Operations of small and medium enterprises and the legal system in Nigeria

The paper investigates how effectively the Nigerian legal system supports the operations of small and medium enterprises (SMEs). It frames the central research question as the extent to which SMEs can rely on the legal system for backing in Nigeria. Motivated by documented gaps—such as legal inefficiencies contributing to SME failures, winding up, and liquidations—the study examines the relationship between legal system functionality and SME operations. It emphasizes the importance of a fair, reliable legal framework to regulate business interactions, foster trust, and provide redress for contractual breaches, aiming to understand current support levels and responsibilities of SMEs in building a just business environment.

The review outlines definitions and classifications of SMEs in Nigeria, noting their significant role in economic development and their prevalence (over 80% of the business sector). Despite their importance, SMEs face high failure rates (about 50% of start-ups), attributed to factors including funding constraints, poor management skills, and legal breaches of statutory obligations. The legal framework affecting SMEs is extensive: CAMA (repealed 2004 version and the 2020 update) governs company and business name registration and empowers the Corporate Affairs Commission; the Investment and Securities Act 2007 establishes the SEC and Investment and Securities Tribunal, mandates registration for public offerings, and provides investor protections; the Factories Act sets health and safety standards; the Financial Reporting Council Act 2011 sets accounting standards and promotes corporate governance; BOFIA and the Central Bank Act regulate banking access, licensing, and restructuring for SMEs in financial services; the SON Act standardizes products and combats counterfeits; the Ministry of Mines and Steel Development regulates SME mining activities; and the Federal High Court has jurisdiction over civil matters arising from SME operations, with ADR encouraged as a cheaper alternative to litigation. However, weak enforcement, insufficient funding of tribunals, corruption, delays, pervasive internet fraud risks, high legal costs, and low legal literacy undermine SMEs’ trust in and use of the legal system. Some SMEs—especially in rural areas—rely on traditional norms and deities for trust, increasing vulnerability to exploitation. The review highlights calls for restructuring, regulation of legal service costs, improved statistical monitoring, ethical business promotion, and government support to create a conducive, trust-enhancing business environment.

Conceptual review based on extant literature. The study synthesizes evidence from primary, secondary, and tertiary sources (including academic literature, reports, newspapers, internet, and websites), with emphasis on works from roughly the last decade, to examine the antecedents and effects of Nigeria’s legal system on SME practice. No primary empirical data collection was undertaken.

- The legal system is pivotal to effective SME operations in Nigeria, influencing trust, contract enforcement, and business confidence. - Significant weaknesses exist in providing reliable legal backing: weak enforcement by regulators, judicial delays, corruption, high litigation costs, and limited tribunal resources impede SMEs’ access to justice. - SMEs’ reliance on the legal system is hampered by cost and complexity; many avoid legal redress, which emboldens contractual breaches. - Legal literacy gaps and reliance on non-formal trust mechanisms (especially among less-educated, rural operators) increase risks of exploitation. - A proposed model emphasizes restructuring the legal system, strengthening regulatory and institutional support, promoting ADR for commercial disputes, and coordinated stakeholder involvement to create a conducive environment for SMEs. - Legislative reforms to obsolete statutes and business-friendly policies (tax incentives, reduced regulatory burdens, support for restructuring/turnaround) are needed to reduce insolvency and enhance resilience. - Contextual data from the literature: SMEs constitute over 80% of Nigeria’s business sector, with about 50% of SMEs failing on average, partly due to legal and regulatory challenges.

Addressing the research question, the findings indicate that SMEs currently cannot fully rely on the Nigerian legal system due to enforcement gaps, corruption, costs, and delays, which erode trust in business relationships and deter legal recourse. Strengthening and restructuring legal and regulatory institutions, improving access to affordable justice (including ADR), and enhancing transparency and governance would directly improve SMEs’ operational confidence and compliance. Education and awareness campaigns can increase legal literacy among SME operators, while regulating legal service costs can broaden access. Coordinated government and stakeholder support—including tax reliefs, infrastructure, and streamlined regulations—can promote ethical practices, fair competition, and greater contributions to economic growth. Overall, a robust, trustworthy legal framework is essential to foster SME sustainability, partner trust, and compliance, thereby addressing the identified gaps.

The study underscores the centrality of the legal system to SME effectiveness in Nigeria and identifies systemic challenges that limit its support. It calls for an overhaul of the legal framework to provide reliable backing, coupled with government measures such as low-interest credit, tax and duty incentives (e.g., for essential machinery), and infrastructure improvements to sustain SME operations. The proposed reforms and stakeholder supports aim to create a conducive, business-friendly environment that enhances SME formation, sustainability, and contributions to national economic growth.

The study is limited by its conceptual review design and exclusive reliance on extant literature, with a focus confined to Nigeria. It lacks primary empirical data and cross-country comparisons. Future research is recommended to apply alternative methodologies (e.g., action research), develop and test ADR mechanisms tailored to SMEs, and conduct comparative studies across multiple economies to broaden insights.