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Home Financial Literacy Small Business

Analysis: Is Patient Capital Enough For SME’s To Survive

Onome Ohwovoriole by Onome Ohwovoriole
February 10, 2017
in Small Business
Access Bank seals partnership with Coronation Insurance on bancassurance, Businessmen shaking hands, close up

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Nairametrics| The Bankers Committee, recently announced an SME scheme, where banks will take equity stakes rather than give loans to SME’s. Funding for the scheme will come from 5% of banks profit before tax, starting from the 2016 financial year. The scheme is to last for ten years. As laudable as the idea is, it appears to be dead on arrival.

The scheme addresses the issue of “patient” capital by SMEs but not revolving capital. SMEs require working capital, not just patient capital. Patient capital refers to long-term capital invested in a business without an immediate expectation of a return. So a bank could take an equity stake of ₦50 million in a business and then have the SME invest it in long-term capital such as acquiring plant and machinery.

However, this leaves a critical portion of what SME’s need to get; working capital. Without adequate working capital, SME’s lack the cash flow to meet every day business challenges such as having to plug holes left by high receivable turnovers, need to stock up inventories ahead of sales or during high demand or even meet other short-term obligations. Most businesses fail not due to the availability of assets but due to short-term financial obligations that they cannot meet.

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Accessing the equity scheme will also be a major challenge. Similar intervention schemes by both commercial banks and the Central Bank Of Nigeria (CBN) have come to nought, because the terms and conditions to qualify are simply impossible. The typical SME owner is often unwilling to let go of control. There are bound to be management tussles between the bank and the owner of the SME.

The most pressing challenge for SMEs is the harsh operating environment they all have to face in every corner of the country. Difficulties in accessing foreign exchange, infrastructural issues and multiple taxation make running a business in Nigeria a hellish experience. The banks would be better investing in PPPs addressing the infrastructure challenge than taking equity stakes in SMEs.

Tags: SME
Onome Ohwovoriole

Onome Ohwovoriole

Onome Ohwovoriole has a degree in Economics and Statistics from the University of Benin and prior to joining Nairametrics in December 2016 as Lead Analyst had stints in Publishing, Automobile Services, Entertainment and Leadership Training. He covers companies in the Nigerian corporate space, especially those listed on the Nigerian Stock Exchange (NSE). He also has a keen interest in new frontiers like Cryptocurrencies and Fintech. In his spare time, he loves to read books on finance, fiction as well as keep up with happenings in the world of international diplomacy. You can contact him via onome.ohwovoriole@nairametrics.com

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