Nigeria’s Small and Medium Enterprises (SMEs) are the backbone of the country’s economy, accounting for 96% of Nigeria’s businesses, 84% of its labor force, and 48% of its GDP. SMEs also provide Nigeria’s oil-dependent economy with some important economic diversification. Nevertheless, difficulties in securing startup or operational funds, among other problems, makes starting and operating a small business in Nigeria remarkably challenging. To mitigate these difficulties, the Nigerian federal government has created an assortment of agencies to support SMEs. In addition, at least 26 of Nigeria’s 36 state governments have established at least one SME development agency or office.
Unfortunately, government funds meant to help small businesses often fail to reach their intended recipients. Instead, the government’s SME programs often function as gateways for corruption, either in the form of misallocation of resources for political patronage, or as outright embezzlement of funds. This corruption problem is well illustrated by two of the most important national-level government programs meant to support Nigerian SMEs:
- Small and Medium Enterprises Development Agency of Nigeria (SMEDAN): SMEDAN was established in 2003 with the mandate to stimulate, monitor, and coordinate the development of programs and policies to facilitate the growth of SMEs. However, SMEDAN has been largely ineffective (see here and here). The agency spent over ten billion Naira (approximately US $26 million) on training programs for SME owners, but despite repeated requests from civil society groups pursuant to the Freedom of Information Act, SMEDAN has refused to provide detailed information regarding the training program’s implementation and beneficiaries. This has made it impossible to ascertain the specific individuals or entities that have received funding to implement the trainings and how the recipients used that funding. Despite this opacity, researchers have estimated that 80% of SMEDAN’s expenditures were allocated to recipients that were hand-picked by federal legislators, suggesting that the program is a conduit for political patronage. Worse, this could be evidence of embezzlement, if federal legislators created fraudulent corporations to receive SMEDAN funding.
- The Central Bank of Nigeria (CBN): Although the CBN does not loan funds directly to SMEs, it has developed several programs to support SMEs by lending funds to government-run development finance institutions, which in turn loan the money to the commercial banks from which SMEs are authorized to borrow at low interest rates. One such program is the CBN’s 220 billion Naira intervention fund (the “Fund”), which apportioned funds to each of Nigeria’s 36 states and the Federal Capital Territory in order to ensure that governors have the resources to aid SMEs within their regions. While the CBN stated that the Fund had distributed 76 billion Naira to SMEs, media investigations revealed that most SMEs did not receive loans from the Fund, while governors and politicians regularly misappropriated the Fund’s monies by dispersing them to political associates, relatives, and party members, often via proxy companies. Meanwhile, legitimate SMEs found it nearly impossible to receive loans from the Fund due not only to lack of awareness about the existence of the Fund, but also to stringent requirements intentionally put in place by participating financial institutions. For instance, government-run finance institutions adopted a rule that an applicant have backing from a wealthy guarantor—which effectively disqualifies millions of small business owners who hail from poor backgrounds—as well as a rule that applicants provide various legal documents, which many small business owners cannot provide because their businesses are not formally registered.
Although well-intentioned, government programs to support Nigerian SMEs have been functioning as conduits for corruption. The key lesson from the programs implemented by the CBN and SMEDAN—a lesson that could be applied to other SME programs as well—is the need for greater transparency regarding the beneficiaries of funds:
- With respect to SMEDAN, the government should require that SMEDAN publish information on how it allocates funds to different trainings and how it selects the consultants that will conduct those trainings. SMEDAN should also continuously release information regarding the businesses selected to participate. This would enable civil society groups and the Nigerian government to investigate the training programs and certify that the funding recipients are legitimate and do not have significant connections with SMEDAN leadership or federal legislators.
- With respect to the CBN Fund, the government should require that the CBN and all states and participating financial institutions collect and publish information about each Fund beneficiary. In addition to this pro-transparency measure, the government should also require that the institutions tasked with dispersing funds eliminate overly strict criteria and establish programs to help SMEs gain knowledge about the Fund, and steps to properly incorporate and fulfill the documentation requirements.
While transparency will not eliminate all corruption from the system, it would provide a vital check on misconduct. When information regarding the allocation of funds, meant to help genuine small businesses, remain in a “black box”—not collected or shared publicly—corrupt politicians and officials are free to subvert the system for their own ends. More sunlight, in this context, would indeed be an excellent disinfectant.