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Liquidity crunch hits SMEs as high interest rates curb lending

…Nigerian cost of borrowing highest in SSA

SMEs
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Onyedika Ikegwuonu is a small-scale shoemaker in the sprawling city of Aba, Abia State’s industrial capital. He has been seeking N10 million loan from two of Nigeria’s tier-2 banks for the past 19 months. The banks have only been willing to give him half of this money on the condition that he must return it in 12 months and pay back 23 and 25 percent interest rates, respectively.

“Now, you can’t give me the money I need and you are asking me to pay you 25 percent as interest rate,” the dejected Ikegwounu said.

Aba has more than 80,000 leather-makers who produce shoes, belts and trunk boxes for the entire West Africa, but these key economic players cannot access loans from banks who consider them high risk.

“Requests come to us every day, but we cannot meet up because we don’t have money to buy good machines,” said Ken Anyanwu, secretary, Association of Leather and Allied Industrialists of Nigeria (ALAN), who produced shoes for the Nigerian Armed Forces in 2016.
“The Bank of Industry has done its best by giving few people N300,000 each, but it takes 100 or 200 times that money to set up a standard shoe factory. Again, commercial banks are not interested,” he said.

In the first half of 2018, average interest rate charged to Nigerian manufacturers stood at 22.9 percent, representing 0.25 percentage point higher than 22.65 percent recorded in the same half of 2017, according to the Manufacturers Association of Nigeria (MAN).
Governments and the private sector are competing for funds in the banks, with federal and state governments crowding out the private sector, especially small businesses. While credit to the private sector in the third quarter of 2018 was N15.59 trillion, federal and state government claims were N13.4 trillion.

Small and medium businesses (SMEs) numbering 37 million are the worst hit, with many of them seeking offshore funds and equity to pump cash into their business.
Banks, however, say many businesses lack proper documentation, structure, plan, and financial history.

Nigeria’s monetary policy rate (MPR), which is a benchmark interest rate in the country, has remained 14 percent for almost two years. Deposit money banks lend as high as 25 to 35 percent, according to BusinessDay checks.

The monetary policy committee (MPC) of South Africa’s Reserve Bank met in March last year and cut interest rates by 25 basis points.

The current repo rate (central bank lending rate to commercial banks) in South Africa is 6.5 percent, while the prime lending rate (lending rate to customers) is 10 percent.
Similarly, Kenya Central Bank’s monetary policy committee cut the determining bank rate in late July to 9 percent, from 9.5 percent.

BusinessDay gathered that Kenyans now borrow at an interest of 13 percent (as against 13.5 percent earlier) in line with the interest rate capping rule that limits lending rates to 4 percentage points above the CBR.

Zambia is one of the emerging countries in SSA and its central bank cut benchmark lending rate by 50 basis points to 9.75 percent in February this year, citing lower consumer inflation and weaker economic growth, according to Reuters.

In October 2017, Ethiopia’s central bank raised its benchmark interest rate to 7 percent, from 5 percent.

At least the benchmark interest rates of most SSA countries have remained single digit, barring few, meaning that it is cheaper for businesses to access funds there than in Nigeria.
The Central Bank of Nigeria (CBN) has held the MPR at 14 percent for the 15th consecutive time, due chiefly to high inflation rate. Inflation rate in June 2018 was 11.23 percent.
Nigeria is facing a make-or-mar general election, which will see politicians spending huge sums on campaigns and vote-buying. Analysts see this as one of the main reasons why the CBN is reluctant to cut rates.

Bismarck Rewane, CEO of Financial Derivatives Company, has been consistent on asking the CBN to cut rates to aid economic recovery for a country that just exited recession.

“No economy will grow when businesses get interest rate at a very high rate. What we need is a single-digit interest rate as manufacturers. We believe that this is what can stimulate growth,” Frank Jacobs, former president of MAN, told BusinessDay recently.
“It is important to fast-track the recapitalisation of the Bank of Industry (BoI) to enable it to meet huge credit demands of the industrial sector,” Jacobs said.

He said government now needs to open up access to various development funds created by the CBN such as the N220 billion Micro, Small and Medium Enterprises Development Fund (MSMEDF) and the N300 billion Real Sector Support Facility (RSSF) by relaxing stringent conditions denying manufacturers and businesses access to these funding windows.
Babatunde Paul Ruwase, president, Lagos Chamber of Commerce and Industry (LCCI), said the current state of the economy shows the government must prioritise stimulation of investment and growth.

“The proposition is that low interest rate will stimulate investment, impact positively on growth, create more jobs, increase income, and boost output. This would ultimately have a moderating effect on inflation,” Ruwase said.

Tony Elumelu, founder, Tony Elumelu Foundation, recently said that every $1 spent on SMEs generates $5.

 

ODINAKA ANUDU

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