Why your government needs to focus on building MSMEs

This article is written by Tejumola Abisoye, the CEO and Executive Secretary of the Lagos State Employment Trust Fund. She is an Amujae Leader ’21. The Amujae Initiative is the flagship program of the Ellen Johnson Sirleaf Presidential Center for Women and Development (EJS Center) and aims to shift the landscape for women in public leadership in Africa, moving from a culture of tokenism to a culture that values women’s leadership.

• The problem: As we build back from COVID-19, micro-, small-, and medium-sized enterprises are struggling to access finance and other support that will help them flourish.
• Why it matters: MSMEs are the backbone of African economies, providing a valuable source of innovation and employment opportunities for our large youth populations.
• The solution: By partnering with commercial banks, supporting wider support networks and ecosystems, and listening to what MSMEs need, governments can create the conditions for small businesses and entrepreneurs to thrive.

Small enterprises are often referred to as the backbone of African economies. According to the United Nations’ Economic Commission for Africa, small- and medium-sized enterprises account for about 90% of private businesses in Africa. In Nigeria, micro-, small-, and medium-sized enterprises (MSMEs) accounted for nearly 50% of national GDP and 86% of the national workforce in 2017.

MSMEs are a valuable source of innovation in our economies and present huge opportunities to meet the demands of Africa’s growing labour force. Among the many challenges the African continent faces as we look to build a post-pandemic world, youth unemployment is arguably one of the most pressing. Africa is home to over 420 million people between the ages of 15-35, one-third of whom are unemployed. The African Development Bank recognizes the socioeconomic risks of high youth unemployment with its Jobs for Youth in Africa Strategy, which includes multiple programmes seeking to address skills gaps and support business development.

• Want to write for us? Take a look at Apolitical’s guide for contributors

In Lagos, Nigeria’s largest city with an estimated 22 million people, we responded to a looming youth employment crisis by founding the Lagos State Employment Trust Fund (LSETF), an agency dedicated to tackling the issue of youth unemployment. The most effective and lowest-risk method for increasing employment? MSMEs.

By their very definition, these businesses have fewer than 50 employees. If a major multinational corporation closes a branch, hundreds or even thousands of people lose their jobs and livelihoods. A small business shutting down, while devastating for those directly involved, has a much smaller impact on a local economy.

Investing in support for MSMEs will be a crucial way to build back after the COVID-19 pandemic. Over the last five years, I’ve seen first-hand the interventions that have led Lagos to be named as Africa’s top startup city. These have taken a variety of forms, but three of the most critical components have been securing strong collaboration with the private sector, building ecosystems, and listening to entrepreneurs’ unique needs.

I hope that our experience in Lagos across these three areas can provide a blueprint for other state and national governments to help MSMEs achieve their potential as engines of growth.

Collaborating with the private sector

When LSETF began its operations in 2016, our initial diagnostics surveys found that entrepreneurs were struggling to get affordable loans. As a government agency, we felt that we were in the unique position of being able to provide loans to MSMEs at lower interest rates than commercial banks. When banks were charging interest of over 20%, ours came with just 5% interest. In our first year, we provided 7,000 loans to micro and small enterprises—showing just how many micro businesses were in need.

However, we soon realised that partnering with commercial banks would allow us to support even more businesses. In 2019, we introduced a matching fund structure and blended interest rate in collaboration with a handful of Nigerian banks. This model is similar to the MUDRA Business Loan structure seen in India and has reduced interest rates by over 500 basis points, reducing the cost of capital for MSMEs.

Using these partnership models and structures to ease access to finance (loans and grants), LSETF has supported over 16,000 MSMEs and disbursed about US $18.5 million (NGN 8.8 billion) – creating and supporting over 140,000 direct and indirect jobs. Enterprises such as SoFresh, NuliJuice, Jand2Gidi, and MoDs Salon have successfully expanded their operations, raised additional equity, and opened new branches.

We have also worked to develop networks and ecosystems for MSMEs to thrive. Enterprise development institutions such as LEAP World, Fate Foundation, and Strengths Africa have provided support at reduced costs, and legal advisory firms and consultancies have provided advice to MSMEs free of charge. This kind of advice is invaluable for start-ups and would otherwise be out of reach.

Building wider support networks and ecosystems

We have also partnered with private-sector actors to develop business parks through providing grants and affordable financing to Private Sector Promoters (PSPs). These business parks can provide startups with access to machinery and other infrastructure, such as electricity and internet, that would otherwise pose a heavy cost burden for young companies. Business parks can also be developed for specialized skills and services, enabling the areas where they are based to become hubs for certain types of businesses. In Lagos, for example, the Shomolu Local Government Area (LGA) is known as a printing hub. Another LGA — Mushin — is known for formwork and carpentry. Governments and development banks would do well to expand business park offerings to other industries and digitised services such as digital marketing, last-mile delivery services, and CRM tools to accelerate business performance.

Governments and development banks would do well to expand business park offerings to other industries and digitised services.

Beyond business parks, we have provided targeted support to tech entrepreneurs through Lagos Innovates, a suite of programmes designed to support founders and start-ups. With programmes such as “Workspace Vouchers,” which covers part of the cost of coworking space memberships, and “Hub Loans,” which provides workspace providers with loans to expand or improve their existing facilities or increase their location offerings, we are facilitating access to high-quality workspaces and infrastructure and a natural source of networking and knowledge sharing. There are also programmes to facilitate access to early-stage investment capital, a talent development scheme, and event co-sponsorships. To date, the programme has supported over 150 tech start-ups in Lagos, which have created an average of 42 jobs each. Each year, we are overwhelmed with applications from ambitious entrepreneurs.

Taking time to listen

When the Lagos State Employment Trust Fund was established, one of our first tasks involved running a diagnostics survey to determine what MSMEs and entrepreneurs really needed. LSETF regularly runs surveys and commissions independent groups to run impact studies to ensure that our interventions are truly addressing the problems they are intended to solve.

We have also taken a nimble approach, adapting our programming as new challenges emerge. For example, in response to the pandemic and the looting coinciding with the #EndSARS protests, LSETF set up a major recovery fund for MSMEs. The roll-out of these programs have provided further opportunities to listen and learn from those we serve.

For example, our surveys and analysis of the applications we received showed us that many of the businesses impacted did not have formal bank accounts — many of the grants under the recovery fund were paid to personal accounts of the business owners. This showed us that we can do more to increase training for small business owners on how to formalise their businesses—and maybe we can also find ways to make that process easier and more accessible.

As African economies continue to be pummeled by COVID-19 — especially amid this third wave of virus infections — governments must explore creative ways to support MSMEs and unleash their potential to drive employment and economic growth. Through public-private collaboration, strong ecosystems, and a desire to listen and learn from entrepreneurs, governments can help start-ups to thrive, building a better future for Africa’s youth. — Tejumola Abisoye

We want to hear what you think about this article. Pitch an article to us or send your comments to discussion@apolitical.co

(Picture credit: Pexels)