The Micro Small and Medium Enterprises (MSMEs) have been tipped as a key driver of growth for any economy. However, the sector has been limited by inadequate access to cheap credit and this necessitated the birth of the Development Bank of Nigeria (DBN) to provide entrepreneurs with finance. In this Interview, Tony Okpanachi, Managing Director of the bank explains to BusinessDay analyst, Michael Ani, on how the financial institution is helping to improve access to credit to MSMEs
Give us an overview of what your business as a developmental financial institution entails
Development Bank of Nigeria (DBN) is a wholesale Development Financial Institution (DFI), set up to alleviate the financing need of Micro, Small and Medium Scale Entrepreneurs (MSMEs). Essentially, we focus on providing long term finances to this space. Our mandates are in three folds, we do lending activities by providing wholesale lending funds to financial institutions to on-lend to MSMEs. This is the core of our mandate.
The second part of our mandate is to provide a partial guarantee to financial institutions to encourage them to be able to provide accessible credit facilities to MSMEs. That again, we have already set up a subsidiary of the development bank of Nigeria with the skill set for credit guarantee to focus on that.
The third part of our mandate is on capacity building, on what we call rendering technical assistance to the financial institutions. And again, since we are a wholesale financing institution, we work through other financial institution so there is no direct access to the end borrower. At the end of three mandates, we want to act as a catalyst in ensuring that other financial institutions like commercial banks, microfinance institutions and others that interface in providing loans to the MSMEs are able to do that effectively.
But ultimately, we do all this to be able to achieve our development objectives and what are they? off course in the Nigerian economy, for example, we want to see how we could create jobs because we know that the MSMEs are largest employers of labour so the more we are able to empower them, the more we create employment opportunities in the country. We also want to achieve diversification of the economy, youth empowerment, gender empowerment that have a developmental impact and that will translate in the long run into boosting the Gross Domestic Product (GDP) of the economy.
What are those key things that differentiate the DBN from other financing institutions that are performing similar functions?
First of all, let me point it out that the need for that segment of the economy is huge and no one financial institution can single handily do it all. So you have the development finance of the Central Bank of Nigeria (CBN) coming with their own making the impact trying to stimulate a specific sector of the economy, you have Bank of Industry (BOI) focusing on industries and in some cases focusing on SMEs, you have NEXIM trying to provide funding to exporters, you also have Bank of Agriculture, focusing strictly on agriculture in terms of how funding could be provided to farmers. For us, the difference between DBN and all these financing institutions is that most of them focus on specific areas while we cut across all the MSMEs. If you are in the agric, tech, industry, any sector of the economy, we cut across them.
The second distinguishing factor for us is that we are a wholesale DFI hence, our funding model is that we do all our financing through other financial institutions that already have a relationship with these MSMEs as the case may be. So for us, we are quite distinctive compared to other financial institutions because we are wholesale, and we are not sector specific. The philosophy in DBN is that we collaborate with all these financial institutions that are able to provide funding to MSMEs.
What do you think is responsible for the scarcity of financing despite the pocket of support we have been seeing and how do you think we can bridge the gap in funding to the sector
First and foremost, I will say that the financing need of that segment is quite big running into trillions. The available finance itself is pretty much truly inadequate hence, we need to get catalyst in getting more people and institutions to be able to finance. So, I will categorize the issue into the availability of funds, the risk profile of that segment and thirdly, the bankability of that business.
As regards the availability of funds, the last data from the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) shows that in 2017, there are about 37 million people operating in that segment which is quite huge. If you look at the number of people employed in that segment of the economy, it is the greatest employer of labour both full time and part-time. So, we can say it is a big chuck hence their importance cannot be overemphasized. In terms of the need from that area, it is quite huge.
Most business will assume they have the idea but the major issue they have is about finances. So, both the effective and perceived need for financing—I call it effective because those whose projects needed to be financed and those who think that they have the ideas and financing should be made available to them—when you put them together shows that there is a huge demand in that sector. So I think that market is quite huge in terms of the requirement for it hence there is a need for there to be a concerted effort in meeting the demand for the sector and that is in the point of availability.
The second part I talked about was in terms of the risk profile of that segment. If you look at it historically, most Small and Medium Scale Enterprises is where most commercial banks use to have the issue of Non-Performing Loans (NPLs) because historically, a lot of small businesses start their operations, they fail, there are issues about people not being able to differentiate between their business and the individual themselves, there are issues about going into business without proper feasibility study and then when they get finances, it goes to burst with several issues hence, because of the experience by most financial institution regarding that segment, they tend to shy away from that space.
So you have the issue of the risk profile of that segment being high compared to the large corporates who are more structured, more organized and have a track record with a reputation they hope to protect overtime, they can dimension them in a way that their risk profile is better. Also, if you look at the risk profile in that segment itself, you are left with no choice but to profile it by pricing appropriately for the risk or you mitigate it by way of what mitigants usually put in to ensure that risk profiles are contained. So, given the fact that traditionally and historically that segment has a lot of issues as regards risk profiling, a lot of financial institutions have had issues as they have gotten their fingers burnt so they shy away from it so that is another reason why I feel they complain about finances not being made available to them.
Another major issue is on the bankability of some of the projects itself and some of the financing requirements of the projects that the people in this segment are going into. Every entrepreneur gets up, have an idea, put them together and say I need the bank to finance it; I need finances to come through. Typically, you have to go through a process; you need to have it bankable for you to be able to receive finances from an institution. So, the bankability of this project, talking about how they do their feasibility study, on how they package their products to make it attractive to financing is also key.
So if we look at it from those three key dimensions we could say that is why there has been a lot of ampere in terms to access to financing.
Can you give us the breakdown of loans that you have disbursed since inception?
In 2017, that was when we started our pilot lending with two microfinance institutions. But I will say 2018 is our first full year of operations and at the end of 2018, we did over N31 billion in terms of finance provided for on lending to MSMEs. In terms of numbers of loans done to end borrowers, we did 35,000 in 2018 which was our full year operations. But I can assure you that in the first quarter of this year we have done more than that but usually, we give our reports annually. However, the figures are already looking up because, by the end of the first quarter, we had gone beyond that amount.
You aim to disburse about N7o billion in loans this year. Do you still feel you will hit this target?
Definitely, we are going to meet it. With what we have done in the first quarter and this second quarter that we are in now, I can say we are very much on track to meeting it.
You are a wholesale lender by going through other financial institution. In the event of Non-Performing Loans (NPLs), who does the recovery?
Been a wholesale lender, the credit risk or the lending risk is on the participatory financial institutions. They do the credit appraisal, they do the pricing, if there are needs for collateral, they handle it. They have a relationship with the end borrowers so, in the event of bad loans, they also have the machinery to collect that.
We are wholesale lenders as we provide wholesale for on lending and we do not have any interface with the end borrowers. We will be talking about non-performing loans when the financial institutions them self that we are giving wholesale funds to have issues. That is when our own NPL comes in. However, because we also have an interface with them, when there are technical issues as regards NPL, we can come in to render some technical assistance.
How many PFIs are you working with at present?
We have about 29 participatory financial institutions working with us, cutting across commercial banks, microfinance institutions. Our plans and objectives are to get as many as possible that meets our eligibility criteria on board so that we can give alternative options to the end borrowers. As at today, we have about 10 commercial banks on board already with some of them at various stages of our onboarding exercise to bring them on board so that their customers can go to them to get DBN financing loan.
For Microfinance institutions, the balance is there both the National and the state a lot of them that we have already on-boarded with funds disbursed to them.
When I told you about our 35000 customers, about 85 per cent of them are Micro with an average loan size of about N170,000 while those of the Commercial banks is about N70 million that is why we cut across all of them.
Most of the major banks in the country have been on-boarded. About 90 per cent of the Microfinance institutions that have met our eligibility criteria has been on-boarded so now the drive for us is to ensure that customers are able to go to those banks ask them for DBN loans and be able to get them.
What are your eligibility criteria
Our eligibility criteria essentially are the same. First of all, we try to look at the financial institution and say, have they been profitable in the last two years. We look at their prudential ratio that is their non-performing loans and also how strong they are in the area of lending to the MSMEs. We do not want to take a financial institution that is not interested in them. We are very transparent on our eligibility status as it is on our website and once they meet those criteria we on board them.
Give us the location where your operations are and how PFIs who wish to get onboarding can reach out
In terms of location, our head office is located in Abuja and we also have a branch here in Lagos. Since we are a wholesale institution, we do not require branches. In terms of interface, with all the financial institutions that are working with us, we work with them from our head office.
On coming on board, we wrote to all the financial institutions and to make access clear, we went to the process of automating these applications for the financial institutions so that they can go online and see what their eligibility criteria are. They also have a chance of filing a questionnaire and we get a response from them. The reason for this is to make it easier for them to get on board from anywhere in the world. Like I said earlier, we already have about 10 commercial banks that have gotten on board that shows that the engagement is on-going same for the microfinance institutions as many of them that met our criteria has gotten on-boarded. So in terms of engagement, we are reaching out to them and they are also reaching out to us and that is very much on-going. However, people are going to be seeing more of our feasibility in terms of creating awareness that we have been doing before.
How well do you track the lending activities of these participatory financial institutions?
It is because we track their activities consistently, that is why we could tell you conveniently about their numbers. I can tell you where we started and where we are now. This is because we are not just giving them a loan but we also see who these customers are for us to disburse these loans to them. So we are able to know, For example, Bank A has a line of 1 billion with DBN and they want to access 500 million, they have to give us a break down of the customers accessing these loans because we have a template to see whether these customers fall into the MSMEs and whether they meet the entire requirement.
After that, we always ensure that we do our monitoring and evaluation to ensure that these loans that the financial institutions have taken, they use it for the right purpose and the impact it is making as the case may be. We are developmental financial institutions hence we are not just giving out loans for the sake of giving money; we want to see what impact it is making in their businesses and the impact on the overall economy. So, from the disbursement to the utilization and to the impact, we follow through.
So I can tell you the 35000 that I had mentioned earlier, what the names of these customers are, their locations, their directors and the phone numbers of their businesses. Now, because we are relatively new, by the end of every year, we always go to do what is called annual due diligence, that is we go back to the financial institutions to check through the money they have collected from DBN comparing it with what they have loaned out. We also look at how their portfolio is performing. Yes for us we know that they will pay back in the event of default but ultimately for us, it is not just about paying back but impacting on the MSMEs.
How well is your collaboration with agencies like the Chamber for Commerce and industry since they have many small businesses as members?
We have a strategic alliance with all of them including the Chambers of Commerce, Nigerian Association of SMEs, which we are a corporate member. We believe we have a common objective and common goal which is how do we ensure we empower the MSMEs. How do we ensure that they have access to credit? So we all have a strategic alliance with them in the form of partnership. We interface with them; we attend presentations at their seminars when necessary to create awareness. We have been on a panel where they invite us to their conference. We need to also create that awareness that DBN funding is available through the banks and they have to go to the bank to get it. So we need to create that awareness which can come in through direct to them or through association that they belong to. So we tolerate them as we have a strong bureau committee that interface with them.
Most financial institutions try to focus on a sector of the economy and try to master them but you focus on all sectors of the economy, is this not too broad for you
Let me again rephrase the fact that being a wholesale lender, our own catchment segment is the MSMEs hence it is not a jack of all trade it is within a segment. For example, if a large corporate comes and needs a loan, DBN will not lend because we have a maximum amount of loan that we can lend. For Micro, it is N10 million, while the Small category is N150 million and when we get to Medium corporate about N600 million so we are limited when it comes to lending.
By the time these businesses are growing to the point that we see they can stand on their own and can get access to bigger funding, they move out from that circle.
The only reason why we are not going to be sector specific is that the MSMEs cut across all sectors of the economy and if we begin to narrow our scope, we would begin to cut out a lot of them and that is why we work with other financial institutions.
As long as that customer is within the MSMEs, then we will deal with them whether they are in the power sector value chain or manufacturing or any sector at all.
You joined the league of 140 members in the global financing of SMEs. How well is this going to impact on your operations?
What we are doing by joining the forum is to ensure that we replicate and share in Nigeria global best practices. The forum is made up of both financial institutions and SMEs themselves across the different sector including Fintech companies etc. So, that forum enables us to see and have a feel of how the business is doing, what their funding requirements are and how it is done in other areas so that we can come in and use the experience of other areas to improve the way it is done here. So for us in Nigeria, we are the only financial institution that is a member of the global SMEs finance forum and we took that deliberate step to join because if we say we are a bank for the SMEs, then whatever concerns them, we should know all over the world. I must say that the learning from that experience has been insightful and helpful this is because whatever concerns SMEs in Nigeria like financing constraint and regulations, other countries must have gone through those stages and came out fine. So how did they do it, learning from them and what other new things are they doing that we can learn from so that at the end of it all SMEs in Nigeria would be able to stay afloat in business.
Can you give us an idea of the size of your available funds and where we are sourcing these funds from?
In terms of the size of funds available to us in dollar terms, we have about $1.3 billion and that is made up of debt and equity. The shareholders of the bank who have provided equity include the federal government of Nigeria who is the majority shareholder, the African Development Bank (ADB) and the European Investment Bank (EIB), then the Nigerian Soviet Investment Authority (NISA).
In terms of regulatory capital, we have about N100 billion. In terms of debt, we have the World Bank, African Development Bank, KSW of Germany and the French Development Agency (FDA), are all providing us debt.
The CIBN recently conferred you, fellow, how do you feel about this special recognition.
I feel quite great. I think it is momenta given the fact that a profession that I have been in for almost 30 years recognized me and the highest level of recognition that you think of from a professional body. So I think it is great and I am really grateful and excited about it. I am grateful to CIBN for diming it fit to be conferred that fellowship and on my part, I will leave the idea that is expected as a fellow of the chartered institute of Bankers in Nigeria.
Where do you expect DBN to be and what impact would he bank have created
First, we want to look at our self that we will be lending about 12 per cent of the loaning in that segment but most importantly, with our credit guarantee and our N10 million capacity building. With these three, we want to act as a catalyst so that the overall need of that segment would not be one that commercial banks will be running away from funding it will be a question of them scrambling for it. So while our own direct lending to the segment will be 12 per cent of the market, it would be a catalyst that other financial institution will leverage on and in collaboration with several other initiatives from other DFIs who are providing different funding will ensure that the segment will become an attractive segment and access to credit would become an issue that is really not critical then we can begin to look at other issues outside funding.
