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SME financing through diaspora remittances


smeFor Nigeria to grow, small businesses must thrive. Small and medium enterprises (SMEs) are key to inclusive economic growth. Micro, Small and Medium Enterprises (MSMEs) in Nigeria have employed 60 million people, according to figures shared in 2015 by the then Minister of Industry and Trade, Dr. Olusegun Aganga. He said at the time that MSMEs accounted for 48 per cent of the nation’s Gross Domestic Products (GDP).

The major challenge faced by SMEs in Nigeria, and indeed most of Africa, is that of affordable and accessible financing. With Nigerian bank interest rates sometimes as high as 25 per cent (where it is even available), and the absence of a structured, easy-to-navigate system of providing funding for SMEs, the Nigerian entrepreneur is faced with limited options of low-cost financing.

A potential avenue of large-scale SME financing is the Diaspora remittances, an area in which Western Union is leading. Next to crude oil sales, Diaspora remittances account for the second largest source of foreign exchange for Nigeria. The World Bank migration and remittance brief states that Nigeria is the largest remittance market in Africa, fifth in the world, attracting over $21 billion in 2014, which contributed significantly to GDP. Remittances of about $35 billion were expected in 2016.


Although it is challenging to pin it down to specifics because most transactions are private in nature, there is evidence that a large number of remittances in Nigeria go towards financing different types of businesses. One can think of stories of Nigerians who have been able set up small businesses as a result of capital raised from relatives and friends in the Diaspora. In many instances, such remittances even continue to provide a steady flow of finance to sustain such businesses, until they become viable enough to stand on their own.

A case in point is that of Joseph Blabo, a young Nigerian graduate who lives in Makoko, a riverine slum on the fringes of the Lagos lagoon. Blabo was inspired to start a nursery and primary school a few years ago, and was able to raise the needed capital through remittances by a relative living overseas.

In Joseph’s words: “The vision to start a school was one that I shared with my uncle, and we then asked ourselves how to raise the money. We talked about it to my aunt who was living overseas. She bought into the idea and sent us some money through Western Union. With that money, we bought some tables and chairs, and then paid for a building, and moved into it. Then we started to create awareness for the new school that was about to begin. The result was amazing. In three months, we had registered about 100 pupils.”


In the face of the current economic recession in Nigeria, triggered largely by declining foreign exchange earnings from weak oil prices, it has become imperative to explore the possibility of organising and harnessing Diaspora remittances in a structured manner so that they become veritable sources of financing for small Nigerian businesses on a wider scale. This thinking probably informed, in part, the recent decision by the Central Bank of Nigeria (CBN) to officially license more International Money Transfer Organisations (IMTOs) to operate in the country. Beyond a clear and laudable financial inclusion agenda, one of the reasons offered by the CBN for expanding the IMTO space was: ‘to properly organise the international money transfer business and ensure that all transactions were formalised within the official financial services eco-system. This move will help bring the estimated 50 per cent remittances to Nigeria that are currently go through unregulated, informal networks into formal network channels through licensed IMTOs’.

A key element of this desired ‘formalisation’ should be to ensure proper documentation and categorisation by the partner banks, such that it becomes possible to determine, to a large extent, how much of the inflows are specifically deployed to financing business ventures in Nigeria. This information, gathered and analyzed over a period of time, should begin to show, not just the absolute quantum of such funds, but trends and insights which will enable the authorities to plan, and hopefully come up with long-term strategic and policy frameworks of options on how to increase such remittances and organise them in ways that can be extended to the larger SME community, beyond just the primary recipients themselves.

Western Union is also boosting SME development in Nigeria through its extensive partner network. The company has worked with its partners and agents to build an extensive network of over 5,100 walk-in transaction locations in Nigeria over the past 20 years. These facilities are spread across all of the 36 states and the Federal Capital Territory, and many of them are operated by businesses that can be classified as SMEs. As the IMTO space grows, one can only imagine how many more business and employment opportunities will be generated by this service alone.
• Johnson, a business and public analyst, wrote from Lagos.

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