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How Nigerian banks can achieve low default rate with MSME credit

Credit accessibility and affordability have remained a challenge for businesses particularly the Micro, Small, and Medium Enterprises (MSMEs).

Nigeria has over 41.5 million MSME businesses however less than five percent are able to access adequate finance for working capital or get funding for business growth and expansion. Yet, MSMEs still contribute 50 percent to GDP, according to the National Bureau of Statistics (NBS).

Pricewaterhouse Coopers (PwC) in its MSME Report 2020 estimated the financing gap for Nigerian MSMEs to be about N617.3 billion annually.

Beyond its intervention programs, the Central Bank of Nigeria (CBN) has continued to encourage banks and financial institutions to lend from their balance sheet in order to support the growth of critical sectors of the economy as well as the SME businesses. The CBN in October 2019 raised the Loan to Deposit Ratio of banks to 65 percent from 60 percent to boost lending to critical sectors.

This has however yielded minimal results as business and finance experts say that financial institutions are usually hesitant to give credit to MSMEs because they are perceived as high risk as they lack proper documentation, lack proper management, lack enough collateral, etc.

4G Capital, a financial technology company whose main activity is to provide working capital finance to MSMEs has shown that despite the odds, small businesses are creditworthy.

Launched in 2013, 4G capital which operates in Kenya and Uganda has successfully given out loans worth $170 million to 182,000 businesses with a repayment rate of 95 percent. Furthermore, it has significantly boosted financial inclusion in Kenya which had a record of 83 percent by 2019.

Read also: Okowa launches NG-CARES in Delta for MSMEs

According to the company’s website, it seeks to address the finance gap across Africa and provides a bespoke program of business training to help them use micro-loans to achieve much higher take-home earnings.

“Well-used credit creates wealth, poorly administered credit creates debt-dependency and fuels poverty. Our loans operate within strict affordability limits based on data, and our training helps clients maximize returns from the working capital we provide,” it states.

Its customers cut across various segments but majorly fall under the agri-business and Fast Moving Consumer Goods (FMCG) sectors with 36 and 35 percent respectively. Services account for 23 percent while other sectors contribute six percent.

Analysts at FBN Quest believe that 4G Capital has been a successful journey to extend finance to unbanked MSMEs in East Africa and is a narrative to share for those unfamiliar with its approach through technological innovation.

Therefore the firm holds lessons financial institutions in Nigeria can adopt when providing credit for MSMEs.

First, the company has trained relationship managers based in all its offices. These managers carry out due diligence on would-be borrowers and then provide financial training for those who have passed their initial tests, this includes budgeting and managing expenses. The training continues after the loans have been disbursed.

Second, the company optimizes advanced technology and digitalization in its operations, through its proprietary machine learning technology, it delivers high fidelity insights from traditionally data dark sectors and scores relatively well for data finding and protection.

The third is 4G’s aim to continually improve its products and offerings through innovation and strategic activities. This it has prioritized, before making efforts to expand into other countries.

Fourth the SME lender does not refinance loans rather customers repay in full and then can borrow again. Furthermore, repeat loans are approved and disbursed via mobile which boosts mobile transactions.

Fifth, the company only lends to viable businesses on terms that are right-sized for them, especially as regards amount, the reason for the loan, projects, company size, et cetera.

Wayne Hennessy-Barrett, CEO and founder, 4G Capital in an interview with African Business said the company’s 94 percent lending return rate rides on the back of its central premise which includes building a financial service that meets the customer’s needs. He added that collateral and securitization are not really the key to positive repayment behavior.

The CEO who is an advocate of mobile money transactions believes it is an enabler of economic growth hence should be encouraged particularly in developing countries.

“We are proud to be a mobile money provider because we think it is an enormous enabler of economic growth, this is the 21st century and so everything needs to be tech-enabled,” he said.

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