The Role of Small and Medium Enterprises in Revamping the Nigerian Economy


According to the oxford advanced learners dictionary of current English an economy in the avoidance of waste of money, resources strength or anything else of value. It is also the control and management of the money, good and other resources of a community, society or household.

Some of the major classifications of an economy according to Eyifere” (1996) include:


A country is said to have a tree enterprise belong to private persons. More so, in free enterprise economy the government does not own many business enterprises. It rather restricts itself to the provision of defense, administration and a few utilities such as road, railways, water supply and market places. The best example of a free enterprises economy in the united state of America.

PLANNED ECONOMY:       In this type of economy nearly all business enterprises belong to the government. The government has a central planning committee, which decides how much at each commodity should be product. This is type of economy that now exists in the soviet union.

MIXED ECONOMY:  In  many development countries, some of the business concerns belong to private persons while the government owns others. In other words private enterprises, which exist side by side with government enterprises which might be in the form of large scale and public organizations. When this happens the country is said to have a mixed economy. This is the type of economy that is being practices in Nigeria and all other countries in west Africa. It is also practiced in Britain and others countries of the world.



The terms “small, medium and large” as relative and differ from industry to industry, country to country and therefore, there is no universally accepted definition of them. In fact, there is no single criterion or classifying a business enterprise as small or medium scale. Definition change over time and more importantly defenders upon a country’s level of development. According to Adekunye (1990) as  study carried out by the Georgia institute of technology in the  united states of America came up with fifty different definitions in seventy five countries.

The absence of a universally accepted definition of small and medium scale enterprises might well explain why India came up with four categories of small and medium scale enterprise namely: modern scale industries cottage industries, handicrafts and hund bons industries (Adekanye, 1990). In the united states of  America, the small business association regards business, which has less than two hundred and fifty employees and whose annual turnover is not more than 510 million (dollars) as small-scale similancy, the  united states committee for economic development also considers enterprises with independent management and whose capital and ownership is supplied and held by an individual and operates mainly within the locality and with a relatively small size within the industry as small scale enterprises.

The united kingdom regards any business with an annual turnover of 2 million (pounds) or less and employing not more than two hundred person as a small-scale enterprises.

In Taiwan, the small-scale enterprise is defined as an enterprise with capital investment below Nts 40 million (about us $ ).

In nigeria contest, the multiplicity of definitions for  small and medium scale enterprises is the rule rather than exception, it is however, possible that as a result of differences in policy focus, different government agencies in Nigeria apply various definitions to small and medium scale enterprises (Nwankw 1992).

For instance, the center for industrial research and development, Ile- Ife, defines small-scale industries as one whose total asset in capital equipment, plant and working capital are less than two hundred and fifty thousand naria and employing fewer than fifty full-time workers. The Nigeria Bank for commerce and industry defines small-scale industries as commercial enterprises with project cost (investment and working capital) of not more than seven hundred and fifty thousand naira.

The Nigeria industries development Bank accepts this definition for small-scale enterprises while that of medium scale are up to three million naira. The federal ministry of industries in 1973 defines small-scale industries as one with a total capital investment of not less than sixty thousand naira and employing not more than fifty person. This has cater revised to include any manufacturing and service industry with a capital of not more than one hundred and fifty thousand naira in machinery and equipment. The third National development plan 10 (1975-1980) put the capital investment of small-scale industry at one hundred and fifty thousand naira. While in another vein, the central bank of Nigeria monetary policy circular No. 25 of 1991 defines small-scale enterprises as one whose capital investment does not exceed five million naira including land and working capital or whose turnover is not more than twenty-five million naira annually.

The world bank Document (report No 7114) of 1980 in Nigeria defined small and medium scale enterprise as one whose total fixed assets (excluding land) plus cost of investment do not exceed ten million naira in constant 1988 price and a micro enterprises as one with fixed asset5 (excluding land) plus cost of the investment prospects below four hundred thousand naira in constant 1988 prices.

The African Development Bank (ADB) Export Stimulation loan (ESL) scheme define a small and medium scale enterprises as one whose total investment excluding cost of land does not exceed us & 6.35 million.

Further more, the National Economic Reconstruction fund (NERFUND) define small and medium scale enterprises (Section 2 (b) of decree No 2 of 1969) as those with fixed cost of new investment excluding land but not exceeding ten million naira.

In the industrial policy of Nigeria published by federal ministry of industries, small-scale industry is defined in the light of SAP economic realities  as those whose total investment is of between N100,000 and N2 million exclusive f land but including working capital. Minor cottage industries are defined by the policy as those whose total investment cost does not exceed N100,000 including working capital but exclusive of land.

In Enugu state, the state government established fund or small-scale industries (FUSSI) in 1971 through the state ministry of commerce, industry and technology. This fund ways, small-scale industry means a manufacturing processing or servicing industry with a capital investment of up to N150,000 in machinery and equipment alone. This exclude working capital and cost of land. These various definitions highlight the fluidity in the concept of small and medium scale enterprise. However, the observed fluidity is a direct response the countries, growth form a traditional rural agro-bused economy to a developing country, which is semi-urban. Urban, where individual sectors respond and adjust to the dynamics of development. Therefore, as a result of the structural transformation needed in the industrial sector coupled with the attendant production costs, the 1989 industrial policy of Nigerian defined small-scale industries as these with total investment of between one hundred thousand naira to two million  capital thus recognizing the existence of micro/ cottage industries, defined as those enterprises with investment cost below one hundred thousand naira excluding cost of land but including working capital.

Viewed from another perspective of response to the general upward movement of cost of plant and machinery in producing nations, the high cost of building materials in Nigeria and the unstable and increasing exchange rate of foreign currencies to the naira, the following definitions of industrial enterprises were adopted by the national council on industries in owerri 1991.

  1. COTTAGE ENTERPRISES: An enterprises whose total project cost excluding  cost of land but including working capital is not more than one million naira (i.e. US $ 50,000).
  2. MEDIUM SCALE ENTERPRISES: An enterprises whose total project cost excluding cost of land and including working capital which does not exceed ten million naira (i.e. US $ 500,000).
  3. MEDIUM SCALE ENTERPRISES: An enterprises whose total project cost excluding of land including working capital which does not exceed forty million naira (i.e. US $ 2 million).
  4. LARGE SCALE ENTERPRISES: An enterprises whose total project cost excluding cost of land but including working capital is above forty million naira (i.e. above US $ 2 million).

From the above, it can be discussed that there are only two major ways of defining a small and medium scale industry: a qualitative and quantitative approach, a quantitative approach talks about the number or size of people employed in the business and the sales volume.

Quantitatively, there are about four characteristics:

  1. Owner supplier manager
  2. Capital supplied by one person
  • It operates in a local areas.
  1. The size is small in consideration with other industries.
  2. One fundamental problem with these definitions is that they would need periodical (annual) review in response to movement in the exchange rate of the naira using dollar value as the yard stick.



As earlier stated that the term small and medium scale does not have any clear-cut definition, because it varies from one countries economy to the other, so do its classification. However, according to Nnenna Ani, some of the main criteria used to classify small and medium scale business includes;

  1. ACCORDING TO INITIAL CAPITAL OUTLAY: Here according The third national development plan (1975-1980) small scale was classified as any industry with one hundred and fifty thousand naira capital investment, while the federal ministry of industries in 1973 classified as small business as one with not less than sixty thousand naira.
  2. ACCORDING TO MANAGEMENT STYLE: In classifying a small-scale according to the management style (Drucker) says it requires at least one man that is not engaged in any other functional work but spends all his time and finance in it. He knows other members who may not e active (eg partnership.

iii.     ACCORDING TO NUMBER OF EMPLOYEE: Drucker summed this pattern of classification up by asserting that regardless of titles and position, the maximum number for an organization to quality, as a small scale business should hardly exceed twelve (12)  fifteen (15) me. While the bottom committee (BC) in their contribution says that a small-scale in one with not more than three (3) persons.

  1. ACCORDINT TO MARKET SHARE: The bottom committee in one of its characteristics to hards defining small scale and making it significantly different from large firms says for an enterprises to quality as small it must have a relatively small share and its owners or part owners must also be its customers.

Other forms of classification according to Ani includes according to total asset of firm, type of industry, relative position of firm within its industry or a combination of two or more of the above criterion.



Small and medium scale enterprises are found significantly in every nook and corner of Nigeria. They could be likened to front line troops in the battle for even development of a nation. An international finance.

Corporation (anonymous) study estimated the number of modern sector small and medium scale enterprises in Nigeria a 90,000 and 125,000 in 1982 and 1993 respectively, suggesting on average annual growth rate 3.5 percent between 1982 and 1993. If it is assumed that this growth rate had been maintained since. 193, the number of modern small and medium scale enterprises in Nigeria could have been about 320,000 in year 2001. the small and medium scale enterprises in Nigeria employees about 50 percent of labour force in Nigeria.,

Ani industrial survey carried out by Ekhator (1999) revealed that there were 3,185 manufacturing establishments, which employed 435, 179 workers and paid 2,231 billion in wages and salaries.

A tabular illustration of the various size characteristics of distribution as carried out by Ekhator is represented thus.



Categories industry Average no of employees in each establishment Average out put employee (N,000) Average out put value establishment (N, 000) Average capital employer per establishment (N,000)
Non durable 5.52 N9.5 N52.3 N7.43
Durable 4.02 N16.9 N67.8 N6.3
Capital 7.71 N38.8 N100.0 N6.5
Over all 5.70 N11.6 N65.9 N7.3

SOURCE:  1999 National survey of small scale industries in Nigeria.

Using an average of 5.7 workers per enterprises stimulated by Ekhator in table 1 the total employment in enterprises in 1991 could have bee 7/2,800. Assuming that these here 320,000 small and medium scale enterprise in year 2001, the total employment could have increased to 1,824,00 in year 2001.

In 1999, Ekhator carried out a research covering  2, 696 enterprises  with a maximum capital of N150,000.

According to the survey, the bulk of employment was food and basic metal industries accounted for 40% and 16% respectively. Furthermore, the average number of employees in an enterprise was five and 905 of enterprises were sore proprietorships. While about 35% of the managers did not have any basic educational qualification and more than 75% of the managers have working experience of five or more years and about 88% had received more than two years apprenticeship. They are also intensive users of domestic raw materials, which accounted for about 60% of the total cost of materials. There is no doubt that large domestic employment generated by the small and medium scale enterprise sector is as result of not only the large number of enterprise operating in the sector, but also from the low level of capital investment per enterprises and per work as shown in table 1 above.

The 1999 survey of SMSS percentage sectoral distribution of the number, output and employment of small-scale industries is illustrated thus.



Sector Number Output Employment
Non durable consumable goods 55.18% 49.12% 56.22%
Durable goods 22.76% 20.24% 13.99%
Capital goods 22.06% 30.40% 29.79%
Total 100% 100% 100%

SOURCE:  1999 national survey at small-scale industries in Nigeria.

Table 2 shows that 55.18% of the establishment were engaged in the  production of non durable consumer good such as processed food, toiletries, soaps, foot wears, leather products, wearing a process and so on, 22.76% were engaged in durable such as furniture, household appliances etc.

While about 22.60% were engaged in the and fabricated metal products and simple machinery and equipment. It is quire evident that the output and employment pattern are quire similar to that number of establishments. The final consumer accounted for over 66% of total output while more than 70% of the volume of employment were engaged in the production of these goods.

A national survey carried out in 1999 to determine the percentage level of external dependence of small scale industries reveals thus;



Sector Raw materials Equipment Labour Finance
Non durable consumable goods 46.96% 60.19% 1.05% 0.74%
Durable consumers goods 5.23% 49.93% 1.29% 0.17%


Capital goods 86.33% 65.40% 9.98% 0.63%
Over all 40.68% 63.61% 3.73% 0.58%

SOURCE:  1999 National survey of small scale industries.

TABLE 3 shows that SMSE depend heavily on imported raw materials and equipment. They relied on local labour and finance. It also shows that industries produce capitals good depend more in imported inputs than those which produce final good. There are no indications that the pattern of external dependency has changed. This import (dependence) according to Nwankwo (1992) is a major cause of small and medium scale enterprises financial predicaments.



In realization of the importance of promoting small and medium scale enterprises and active roles. The first serious policy to promote the development of small and medium scale enterprises came in 1970. to this effects, the small scale industries division of the federal ministry of industries was established to initiate and implement policy on the promotion of small and medium scale industries in Nigeria and in the same year the industrial development centers (IDC) were established to provide technical support and manpower training facilities for industries.

According, the government has employed a combination of monetary and fiscal measures as well as industrial incentives to enhance the achievement of the desired goals. It has enunciated policies through national  development plans, annual budgets and its agencies to provide financial and technical assistance to small and medium scale enterprises.

Specifically, the government has played encouraging role in the following:

  1. Providing infrastructural facilities for small and medium scale enterprises by setting up industrial estates and areas to reduce overhead cost for industrialist.
  2. Providing local financing through it agencies particularly, the Nigeria Industrial Development Bank(NIDB) and the world bank assisted small and medium scale enterprise apex unit.
  • Directing the Bank, through its monetary policy to grant specified minimum credit to small and medium scale enterprises for instance, the contract bank of Nigeria (CBN) through its credit guideline directed the bank of their total loans and advances to operators of small-scale enterprises. In 1989 the proportion was 16% and by 1990 it has been  increased to 20%. Failure to comply with this directive has it penalty.
  1. Facilitating and funding institutions, like the center for industrial research and development Obafemi Awolowo University Ile-Ife with the purpose of training personnel in small and medium scale industries, manager and conducting research into small and medium scale enterprise problems.
  2. Acquainting policy makes and financiers with the features and  guaranteeing external finance through international finance institution such as the world bank and Africa Development bank (industrial policy of Nigeria).

Monetary policy may be described as measures which deal with the discretionary control of money supply by the monetary authority with a view to achieving stated economic objective, designed to influence the cost and availability of (Falegan in Femi 1986) some of the monetary and fiscal policies adopted by government in promoting small and medium scale enterprise includes;

  1. Development of the money capital market and financial intermediaries. In order to enhance performance of the financial system and effectiveness of monetary policy, the monetary authorities paid great attention to the development of the money and capital market and also establishment of financial institutions to provide finance to small-scale industrial. In addition, various financial intermediaries were encouraged or established Bank (NIDB) and Nigerian Bank for commerce and industry (NBCI).
  2. Direct control of credit: prior to the introduction of structural adjustment programme (SAP) and deregulation of the economy, the interest rates in  Nigerian were directly managed by the monetary authorities. The practice in Nigeria make it possible for the government to set the deposit and lending rates of the financial intermediaries. Also, the  practice made it possible for the government to set the rate for lending  to specified sector of the economy with a view to encouraging lending to these sectors. Thus lend rates to small and medium scale enterprises like agriculture, residential and building construction sub-sectors were lower than the rates for other borrowers.
  3. Another aspect of bank credit allocation in respect of small and medium scale enterprise relates the stipulation that not less than 50% total deposits collected through bank rural branches should be, lend to customers in those rural areas (Femi (1988).
  4. Another aspect of bank credit allocation in respect of small and medium scale enterprises relates to the stipulation that not less than 40% percent it total deposits collected through bank rural branches should be lent to customers in those rural areas. This 40% percent have been raised to 50% in 1991.



Small and medium scale business enterprises in this country have on heir own made immense contribution to the development of the national economy over the years. The extent of economic contributions can be summarized as follow (Ani 1999:23).

  1. EMPLOYMENT GENERATION: Before independence, government establishment were the major employers of labour, but these days with many private enterprises set up by entrepreneurs more people have gained employment with these enterprises and this hard reduced the department on for employment small business enterprises have now come to be know as a major sources of new jobs and is capable of unemployment must be solved, it is necessary that we must encourage small and medium scale, as sit will go a long way towards enhancing the economic  development of the country.
  2. ACCELERATION OF THE DEVELOPMENT OF BOTH THE URBAN AND RURAL AREAS: With more enterprises in the community, more infrastructural facilities are attracted, life good road electricity, telephone services etc, more people get employment and they able to better their standard of living and save for investment. All these accelerate development both in the urban and rural areas. For example, if more enterprises are established in the rural areas people from these areas get employed and at the end of the month they are paid, this means getting more income, they can improve their standard of living and they many, also think of lot by embarking on community development like building hospitals, school etc.



(GNP): The gross national product in the total naira value of all the good and service produced in the country in a particular year. It the GMP increases each year, it is a sign that the economy is growing and wealth is being created. For example, if in 1990, the number of enterprises in the country was two hundred and six (206) and by 1998 it has increased o three hundred and forty-two (324), it means that more products and/or services have been introduced or are available in the economy and thus increasing the GMP. This increase have been achieved  by the establishment of new enterprise by entrepreneurs. This shows the need for SMSE in the growth of the national economy.


  1. PROVIDING TECHNICAL INNOVATIONS: Invention and innovation are among the foundations any economy. In advanced countries, for example, the USA, the increase in the productivity that have characterized the two hundred years of their history are all rooted in one principal source, new ways to do a joint with less effort of a lower cost more than half the major technological advances in the advanced countries originated with individual investors and small enterprises.


  1. FILLING NEEDS OF SOCIETY AND OTHER BUSINESS: Large firms must by their nature, operate in large scale. Many may be unwilling to unable to the special need of  small  group of consumers. Such groups creates almost ready market for small business which an tailor their small business which group and fill their need profitability. A good example, in  a workshop that modifies machines to accommodate handicapped drivers. Small business also provide variety of good and services to each other and to large forms. Large forms generally buy parts and assemblies from smaller enterprises for one very good reason, it is less expensive than manufacturing the part in their own factories. This lower cost is eventually reflected n products. In this way, we all benefit enormously from the presence of small and medium scale enterprises. (John Udeh 1990).


  1. PROVIDING COMPETITION: Small and medium scale enterprise challenges larger well established firms in many ways, causing them to become more efficient and more responsible to the consumer bend and wants.



Some of the basic characteristics enterprises:

  1. The small and medium scale units equity base in relatively small and is usually distributed over a much basic than in large firms ownership and management are often done by one individual. These is greater owner influence more of one person domination small and medium scale enterprises. Thus the ownership structure is highly firmly centered.
  2. Decision- making in small and medium scale enterprises are more subjective and is less bused on analysis
  • There is higher labour investment ratio and employee turnover is small and medium enterprises.
  1. There is greater concern for financial attracting funds for expansion.
  2. The proprietor funds it difficult to separate his private funds from the company’s fund.



As earlier stated that small-scale industry means manufacturing processing or servicing industry with a capital investment of up to N150,000 in machinery and equipment alone. This excludes working capital  and cost of land (Fussi 1971). And because of the fluidity in the concept of  small and medium scale enterprises, which is as result of a direct response of a country’s growth from a traditional rural agro-based economy to a developing country which is semi-urban/urban where individuals respond and adjust to the dynamics of even development.

  1. They serve as a solid based for providing a country’s economic development.
  2. They provide goods and services for both end and intermediate users.
  3. They utilize low capital cost for creating jobs especially in fast growing service sector of the economy.
  4. They are intensive users of raw materials
  5. They serve as training ground for local entrepreneurs.
  6. They promote technological development and adaptation, facilitate, powered and backward linkage between small enterprises and the larger corporate bodies and create entrepreneurship.


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