1.1                   BACKGROUND TO THE STUDY

The pursuit of economic development has been a major goal of many developing nations of the world. Developing countries are confronted with several problems such as high rate of poverty and unemployment which have continued to hinder the attainment of socio-economic development. For any nation to attain development, industrialization, gainful and meaningful employment are important indices used as a measurement of economic development.

This is often depicted by income per capital, equitable distribution of income, the welfare and quality of life enjoyed by the citizen of that nation. Small and Medium Scale Industries (SMI) has proved to be a major tool adopted by the developed nations to attain socio- economic development. In recent time, small scale industrial sector is considered to be the backbone of modern day economy. Historical facts show that prior to the late 19th century, cottage industries, mostly small and medium scale businesses controlled the economy of Europe. The Industrial Revolution changed the status quo and introduced mass production (Thomas, 2001).

The twin oil shocks during the 1970s undermined the mass production model, which triggered the unexpected reappraisal of the role and importance of small and medium scale industries in the global economy (Wendrell, 2003). In Nigeria, the introduction of SMI can be traced back to the year 1945 when the essential paper No. 24 of 1945 on “A Ten year plan of development and welfare of Nigeria 1946 was presented”. Small and Medium scale Industries was considered an all times necessity at the beginning; which has gained prominence today and is expected to increase its importance in the future (Basil, 2005).

Since 1986, government had reduced its role as the major driving force of the economy through the process of economic liberalization entrenched in the IMF pill of Structural Adjustment Programme. Emphasis, therefore, has shifted from large-scale industries to small and medium- scale industries, which have the potentials for developing domestic linkages for rapid and sustainable industrial development. Attention was focused on the organized private sector to spearhead subsequent industrialization programmes. The incentives given to encourage increased participation in these sectors were directed at solving and/or alleviating the problems encountered by industrialists in the country, thereby giving them opportunity to increase their contribution to the Gross Domestic Product (GDP).

The contribution of Micro, Small & Medium Enterprises (MSMEs) to economic growth and sustainable development is globally acknowledged (CBN, 2004). There is an increasing recognition of its pivotal role in employment generation, income redistribution and wealth creation (NISER, 2004). The micro, small and medium enterprises (MSMEs) represent about 87 per cent of all firms operating in Nigeria (USAID, 2005). Non-farm micro, small and medium enterprises account for over 25 per cent of total employment and 20 percent of the GDP (SMEDAN, 2007) compared to the cases of countries like Indonesia, Thailand and India where Micro, Small and Medium Enterprises (MSMEs) contribute almost 40 percent of the GDP (IFC, 2002).

Whilst small and medium scale industries (SMSI) are an important part of the business landscape in any country, they are faced with significant challenges that inhibit their ability to function and contribute optimally to the economic development of many African countries. The position in Nigeria is not different from this generalized position (NIPC, 2009).

Realizing the importance of small businesses as the engine of growth in the Nigerian economy, the government took some steps towards addressing the conditions that hinder their growth and survival. However, as argued by Ojo (2003), all these SME assistance programmes have failed to promote the development of SMEs. This was echoed by Yumkella (2003) who observes that all these programmes could not achieve their expected goals due largely to abuses, poor project evaluation and monitoring as well as moral hazards involved in using public funds for the purpose of promoting private sector enterprises. Thus, when compared with other developing countries, Variyam and Kraybill (1994) observed that many programmes for assisting small businesses implemented in many Sub-Saharan African (SSA) countries through cooperative services, mutual aid groups, business planning, product and market development, and the adoption of technology, failed to realize sustained growth and development in these small enterprises. Among the reasons given were that the small-sized enterprises are quite vulnerable to economic failure arising from problems related to business and managerial skills, access to finance and macroeconomic policy.

Despite Small and medium scale industries important contributions to economic growth, small enterprises are plagued by many problems including stagnation and failure in most sub-Saharan African countries (Bekele, 2008). In Nigeria, the problem is not limited to lack of long-term financing and inadequate management skills and entrepreneurial capacity alone, but also, includes the combined effect of low market access, poor information flow, discriminatory legislation, poor access to land, weak linkage among different segments of the operations in the sector, weak operating capacities in terms of skills, knowledge and attitudes, as well as lack of infrastructure and an unfavourable economic climate.

Lack of access to finance has been identified as one of the major constraints to small business growth (Owualah, 1999; Carpenter, 2001; Anyawu, 2003; Lawson, 2007). The reason is that provision of financial services is an important means for mobilizing resources for more productive use (Watson and Everett, 1999). The extent to which small enterprises can access fund determines the extent to which small firms can save and accumulate their own capital for further investment (Hossain, 1988), but small business enterprises in Nigeria find it difficult to gain access to formal financial institutions such as commercial banks for funds. The inability of the MSEs to meet the conditionalities of the formal financial institutions for loan consideration provided a platform for attempt by informal institutions to fill the gap usually based on informal social networks; this is what gave birth to micro-financing. In many countries, people have relied on the mutually supportive and benefit-sharing nature of the social networking of these sectors for the fulfillment of economic, social and cultural needs and the improvement of quality of life (Portes, 1998). Networks based on social capital exist in developed as well as developing countries including Nigeria.

The reluctance of formal financial institutions to introduce innovative ways of providing meaningful financial assistance to the MSEs is attributed to lack of competition among financial service providers, in the sense that none of financial service providers came up with an innovative way of financing small businesses. In order to enhance the flow of financial services to the MSME subsector, Government had, in the past, initiated a series of programmes and policies targeted at the MSMEs. Notable among such programmes were the establishment of Industrial Development Centres across the country (1960-70), the Small Scale Industries Credit Guarantee Scheme  (SSICS) 1971, specialized financial schemes through development financial institutions such as the Nigerian Industrial Development Bank (NIDB) 1964, Nigerian Bank for Commerce and Industry (NBCI) 1973, and the National Economic Recovery Fund (NERFUND) 1989. All of these institutions merged to form the Bank of Industry (BOI) in 2000. In the same year, Government also merged the Nigeria Agricultural Cooperative Bank (NACB), the People’s Bank of Nigeria (PBN) and Family Economic Advancement Programme (FEAP) to form the Nigerian Agricultural Cooperative and Rural Development Bank Limited (NACRDB). The Bank was set up to enhance the provision of finance to the agricultural and rural sector. Government also facilitated and guaranteed external finance by the World Bank (including the SME I and SME II loan scheme) in 1989, and established the National Directorate of Employment (NDE) in 1986.

In 2003, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN), an umbrella agency to coordinate the development of the SME sector was established. In the same year, the National Credit Guarantee Scheme for SMEs to facilitate its access to credit without stringent collateral requirements was reorganised and the Entrepreneurship Development Programme was revived. In terms of financing, an innovative form of financing that is peculiar to Nigeria came in the form of intervention from the deposit-money banks. The deposit money banks through its representatives, ‘the Banker’s Committee’, at its 246th meeting held on December 21, 1999. The deposit-money banks agreed to set aside 10% of their profit before tax (PBT) annually for equity investment in small and medium scale industries.  The scheme aimed, among other things, to assist the establishment of new, viable SMI projects; thereby stimulating economic growth, and development of local technology, promoting indigenous entrepreneurship and generating employment. Timing of investment exit was fixed at minimum of three years, that is, banks shall remain equity partners in the business enterprises for a minimum of three years after which they may exit anytime.  By the end of 2001, the amount set aside under the scheme was in excess of six billion naira, which then rose to over N13 billion and N41.4 billion by the end of 2002 and 2005 respectively.

The modality for the implementation of the fund is such that the fund set aside is to be invested within 18 months in the first instance and 12 months thereafter. After the grace period, the CBN is required to debit the banks that fail to invest the fund set aside and invest same in treasury bills for 6 months. Thereafter, the un-invested fund would be bided for by successful investors under the scheme. The fund set aside by the banks under the scheme decreased from N41.4 billion in 2005 to N38.2billion in 2006. This was as a result of N2.5billion and N25.3 million set aside from failed banks and liquidated banks respectively, which were netted out after the bank consolidation exercise. Actual investment during the period grew from N12 billion in December 2005 to N17 billion in 2006, representing only 29.1 percent of the total fund set aside. In 2007, total amount set aside decreased further to N37.4 billion, while total investment stood at N21.1 billion representing 56 percent of the total sum set aside. The number of projects that benefitted from the scheme also increased to 302 projects in 2007, from 248 in 2006 (CBN, 2007).

The CBN found the reasons for the slow pace in utilization of the SMIEIS fund to include: the desire of the Banks to acquire controlling shares in the funded enterprises and the entrepreneurs’ resistance to submit control; inability of the banks to adapt equity investment which is quite different from what the banks are familiar with in credit appraisal and management, and lack of proper structure for effective administration of the scheme when it took off among other factors. Responding to the findings, the Bankers’ Committee took a policy decision to extend funding under the scheme to all business activities including even non-industrial enterprises, except for general commerce and financial services. The name of the scheme was changed from SMIEIS to Small and Medium Enterprises Equity Investment Scheme (SMEEIS) to reflect the expanded focus. Also, the limit of banks’ equity investment in a single enterprise was increased from N200 million to N500 million, making room for medium size industries.

Despite all these efforts, the contribution of SMEs in the industrial sector to the Nation’s GDP was estimated to be 37% compared to other countries like India, Japan and Sri Lanka and Thailand where SMEs contributed 40%, 52% 55% and 47.5% respectively to the GDP in 2003, (UNCTAD, 2003), hence the need for alternative funding window. In 2005, the Federal Government of Nigeria adopted microfinance as the main financing window for micro, small and medium enterprises in Nigeria. The Microfinance Policy Regulatory and Supervisory Framework (MPRSF) was launched in 2005. The policy, among other things, addresses the problem of lack of access to credit by small business operators who do not have access to regular bank credits. It is also meant to strengthen the weak capacity of such entrepreneurs, and raise the capital base of microfinance institutions.  The objective of the microfinance policy is to make financial services accessible to a large segment of the potentially productive Nigerian population, which have had little or no access to financial services and empower them to contribute to economic development of the country.



Nevertheless, despite the efforts and contributions of past and present government towards promoting Small scale industry in Nigeria, the contribution of this sector to the economy still remain relatively small in terms of its impact on Gross Domestic Product (GDP), unemployment and poverty reduction. The rate of unemployment in this state is still high and majority of the population still live in poverty. Ekezie (1995), Bacdom (2004), Iromaka (2006), Aremu, (2010) among others attributed the lack of credit as one the major constraint to the realization of the benefits of SME. In the light of the above, this paper attempt to examine the impact of SMI on the economic development of Nigeria.



The main objective of this study is to examine the impact of Small and Medium Scale Industries (SMIs) on economic development of Nigeria and the specific objectives are to:

  1. To investigate the impact of SMIs on poverty reduction in Nigeria
  2. To examine the impact of SMIs on employment generation in Nigeria and
  3. To examine the impact of SMIs in improving the standard of living of Nigerian.



  1. What is the extent of poverty reduction in Nigeria through the activities of Small and Medium Industries.
  2. What is the contribution of Small and Medium Industries on the level of unemployment reduction in Nigerian.
  3. To what extent have Small and Medium industries improve the standard of living in Nigeria.



Successive governments in Nigeria have always had a policy programme for SMEs, but most of the programmes have failed to achieve sustainable growth in the SMEs sub-sector.  Most of the government assisted-programmes have themselves become failures.

The findings of this study is expected to inform policy makers regarding the direction of further research into interventionist programmes for MSEs in Nigeria.

The study is also of great importance to Microfinance Institutions, in the sense that it is expected to assist the microfinance institutions in assessing the effectiveness of their programmes and to know which variables contribute most to small business growth and survival.

The study is expected to assist the microfinance institutions in their credit policy formulation strategies. For owners and managers of micro and small businesses, access to a study like this can aid their understanding of current challenges and reveal the essential factors that promote small business growth and survival and thus enable them to focus on the relevant ones in an attempt to enhance their growth and performance.

The study is expected to help the government to validate or reject the choice of microfinance as the main source of financing MSEs in Nigeria and also suggest ways of improving the existing financing arrangements, if need be.



The study provides insight into the impact of small and medium scale industries on the economic growth of Nigeria.


The main limitation of the study is the reliance on information supplied by small business operators who normally do not want to make a full disclosure of their businesses to an unknown person for fear of being subjected to tax payment. In the same vein, most of the small business operators lack proper record keeping practices and do not adhere to standard book keeping and accounting procedures. Some of them do not have the necessary skills needed for sound book keeping, auditing and tax assessment; neither do they employ qualified personnel to undertake such tasks for them.



  • Micro enterprise: Micro- enterprise is the informally organized business activity undertaken by entrepreneurs; excluding crop production by convention, employing less than ten people and having assets less than N5 million excluding land and building.
  • Small enterprise: Small enterprise is any enterprise that employs between ten (10) to forty-nine (49) people and has asset worth (excluding land and building) between N5 million and N50 million.
  • Medium enterprise: Medium enterprise is any enterprise that employs between fifty (50) and one hundred and ninety–nine (199) people and has assets worth (excluding land and building) between N50 million and N500 million (SMEDAN, 2007).