign investors.

SMEs, as amply demonstrated in information and communication technologies, are a significant source of innovation, often producing goods in niche markets in a highly flexible and customized manner.


The role of the banking sector in the failure of sme's in Nigeria cannot be over flogged; a study identified poor access to finance as the most critical constraint on small and medium scale enterprises in Nigeria. In fact, 50 percent of the surveyed enterprises received external finance while 79 percent indicated lack of financial resources as a major constraint (see Guardian, Nov, 26, 2001). In Dec. 2001, the bankers committee decided that all banks in Nigeria would set aside 10% of their profit to start a scheme called the Small and Medium Industries Equity Investment scheme, left to me this was a charade because by the definition of the scheme a small business is "any enterprise with a maximum asset base of =N=200 million excluding land and working capital and must have a staff of a minimum of ten people and a maximum of 300 people" it therefore means that over 70% of the population have been disenfranchised from using this scheme and only those in the upper echelon of society can use the scheme and therefore the aim of starting up small businesses that will grow into mega companies is defeated. The Nigerian banking sector `does not have the requisite manpower to help develop the economy. Their staffs are not trained to seek out small businesses that would yield good dividends in the long run; they only know how to go after deposits.

The banking sector - specifically commercial banks and specialized banks - have several ways to get involved in SMEs finance, ranging from the creation or participation in SMEs finance investment funds, to the creation of a special unit for financing SMEs within the bank.

Banking Sector services provided to SMEs, take various forms, such as:

  1. Short term loans, compatible with SMEs business and income patterns
  2. Repeated loans, where full repayment of one loan brings access to another, and where the size of the loan depends on the client's cash flow
  3. Very small loans or bank overdraft facilities are also appropriate for meeting the dayto-day financial requirements of small businesses
  4. Factoring and invoice discounting, asset finance (including commercial mortgages), and equity finance, all being within the framework of a customer-friendly approach.

In providing all these services, it is recommended that banks take into consideration (1) that outlets are located close to entrepreneurs, (2) to use extremely simple loan applications, (3) to limit the time between application and disbursement to a few days (4) as well as to develop a public image of being approachable to low-income people. These are all among the characteristics that should be available in banking units serving the SMEs sector.

Advantages of Commercial Banks in Financing SMEs:

Commercial Banks have several advantages over non-bank financial institutions (NBFIs) and nongovernmental organizations (NGOs) when it comes to financing SMEs as they have:

  1. Clear Regulations illustrating the conditions of ownership, financial disclosure, and capital
  2. Adequacy that help them ensure prudent risk management Physical Infrastructure, including a large network of branches, which enables them to reach a substantial number of small and medium sized clients Well-Established Internal Controls, Administrative and Accounting Systems which facilitate keeping track of a large number of transactions
    Ownership Structures Increasingly Dominated by Private Sector which tends to encourage
  3. Sound governance practices, seeking cost-effectiveness and profitability.

This ownership structure also usually leads to sustainability in funding sources - mainly relying on deposits and equity capital - rather than depending on scarce and volatile donor resources, as NGOs do. All of these advantages give commercial banks a special edge over NBFIs and NGOs inproviding financial services to SMEs. Moreover, the computerization of accounting softwares used by commercial banks could make great headway in increasing transparency which leads to attracting private investors to the SMEs sector.         

Banks benefit from their involvement in SMEs finance, by increasing their client base and thus diversifying into new areas of business that will eventually reflect positively on the banks`portfolio, since SMEs provide a good opportunity for the growth of banks` assets and liabilities.

This gives banks a greater opportunity to grow with their customers, and thus reap long term benefits. This is in addition to the positive outlook on the banks, as they are seen to be playing a

role in developing the community and the economy.

For banks to achieve the benefits from targeting this new investment opportunity, it is recommended that they

  1. Create a separate SMEs unit within the bank
  2. Treat savings equally important as lending
  3. Ensure excellent MIS and portfolio management
  4. Give staff specialized training to be capable to deal with this sector
  5. Develop standardized products that will allow them to serve the entire spectrum of clients
  6. Apply credit information systems or external rating systems to assist them in decision making.

On the other hand, SMEs must present reliable and transparent financial information using a standardized reporting mechanism, coupled with entrepreneurship capacity-building programs for the development of innovative and dynamic SMEs entrepreneurs.

If well implemented, these factors could be instrumental to put together "clusters" of mature Enterprises that have growth potential and are able to contribute significantly to economic development.