Rethinking Microenterprises Support in Northeast Nigeria: Finding the “Right Lever for the Load”
This blog is jointly authored by Christiana Stephen Wakawa, Senior Intervention Lead – Microenterprises Support of the Rural Resilience Activity, and John Rachkara, Deputy Chief of Party of the Rural Resilience Activity.
Microenterprises are small businesses with fewer than ten employees and typically have low startup costs. In Nigeria, they are vital to the economy, providing employment opportunities for tens of millions and contributing to economic growth. They are often the first step for individuals looking to become entrepreneurs and start a business. Microenterprises in Nigeria operate in various industries, including retail, services, the food industry, and manufacturing. Many of these businesses are run by women, who face significant barriers to entry into the formal economy. These women often need access to financing, business networks, and other essential resources for starting and growing a business. As a result, they turn to the informal sector, where they can operate with minimal investment and often without legal registration. These businesses are critical in creating jobs and promoting economic growth, regardless of the challenges. According to an International Finance Corporation (IFC) report, micro, small and medium businesses account for 84% of total employment in Nigeria and contribute over 48% of the country's gross domestic product. Microenterprises alone account for a significant portion of this contribution. Many factors have fueled the growth of this type of business in Nigeria, such as the growing population, which creates a substantial demand for goods and services.
Despite their importance to the economy, microenterprises in Nigeria face various challenges that hinder their growth and sustainability. These challenges include limited access to financing, poor infrastructure, and a burdensome regulatory environment. For many owners, access to financing is the biggest hurdle, as they don’t have the collateral and credit history to obtain loans from traditional banks. This has led to the emergence of alternative financing options, such as microfinance institutions and peer-to-peer lending platforms. The Nigerian government has recognized the sector's importance and has taken steps to support its growth. It has also established the National Enterprise Development Program to provide sector training, financing, and business development services. Despite facing significant challenges, these businesses have thrived, driven by various factors, including Nigeria's large and growing population and the relatively low start-up and operating cost. With appropriate support, micro businesses have the potential to continue to grow and contribute to the country's economic development.
However, finding the best lever to support this promising sector can take time and effort. Because there is no straitjacket, most development practitioners resign themselves to capacity building, essentially training. Training is easy, but on its own, its ability to yield scalable and sustainable impact is not guaranteed. The Feed the Future Nigeria Rural Resilience Activity (RRA) works to protect the livelihoods and well-being of the population in Northeast Nigeria by deploying the market systems development (MSD) approach. MSD is an approach to economic development that focuses on creating sustainable and inclusive markets rather than providing aid. MSD recognizes that markets are complex systems with many actors, including producers, consumers, traders, and public sector, and regulators. The approach works to identify the underlying causes of market failures and address them to create lasting change. In the Northeast, the economy is anchored by microenterprises, and therefore, supporting the sector puts the economy on a recovery and prosperity pathway. While MSD involves a range of interventions, such as building the capacities, introducing or aligning incentives, and creating linkages between different actors, finding the right spot to turn the tide on a sector comprising of small, informal, heterogeneous, and dispersed is not a quick fix.
In our experience, it took us some time to understand the real drivers of underperformance in the sector. Even with the understanding, finding the right lever to increase performance hasn’t been smooth. First, they are often small and dispersed. For example, RRA works across four states, five locations, and multiple sectors. This makes coordination and delivering systemic interventions difficult. Often, we have found ourselves opting for training as the core task. We also profoundly understood that altering the underlying factors that drive performance would not happen with training and ad hoc linkages. Microenterprises are complex and dynamic, with many different actors and interactions, many starting in a short timescale and others collapsing overnight. The urban and rural divide comes with challenges when targeting which ones to work with. Like several other projects, we also jumped into surface problems, such as access to finance, addressing the informal nature, etc. Looking back, our approach was rarely systemic.
We learned that moving the needle on systemic intervention required changes in behavior or practices among market actors, which can take time to achieve. We took the approach of creating an ecosystem that enables micro businesses to thrive. We experimented with microenterprises clinics, facilitated and supported by various institutional actors, including government agencies, private sector firms, and civil society organizations. In one of our brainstorming sessions, a team member hypothesized that the elements – individuals, organizations, or institutions – outside the microenterprises that are conducive to, or inhibitive of, or the probabilities of their successes. The elements include government, state and federal universities, the private sector, banks, entrepreneurs, cultural leaders, industry associations, etc. What remains unanswered is whether these actors have the capacities and incentives to engage in continuing with the clinics’ model.
In our experimentation, we used our resources to convene actors in a central place for 2 to 3 days to interact on the pain points. For example, one of the most significant challenges they face is financing access. Access to credit or loans can help these businesses expand, invest in new equipment, and increase their revenue. At every clinic, we ensured that there were several bank representatives to interact with the microenterprises. Secondly, many microenterprises need more skills and knowledge to run a successful business. If tailored correctly and administered by the right actors, training, and support in record keeping, financial management, and customer relationship management can help these businesses grow and become more profitable. Thirdly, they often need help to reach new customers and expand their market share. Creating market linkages and connections can help these businesses to access new markets and increase their sales. This can involve creating business networks, partnering with larger suppliers, and leveraging tech-enabled marketplaces. Lastly, regulatory requirements can be a significant burden for the sector. Streamlining regulatory processes and providing support to help businesses comply with regulations can help them operate more efficiently and reduce their costs. The clinic became a one-stop shop for microenterprises to meet all these actors conveniently.
Are microenterprises clinics the right lever? Are they systemic? Can the market actors own them? Will they run sustainably by themselves? Will they deliver the scale of impact we expect in the microenterprise sector? As a project, we don’t have the correct answers yet. Overall, we have learned that delivering systemic interventions requires a deep understanding of these businesses' challenges and opportunities and the market systems in which they operate. It is possible to create an ecosystem that supports growth and success. This can help create jobs, stimulate local economic development, and provide opportunities beyond training and ad hoc linkages. More than 15,000 microenterprises have participated in the several clinics we facilitated. They contend they access the required services; more have formalized through the clinics, formed new business relationships, and participated in peer-to-peer learning. More actors like universities, business associations, traditional leaders, and state agencies are willing to co-sponsor the clinics. If improved well, we believe that the clinics are strengthening the systems around microenterprises and are aligning incentives that can yield more benefits. It is too early to say that the ecosystem in Northeast Nigeria is now fertile enough for microenterprises to thrive and whether the clinics are the way to go. Given the opportunities that microenterprises hold in the economic recovery of Northeast Nigeria, we are committed to finding the right lever to solve the challenges facing this sector.