Don’t forget the Principe

A long time ago, a friend of mine who lived in Port-Harcourt called me and announced, “I am going abroad”. I was happy for him. It was, and still mostly is, a good thing to be able to travel out of the country. I asked him where he was going, and he said he was going to Sao Tome. I was like wow.

In my youthful ignorance of African geography, I wrongly assumed that Sao Tome was one of those fancy Caribbean islands and was excited to hear all his tales. To my surprise he called again a few hours later and announced that he had arrived. Needless to say, I was shocked. “Did you use Concorde or something? Or Edo air? Or are you just messing with me? How did you get to the Caribbean so quickly?” He said he went by boat. As it turns out, Sao Tome and Principe is only a few hours boat ride from Port-Harcourt and my curiosity on the country was born. “Don’t forget the Principe” he said over and over again.

As it turns out, Sao Tome and Principe are two islands off the coast of Gabon and people are fond of talking about Sao Tome but always seem to forget the Principe. That applied to me too. Even while learning about Sao Tome and Principe I kept on referring to it as Sao Tome and forgetting the other half. A problem apparently not unique to me.

So, why all these tales? A story in the news over the last week reminded of this Sao Tome and Principe experience, and how we have tendency to focus only on one side of a particular issue while forgetting other aspects of it. The issue in question in this story was access to finance. In response to one of the questions a panelists argued that Nigeria could not grow if citizens don’t have access to consumer credit. Indeed, he is not alone in pointing out the problems with the poor access to finance by both consumers and businesses. Valid problems too. But it is interesting how everyone always forgets the other aspects of access to finance besides just loans.

These other aspects are mostly centered on savings and risk. It should be pretty obvious,but every loan given out must have been the result of savings by some other entity. If no one saves then there can be no loans. And the savings picture for Nigeria is not that great. With a gross savings as a percent of GDP at 15.5 percent in 2017 we are some way off the global average and miles behind the big savers like China, Singapore, and Korea. People often take shots at banks for not giving out loans, but we must not forget that banks are simply intermediaries taking funds from savers and giving out loans. The loans really come from the savers not the banks.

Then there is the risk factor. The most important factor for loans is that it is eventually paid back. And Nigeria has significant risks in doing business and in recovering default loans which we are all aware about. From the high net worth individuals who systematically default on large loans to the small scale borrowers who just up and disappear, we know that defaults on loans are a problem. There is also the inherent risk in doing business in Nigeria which again we are all aware off. If we know there is significant risk in lending then perhaps we should be just as focused on risk as we are on any other aspect of access to finance. In 2017 Nigeria had a non-performing loans ratio of 14.8 percent as against a global average of just under 3.5 percent. Defaults are obviously still a problem.

The risk in lending and other macroeconomic risks are also one reason why we struggle to tap into global savings. In 2017 the top five savers in absolute terms, China, the United States, Japan, Germany, and India had new savings of roughly $12.6tn. Yes, trillion. If we were able to incentivize them to put just one percent of those savings in Nigeria that would amount to $126bn worth of investment. More investment that we would have ever had in any single year of Nigeria’s history and almost one and a half times all the credit extended by the entire financial sector.

The morale of this story is very simple. Access to finance is a problem but when we think about that problem we should not focus only on banks not giving loans. We should put as much effort in incentivizing savings, mitigating risks, and tapping into global savings. Or in the words of my travelling friend; don’t’ forget the Principe.

Nonso Obikili

Nonso Obikili is chief economist at Business Day.