Small Business in Nigeria

Table of Contents Introduction------------------------------------------ 1 Constraint in small business : 1) Exchange rate-----------------------------------2 2) Access to loan -------------------------------2 - 3 3) Infrastructure --------------------------------3 - 4 4) Technology ----------------------------------4 - 5 5) Taxation -----------------------------------------6 6) Regulation --------------------------------------7 7) Policy---------------------------------------------8 Conclusion-------------------------------------------9 Recommendation----------------------------------9 Reference list-----------------------------------10 - 12 Introduction Nigeria is a country with 923,768 sq km ( 356,700 sq miles ) and the population at there is around 144. 7 million. ( Sub Saharan Africa 2008 ). The capital city of Nigeria is Abuja. English is the official language at there. The GDP real growth is 5. 2 percent in 2008 and the labour force is about 51. 04 million people. (Starting your career in Nigeria Country Guide for International Students 2009 )The inflation rate is 11. 5 percent in 2009. Economy , n. d ) Sanni ( 2009, 15 ) has found that most of the business in Nigeria is small business which had cover 90 percent for the whole country. But only two-third of small business can survive around 2 year and it decrease to 44 percent at least four years. ( Top 7 Reasons Why Most Business Fail in Nigeria 2009 ) So we can conclude that only 50 percent of business can survive in first years and after 5 year, there will be 95 percent business fail. The definition of small business is the business with more than 5 employees and less than 20 employees. Sanni 2009, 9 )There are also high business failure rate in Nigeria due to some of the problem. In this report will discuss about the constraint had been occur to establish a new business in Nigeria which include access to loan, technology problem, inadequate facilities, exchange rate, taxation and regulation. It including the reason why is it happen and how it affects the performance of small business. 1 Exchange rate As discussed by Samson, and Daft (2000, 143), small business can be affect by the changing of exchange rate. For example, in 2006, 1 US dollar can exchange for 128 Nigerian nairas. ( Historic Exchange Rates 2006 ) In 2009, the US dollar had increase the value to 148 Nigerian naira’s, then the US goods will be more expensive because Nigeria people need to use more us currency to buy the goods with the same price. ( Historic Exchange Rates 2009 ) Indirectly, the US goods will be more difficult export to Nigeria and the profit will be cut down. Access to loan Sources : (Enhancing the Competitiveness of Small and Medium Enterprises in Africa: A Strategic Framework for Institutional Support, 2001 ) Majority of sub-Saharan country still faced the access of finance problems which has show in table 7. Participation of development banks seems to be performed poorly and low accessibility of loan from commercial bank. (Enhancing the Competitiveness of Small and Medium Enterprises in Africa: A Strategic Framework for Institutional Support . 2001, 26 ) There are not more than 50 percent of countries that have high availability to finance. For 2 example, in table 7, Nigeria had limited accessibility to short term loan and overdraft facilities as it have low availability and accessibility to get loans from bank. The high rate of failure in small business make the bank does not have any confidence to approve the loan for small business. Even though, the lending rate in Nigeria is in between 16. 12 percent to 19. 03 percent in year 2009. ( Central Bank of Nigeria 2009 ) Some of the banks prefer to lend to big business and not reluctant to extend the credit for small business due to the high small business failure in Nigeria. ( Nigeria’s economy at the crossroads 1999 ) Infrastructure Sources: Enhancing the Competitiveness of Small and Medium Enterprises in Africa: A Strategic Framework for Institutional Support . 001. From above the diagram, we can see that there are many African countries still have inadequate facilities for their business. The infrastructure in Nigeria is considering disabling and until now there is no any change in that area. There are only 6000 megawatts can be produces by the state-run National Electric Power Authority. ( Nigeria’s economy at the crossroads 1999 ) It make the electricity in Nigeria is not stable and very limited especially in rural areas as It make the business cannot product their product successfully as there are no electricity then production process had to stop. High cost of electricity cause the business cannot run many generators at the same times in order to produce more goods. It makes the entrepreneur need to increase the price of goods to cover the high production cost. There are several problems that happen to the wireless deployment in Nigeria. Unstable electricity 3 makes the wireless deployment need to depend on the power backup system. However, the backup can last long for 2 to 8 hours in case of fixed wireless system for subscriber terminal and it could be stretch to 12 to 48 hours when there are power failure occur. Ndukwe 2000, 4) This situation cannot be acceptable if there are more cases happen continually Technology Telecommunication can be one of the key elements to stimulate the business growth rate. How can people connect with others when they are travelling? By using the telecommunication, entrepreneurs can do their job or pass the decision to worker when they at other place. However, telecommunications facilities in Nigeria still can be consider as not existence. Today, there are only 20000 analogues cellular mobile line can be boasted in Nigeria which only cover around the 20 percent of Nigeria. Ndukwe 2000, 3) But in South Africa, there are 3 million of digital mobile line had been installed which cover 80% of country. (Ndukwe 2000, 4) By the way the technology in Nigeria still poor and type of the machinery that provide in Nigeria had limited access. It will slow down the production process by the limited mach inery. Without the modern equipment, small business cannot translate the raw material into finish goods quickly and maintaining same condition of goods. ( Sanni 2009, 23 )Besides, there are inadequate infrastructural problem occur in Nigeria which make the small business hard to survive. The road network in Nigeria still poor especially in the rural areas. It will make the worker hard to send their product to the rural and urban areas on time due to the poor road network. ( Ogechukwu 2006, 7 ) Based on table 2a and 2b, there are less than 50 percent of Nigeria road network are in good and fair condition. The road expenditure in Nigeria road is very low and it show a big different compare to Egypt, France and USA which has spend a lot of road expenditure ( Olufemi and Oluseyi, 2007 ) 4 Sources : The Urban Poor and Mobility Stress in Nigerian Cities, 2007 5 Taxation Taxation for business in Nigeria is quiet high which is 32. 2 percent. It means that business needs to pay 32. 2 percent of their profit to Nigeria government. It becomes the burden of small business as most of the small business start up with limited capital. Then, their business profit needs to be share to government and they only get 67. 8 percent of profit. For example, if a business earns 10000 Nigerian naire then 3220 Nigerian naire need to give government for the tax. They only get 6780 nigerian naire and it will limit the expand of business as yearly profit frequently be the main resource of capital to grow the firm. So the high tax rate will make the entrepreneur have less money to increase the capital in business. (Mitchell, and Fellow 1993,6 ) ( Source : Paying Taxes in Nigeria, n. d ) 6 Regulation Nigeria has a high cost on register a legal licence for a standardized company and takes lot of times. It takes around 31 day around 1 month to start up a new business but in US it only takes 6 day. It need 89903 Nigerian naira plus 7. 5 percent stamp duty paid on capital to get a new business licences but in US it only need 325 US dollar. Without operating the business, small business already had to use around 89903 Nigerian naira by getting the new licences. Sources : Starting a Business in the United States. n. d Sources : Starting a Business in Nigeria. n. d 7 Policies Abugu( 2007 ) has found that the government in Nigeria is lack of commitment at every level in order to develop small business sector. But there are certain of the policies or laws that only can carry out by government. In Nigeria, the government has planned to establish a special policy measures and others program to enhance the development of small business. For example, the Third National Development Plan (1975-1980) which include the introduction of New People’s Bank of Nigeria. ( Ethumeahu, Okekeke and Kingsley 2009, 21 ) Ethumeahu, Okekeke and Kingsley (2009, 22 ) state that these program does not been carried out successfully because of instability of political, corruption and lack of government commitment. Business activities had been affected by the rapidly policy changes and unpredictable duty collection which make the import process to be more difficult and expensive. ( Nigeria , n. d) It affects the entrepreneur which depends on import good or raw material to sell. Besides that, in 2006, Nigeria government had ban the importation of selected item which is biscuit, white cement, castor oil, textile product and more. ( Nigeria , n. d)The small business need to find other resource by getting the ban product. It may used up a lot of time to find it when there is a shortage for the item that need to be used for production and the profit will be slim down as the business need to stop operating if they cannot find the item in the market. 8 Conclusion As a conclusion, the failure on small business had been causes by few problems. Firstly, low of exchange rates make small business cannot earn lot of profit by selling to other country. It is hard for small business to access loan at Nigeria as there is low accessibility to get loan. Besides that, inadequate facilities such as unstable electricity had limited the performance of the small business. Poor road condition had limited the small business by sending their goods to other place. Technology problem also affect the small business as they do not have any modern facilities to improve and maintain the quality of goods. Communication system is one of the major problems that result the business failure. There are limited cellular mobile provided by the Nigeria government. It makes the small business cannot communicate with other people at different areas. Strict regulation also controls the growth of small business as they need to do business law by law. The capital of business is decreasing due to the high exchange rate as they to share profit with government. Recommendation As a recommendation, Nigeria’s government should implement models that emphasize in helping small businesses all throughout the country. In addition to that, further improvement towards the banking and financing facilities should be done in order for small businesses to survive and receive financial aids. Lastly, infrastructures throughout the country should be greatly improved to provide further promote business activities. Examples of infrastructures are water supply, power lines or alternative energy source for businesses, network of roads, communication and many more. 9 Reference list Adekunle, P. , and Tella, A.. 2008. Nigeria SMEs Participation in Electronic Economy: Problems and the Way. Forward. Journal of Internet Banking and Commerce, 13(3): 1-13. https://proquest. umi. com. dbgw. lis. curtin. edu. au/pqdweb? index=6&did=1657 609701&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1273185126&c (accessed April 5, 2010) Abugu, I. 2007. 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