What would you like to be when you grow up?

There is one question every adult probably received as a child. That question, amongst a few others, is: what would you like to be when you grow up? If no one asked you this question whilst you were a child, then perhaps this article is not for you. As dutiful children, full of wonder and life, to which this question is posed, they usually pause, and spew out a deluge of responses with various aspirations that mostly include; being a doctor, a scientist, an accountant and many other things. As one would expect, the responses are mostly lovely, positive and life affirming. It is unlikely a macabre response will be produced.

A response one is unlikely to ever receive is “I’d like to be a poor person or lack material resources when I grow up”. I’ve never come across this response and doubt I’ll ever hear it, but do send me a response if you’ve ever heard this before. Its 56 odd years since Nigeria and its other sister countries in sub-Saharan Africa (SSA) gained independence from various European countries. As with little children in the 1960s, none of these nations’ citizens or their political office holders wished or could have imagined that over the succeeding sixty years, they will primarily occupy the bottom of the global human development ladder. It remains a mind-boggling outcome.

Trade and enterprise or the lack thereof has remained a critical engine for the development of the wealth of nations or their poverty. A critically cited constraint to enterprise in SSA is the inadequate access to credit or appropriate financing. The concept of inadequate access to credit anecdotally brings up images of open market sellers who are unable to access credit facilities from “traditional” financial institutions to grow their businesses and expand their inventory. Inadequate credit as a concept also brings up images of the never-ending statistics about the unbanked, under banked and how microfinance and other unusual forms of financial intermediation is the appropriate response. Sixty years into the history of SSA nations, the proffered solutions have not delivered the desired result. The effect of inadequate access to financing affects citizens well beyond the stall holders or merchants. Enterprising doctors are unable to finance new hospitals, scientists are unable to build businesses and invest in research and development to create Tesla’s, i-phones and MRI machines.

As a graduate student in finance, beyond being snowed under with the weight of Ito’s calculus and capital irrelevance from Modigliani and Miller, I learned a valuable lesson. In finance, most risks can be priced and financial instruments can be created to solve customer problems. There has been a lot of criticism about the role of bankers in the last global financial crisis and the subprime debt market in America. Some of this criticism is justifiable but in there is a critical lesson for SSA countries. It is possible to issue credit and finance to non-wealthy sections of the population. A simple corollary therefore, is that the key differentiating factor between the developed World and SSA is innovation in financial systems and financial products. The history of England during the industrial revolution is very revealing to those interested in understanding the role of finance in development. Khanna (1978) showed that at the beginning of the industrial revolution in the 1770s, England had a GDP per capita of 70 pounds using 1960 prices.  In 1960, Nigeria had a GDP Per capita of 35 pounds. In effect, two hundred years post the industrial revolution, Nigeria was yet to catch up to their pre-industrial revolution wealth levels. Adjusting to 2016 levels, Nigeria is still behind and probably slid backwards in per capita comparison basis. A key point from pre-industrial revolution England is that the bulk of capital available to entrepreneurs was accumulated savings from previous trading activities and funding from family. In effect, pre-industrial revolution England was like Nigeria today in terms of funding available to new businesses.

England’s cottage industry or the putting out system was simple, effective and explains how financial innovation is possible with minimal input from the banking system and inadequate long term financing. Large merchants purchased raw materials and distributed these raw materials to different individuals for processing. The processors then sold the output of their process to a higher level of processor who in turn processed the goods further before they hit the market. The capital outlay of each layer of processor was generally low and larger merchants or processors could benefit from balancing their debtors and creditors and very short term loans from larger merchants with access to bank credit. A key driver of the industrial revolution was trade credit and “web of short term credit” available to small industry participants. The subsequent accumulation of capital from these merchants and cottage industry manufacturers led to growth in the banking sector and availability of longer term credit in the latter years of the industrial revolution.

The lesson here is that Nigeria alongside its SSA neighbours can industrialise without initially sourcing long term capital by creating a “web of credit” like that which financed England’s cottage industry. To create a web of credit, the anecdotal demand for payment upfront for goods and services needs to cease or evaporate slowly. Suppliers and manufacturers should start by extending mini-payment deadlines for small amounts and scaling these up as their transaction parties prove their credibility. This emulates the trade credit advances in 1770’s England. Wealthy individuals and businesses can participate in a market for short term credit default insurance for a good return for small amounts relative to their asset portfolios. The short-term credit default insurance can be facilitated using basic internet technology and a distributed ledger system. It is expected that in as little as a decade sufficient capital could have been accumulated to further grow the banking system and sophistication to finance longer term and more capital intensive businesses required to act as change agents in the economies of SSA.

Using the English example, low level innovation in finance is primarily what is required to grow various economies in SSA. What should Nigeria be when it grows up? A developed country with innovative finance solutions that meets the funding requirements of its citizens.

 

Dayo Oduwole

 

Oduwole is an Investment Banking Professional writing in from Lagos. He writes via: [email protected]