The financing and capacity building support offered by the Development Bank of Nigeria (DBN) to small and medium enterprises (SMEs) will enable the operators to step up their activities in the real sector value-chain. This is more significant in the backward integration scheme where SMEs have played active roles to support the Fast-Moving Consumer Goods (FMCG) firms which are currently challenged as reports have shown.
Backward integration is a practice where companies are encouraged to cultivate their own raw materials locally and purchase from their local suppliers or establish farms to grow produce for their factories. The government put the measure in place to save foreign exchange, create jobs, boost productivity and grow the GDP. The FMCG firms wholly embraced the scheme and the result has been satisfactory. The SME operators who keyed into the initiative, especially those in agribusiness and transportation, have also benefited immensely through the support of the manufacturing firms.
For instance, under the backward integration initiative, Nestlé Nigeria established a project that engages 5,000 smallholder farmers for the supply of raw materials for its agro-business operations. Nigerian breweries have stepped up production of sorghum and cassava to boost local raw material supply for its plants using local farmers.
Friesland Campina WAMCO Nigeria has developed its local raw milk sourcing, an initiative that has provided a source of sustained income to almost 2,000 farmers (including 900 women). Flour Mills of Nigeria Plc has invested in local farms and other agricultural projects to cultivate raw materials for most of its processes. Cadbury Nigeria established a cocoa processing plant in Ondo. The government has also benefited by way of tax revenue, employment generation and technology.
Support imperative
However, the FMCG firms are facing challenges occasioned by high operating costs, depreciation of the Naira, multiple taxes, insecurity and lingering infrastructure deficit. They are also yet to fully recover from the COVID-19 impact and the huge losses they incurred during the 15-month border closure. This affected the manufacturing firms that rely on the SMEs as part of their engagement in the backward integration policy to feed their plants.
For instance, data from the half year reports of 10 major FMCG firms showed that they collectively recorded 48 percent increase in the raw materials (with consumables) segment of their Cost of Sales from N531.67 billion in HY 2021 to N786.88 billion in HY 2022. The FMCG firms surveyed include Nigerian Breweries, Nestle Nigeria, Unilever Nigeria, Cadbury Nigeria and Nigeria Flour Mills. Others are Guinness Nigeria, Dangote Sugar, International Breweries, Champion Breweries and PZ Cussons – all quoted on The Nigerian Exchange.
“The companies are facing very challenging times especially in terms of raw materials and other major inputs. Many of the small business suppliers, especially those in agribusiness, have abandoned their farms due to insecurity. They cannot easily transport the little they are able to produce as a result of bad roads and endless extortion by security agents and local government revenue officials.
“The companies would not easily procure from abroad due to the high exchange rate. Coupled with high inflation rate, the firms have tough survival chances and that is why the raw material segments of their Cost of Sales is very high,” said Kennedy Kadiri, an entrepreneur who operates commercial farming and transportation. The reports showed that only Unilever recorded a decrease in cost of materials while Nigerian Breweries, Dangote Sugar, Nigerian Flour Mills and International Breweries recorded the highest input cost.
Furthermore, agriculture has recorded a decline both in growth and contribution to GDP, in recent years, according to data by the National Bureau of Statistics (NBS). Agriculture has recorded a consistent GDP decline since Q2 2019 when it grew by 1.79 percent against 1.19 percent in the corresponding year. Thereafter, it recorded a decline of 1.58 percent, 1.30 percent and 1.20 percent in Q2 2020, Q2 2021 and Q2 2022 respectively.
In terms of contribution to GDP, Agriculture has recorded mixed performance. The sector’s contribution to GDP in Q2 2018 was 22.86 percent but dropped slightly to 22.82 percent in Q2 2019. Thereafter, the sector’s contribution to GDP jumped to 24.65 percent in Q2 2020 before plummeting to 23.78 percent and 23.24 percent in Q2 2021 and Q2 2022 respectively.
DBN to do more
Experts believe that DBN should step up its support to enable the SMEs to play a more active role in the value chain ecosystem.
The CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, applauds the role of DBN in developing the SMEs which constitute the engine of the economy. He urged the DBN to do more at this time and suggested that the development bank be recapitalized, if it is necessary, to enable it to play a bigger role in providing financing and capacity building to the SMEs.
“I know Development Bank of Nigeria focuses on SMEs financing and it has played this role effectively. This is the time to do more given the present economic realities. They can raise the capital base, if necessary, to enable the bank to play a greater role in the backward integration scheme”, Yusuf, immediate past Director-General of the Lagos Chamber of Commerce and Industry, told THWELL in a phone chat.
Kadiri expressed optimism that the intervention of DBN would boost SMEs’ performance towards the recovery of the FMCG firms from the COVID-19 impact and to cope with prevailing economic headwinds. Kadiri told THEWILL last week that both the manufacturing firms and the SMEs will benefit from the measure.
According to NBS, small and medium-scale enterprises (SMEs) in Nigeria have contributed about 48 per cent of the national GDP (Gross Domestic Product) in the last five years. With a total number of about 17.4 million, they account for about 50 per cent of industrial jobs and nearly 90 per cent of the manufacturing sector.
The Federal Government of Nigeria inaugurated the DBN in March 2015, to alleviate financing constraints faced by SMEs.
At a recent media parley, managing director/CEO, Tony Okpanachi, disclosed that DBN had disbursed a total of N482 billion to more than 208,000 MSMEs since inception. He noted that the Bank’s profitability has also remained resilient despite the challenging environment and the impact of COVID-19. Profit before tax and profit after tax stood at N22.7 billion and N15.7 billion respectively, translating to return on assets and return on equity of 4.8% and 12.8% respectively for 2021 which was our last audited financial period.
Earlier at the Bank’s Micro, Small, and Medium Scale Enterprises (MSMEs) summit hosted in Kano in June 2022, Okpanachi, reiterated the commitment of DBN to its mandate of providing access to finance to small businesses in Nigeria.
He said “It has become imperative for us to pull resources together and channel collaborative efforts towards building the capacity of the MSME as a way of revitalising their operations to address the challenge of access to finance. This will guarantee their growth and boost the economic potentials of this critical sub-sector.”
Okpanachi said the summit was one of DBN’s stakeholder engagement strategies aimed at creating awareness around its mandate of providing access to finance, capacity building, and partial credit guarantees to the MSMEs in Nigeria. “This is important because they play a crucial role in accelerating economic growth through poverty alleviation, job, and wealth creation,” he said.
Experts say the DBN interventions will not only widen credit access for SMEs, but also help to promote financial inclusion of small businesses which generate added value and create jobs, a major challenge in the Nigeria economy.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
