• Thursday, March 28, 2024
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BusinessDay

SMEs need more access to loans at reduced costs

SMEs

Access to and the cost of loans frustrates small and medium Nigerian businesses seeking funds for expansion. Coupled with an oppressive economic environment it’s no wonder they fail to be economic growth-generators. Financial technology companies’ (fintechs) foray into this territory has however increased access but interest rates need to reduce.

In Nigeria, the conditions for getting a loan of 15 million naira are onerous – a plot of land worth almost twice the amount, 23 percent interest rate and repayment within a year. Hence repaying the loan could shut down a business; defeating the purpose for which it was taken.

Despite the cost of these loans some businesses take the risk. But commercial banks in Nigeria are risk averse thus the bottlenecks for granting a loan. Besides because of the humongous cost of doing business in Nigeria it is safer, and cheaper, to loan the money to government.

In addition, the money available in commercial banks are mostly for transactions which are short-term whereas entrepreneurs need long-term capital. Between 2013 and 2017 85 percent of small and medium enterprises (SMEs) were unable to access external financing, according to a National Bureau of Statistics (NBS) report. Only 5.3 percent of SMEs had access to bank credit.

The interest rate set by the Central Bank of Nigeria (CBN) is another reason loans are out reach from SMEs. At 13.5 percent Nigeria has one of the highest benchmark interest rates in Africa; it’s 10.25 percent in Zambia and 3.5 percent in Mauritius. In Ethiopia, Kenya and South Africa the rate is 7, 9 and 6.5 percent respectively.

This market gap is what fintechs have ventured into. They are dominating a space where commercial banks have dared to tread. Individuals and business owners are turning to fintechs who deploy technology to assess the risk of default and cut costs of serving this segment of the market. Loans, from a few thousands to millions of naira, are disbursed in hours with minimal paperwork and over the internet.

Some of the biggest banks in Nigeria have now joined the party offering loans secured to the borrower’s cash flow and approved in minutes.

Borrowers are catching on. Despite the high interest rates on the loans from both the fintechs and the big banks. They find the speed to market and convenience more attractive than the cost. Loans with low interest rates are available however, for those with a credit rating.

For market segment once considered a no-go area startups have shown what is possible when technology is used innovatively to solve pain points peculiar to doing business in Nigeria. This development is not lost on the CBN.

To get banks to loan to SMEs, the central bank ordered banks last June to lend at least 60 percent of their deposits to the real sector before the end of September. This could create an additional 1.5 trillion naira in loan assets. Only the biggest banks have responded; others wary of the risks involved will stay away. Beyond a circular telling banks what to, bolder monetary policy and structural reforms from the CBN that reduce the benchmark interest rate will spur lending to small and medium businesses.