An overcrowded field in development finance

Structural adjustment in the 1980s left a trail of institutional destruction across sub-Saharan Africa. Almost all governments in the region bought into the changes with the encouragement of the IMF and World Bank. This included President Ibrahim Babangida’s administration, although Nigeria did not borrow from the Fund. Agricultural marketing was liberalized, state-owned companies were privatized or liquidated, public spending on health was cut, and development banks were wound up.

These policies now have many critics. In most cases, however, the affected institutions were barely functioning. They still have a core role to play if the required funds, personnel and policies are in place. In the case of development banks and Nigeria, there is a large gap to fill between the deposit money banks (DMBs) and microfinance.

The DMBs share a similar lending model with one exception which has an appetite for financing SMEs. The model does not extend too far beyond blue-chip companies. Nor does it advance the cause of financial inclusion, not that it should in our view. At the other end of the spectrum are the microfinance institutions in Nigeria: they fall short of the standards of the iconic Grameen Bank in Bangladesh and its former driving force, the Nobel prize-winning Professor Muhammad Yunus.

The annual report of the Nigeria Deposit Insurance Corporation (NDIC) puts the aggregate assets of microfinance banks at end-2013 at N225bn, and their loans and advances at N100bn. This lending firepower is modest when we recall that the loans and advances at end-2013 of Zenith Bank amounted to N1.25trn and of Stanbic IBTC to N290bn (customers only). Indeed, the NDIC commentary likened the microfinance houses in several respects to DMBs, noting their sizeable investment in fixed assets and government securities as well as their relatively high overheads.

There are other players in the mix to mention. The public space includes the Bank of Industry and the Bank of Agriculture. We should add development finance institutions (DFIs): these are both multilateral such as the Africa Finance Corporation, the African Development Bank and the World Bank, and bilateral including the DEG in Germany, the AFD in France and the FMO in the Netherlands. These DFIs have a regional or international remit, and cannot be expected to bridge the financing gap in Nigeria.

The CBN has a developmental role and has created a series of sectoral credit facilities to compensate for the modest risk appetite of the DMBs. Its latest is the N300bn real sector support facility, launched in December 2014 and setting an all-in annual interest rate of 9 percent (300 bps for the CBN and a further 600 bps spread for the disbursing DMB). Earlier facilities were created for agriculture, aviation, manufacturing and SMEs. What they have in common is that they seek to draw the DMBs into loans by mitigating the risk involved.

For the greater developmental impact and financial inclusion, our preference would be fewer individual facilities and fewer players. It would involve a large state development bank which would have the structure and qualified personnel to avoid the mistakes of the 1980s, and would operate alongside the DMBs rather than through them.

BNDES in Brazil is such an institution. When the grouping of BRICS was posting strong growth year after year before the global credit event (other than South Africa), Brazil was the obvious parallel for Nigeria by virtue of its diverse resource base, population growth and ethnicity. While that rapid growth has ground to a halt in the past five years, BNDES has some strong selling points in addition to a few flaws.

It passes the test of size, with annual disbursements greater than those of the World Bank. Its assets grew close to fourfold between 2007 and 2013. When the country was struggling with runaway inflation, it provided the long-term finance which the market could not. BNDES can also point to a negligible level of non-performing loans.

A development bank on this scale is, of course, consistent with the state intervention favoured by the Workers’ Party (PT) administrations of presidents Lula and now Rousseff. Rather than recoil from the idea of such intervention, we should note that policymakers in Nigeria do not have a vision of unfettered capitalism based on a level playing field. This was the way of structural adjustment in the 1980s, and has been rejected. The FGN looks to frame its policies and create mechanisms to maximize the comparative advantages of selected domestic industries.

BNDES has come under growing criticism for lending to large companies, some of which have funded PT election campaigns. These companies could comfortably borrow on market terms rather than the BNDES long-term benchmark rate, which is half the central bank’s short-term rate (Selic). The bank can offer such a low rate because it secures cheap funding from the Treasury and workers’ insurance funds.

That said, a BNDES-type body without the flaws noted could plug the development financing gap in Nigeria over time. With minority external shareholders, it could accelerate the process. As a stand-alone autonomous entity, it would enjoy some protection from cronyism.

Gregory Kronsten