MICROCAPITAL STORY: Why the Central Bank of Nigeria’s Small and Medium Enterprises Equity Investment Scheme (SMEEIS) was Replaced by a Fund for Microfinance

This past spring, the Nigerian government cut its Small and Medium Enterprises Equity Investment Scheme (SMEEIS) due to a lack of success and underutilization. Recently, many comments by officials as well as outside criticisms have surfaced, explaining and defending the decision to cut SMEEIS and instead support the Nigerian Microcredit Development Fund.

According to SMEEIS guidelines, SMEEIS was approved in December 1999 and officially launched in 2001 by the Central Bank of Nigeria’s (CBN) Banker’s Committee. SMEEIS’ role was aimed to promote economic development, employment and poverty alleviation.

Its mandate dictated that all banks in Nigeria commit 10 percent (reduced to five percent after the first five years) of their annual profits after tax to SMEEIS’ initiatives. Yet, the investments would be made by the banks via equity in SMEEIS’ affiliated small and medium-sized enterprises (SMEs). This funding would be complimented by voluntary training and partial management by the bank. Equity investments, instead of loans, were chosen with the aim “to reduce the burden of interest” on the SME. A bank could gain up to 40 percent in equity in any single institution.

SMEEIS was established by the CBN’s Banker’s Committee as a response to the governments’ concerns about the promotion of SMEs in Nigeria. Administrative costs were facilitated by debiting any banks that had neglected to invest in SMEEIS over the year. In late 2007, SMEEIS was made optional to banks. In December of 2007, according to CBN’s Annual Report (28), SMEEIS had the equivalent of USD 213 million invested by banks in 327 Nigerian projects. Yet, SMEEIS had total sums of the equivalent of USD 362.3 million at its disposal. The report also notes that though Nigeria has 36 states, the equivalent of USD 89 million or 49 percent of the investments were made only in Lagos state. 12 states were completely untouched by the initiative.

The lack of geographic coverage of the SMEEIS program was one of the main reasons the program was cut according to the CBN’s governor Chukwuma Soludo. SMEEIS was also being criticized for having only disbursed 30 percent of its funding during its seven year lifetime. In a 2007 MicroCapital article, the CEO of Nigerian Seedvest Microfinance Bank Limited criticized SMEEIS as unutilized.

The government claims that this underutilization was due to the lack of demand and lack of interest on the part of both the SMEs and banks. Soludo claims the banks had no interest in managing multiple projects for the small amount of equity investment. This indicates that the banks did not find the initiative profitable, grew wary of this obligation and had little incentive to either commit resources or fully participate in SMEEIS.

Banks blame the SMEs for being neither efficient nor well managed, making it difficult for banks to work with them through equity participation and voluntary training. Banks noted the unwillingness of SMEs to work with additional partners in managing their enterprises.

On this point, SMEs seem to agree, pointing out that as entrepreneurs, they were not interested in being owned by outside investors. SMEs also point out a lack of access to SMEEIS funds as banks were requiring collateral. SMEs complained of the cost of documentation to access the funds (up to the equivalent of USD 4,311), which seems to indicate an expensive and cumbersome application process.

Now, as SMEEIS has been halted, the government has chosen to approach the need for funding by initiating CBN’s USD 426 million Micro Credit Development Fund. MicroCapital reported on its launch in February 2008 here. The fund absorbed the extra SMEEIS capital that had not been invested in projects at its close. The fund will also follow a similar funding structure to SMEEIS as banks will have to contribute five percent of their profits after tax to the fund. In addition, state governments will have to provide matching funds.

The aim for the microcredit fund is to disperse loans via microfinance institutions that lend to the public, thereby eliminating the problem of equity participation. The Nigerian government has also mandated that non-governmental MFIs must transform into Nigerian microfinance banks (MFBs) if they have total assets of the equivalent of USD 171,858 or above. The hope is that it will be easier to disperse money directly to MFBs than it was to finance enterprises through commercial banks. Geographic coverage is hoped to expand as MFBs can be set up throughout the country.

The government has not addressed the distinction between the clients served by SMEEIS and the Micro Credit Development Fund. While the fund seems to be targeting micro-enterprises specifically, it is not clear whether or not what was initially designated as an SME (small and medium-sized enterprise) can be re-designated as “micro” in order to be able to access the new funding source.

By Sarah Knapp, Research Assistant

Additional Resources:

Bank of Nigeria: 2007 Annual Report, FAQ

Media: All Africa, Business Day, News Watch Nigeria, Nigeria Business, Sun News, Tribune

MicroCapital.org: Nigerian Government Creates 426m Microcredit Development Fund, Seedvest Microfinance Bank Comes on Board

Small and Medium Enterprises Equity Investment Scheme (SMEEIS)