While the low interest rate environment in Nigeria’s debt market has been a boon for large corporates who are raising capital at cheaper rates compared to bank loans, micro and small businesses, which form the bulk of firms in the country, are left out. Large corporates are leveraging the low interest rate environment to issue commercial papers at single digits while micro and small businesses, which employ over 80 percent of Nigeria’s labour force, are largely shut out of the opportunity to raise capital at such low rates due to their small size and most times lack of a formal structure.
Commercial papers represent short term debt instruments issued by large organisations to meet their financial obligations as well as cover short term receivables within a short period of time usually between 15-270 days. Large corporates in Nigeria like MTN Nigeria, Guiness Nigeria PLC and Dangote Cement are able to lower their finance costs by issuing commercial papers at relatively attractive rates to investors rather than borrowing at a higher cost from banks, according to Obinna Uzoma, chief economist at EUA Intelligence.
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Uzoma further stated that as long as the ban placed by the Central Bank of Nigeria (CBN) on local corporates on participating in OMO auctions remains, there would always be an over-subscription in the treasury bills market, thereby keeping yields low.
Interest rates on Nigerian treasury bills have remained below 5 percent since last year, while the prime lending rate of commercial banks, the rate at which most large corporates borrow, is at about 15 percent.
Information gathered from FMDQ shows that large corporates in Nigeria as at 7th of August 2020 have raised about N559.77 billion from commercial papers which is about 103 percent higher than the N275.37 billion raised in March.
In March 2020, Dufil Prima Foods Plc issued a 270-day commercial paper of N14.23 billion at an issue yield of 7.38 percent. Given the prevailing bank lending rate of 14.71 percent at the time, this would imply that Dufil was able to lower their borrowing costs by about 733 basis points by raising a commercial paper instead of borrowing at 14.71 percent.
MTN Nigeria in June issued a 270 days commercial paper of N80 billion at an issue yield of 5.95 percent, compared to the average prime lending rate of 15.65 percent during the same period, MTN was able to reduce their borrowing cost by 970 basis points. Guiness Nigeria also saved an interest expense of 650 basis points on their June commercial paper issue of N2.5 billion at an issue yield of 6.5 percent.
Omobola Adu, research analyst at Growth and Development Asset Management Limited asserted that it is no surprise that we have seen a rise in the value of commercial papers in the financial market over the last few months. With the advent of COVID-19 and the pressure it has placed on the cash flow of most companies, it is much cheaper for these big companies to issue commercial papers at about 7 percent as against borrowing from the bank at 15 to 20 percent.
However, while large corporates are able to take advantage of the low interest rate in the market, micro, small and medium enterprise (MSMEs) companies have to bear the cost of borrowing from commercial banks.
Nigeria’s SMEs contribute nearly 50percent of the country’s GDP and account for over 80percent of employment in the country. Despite the significant contribution of SMEs to the Nigerian economy, challenges still persist that hinder the growth and development of the sector.
Primary among the myriad of challenges encountered by the sector is lack of access to affordable capital.
According to a survey conducted by PWC, 29% of businesses see the high interest rates on loan as the most important limiting factor to getting funding for working capital and expansionary activities. 25 percent cite insufficient collateral or guarantees for funding, while 22% point to the current economic conditions as the most important limiting factor. According to the NBS, less than 5% of SMEs have been able to access adequate finance for working capital and for funding business growth/expansion.
A check by BusinessDay on guidelines to issue a commercial paper indicate that corporates must provide an ‘Issuer’ or ‘Issue’ rating of minimum investment grade; the commercial paper issued must be a minimum size of about N100 million; and the issuer must have been incorporated for not less than five years and be in operation for not less than 3 years prior to registration for commercial paper issuance.
Obinna noted that these regulations concerning the issuance of commercial papers cannot be met by the majority of MSMEs in Nigeria because of their weak financial capacity and are left to borrow at outrageous costs from commercial banks.
As at May, the maximum lending rate of commercial banks which would be applicable to MSMEs stood at about 30.69 percent.
Most MSMEs are faced with lack of proper documentation and insufficient collateral to access bank loans.
The sources of capital available for MSMEs are Credit Guarantee Schemes which makes it easier for medium-sized and small firms to borrow substantial amount of money. As an example, the Central Bank of Nigeria has established a N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) to promote access to credit by SMEs in Nigeria.
Grants such as the Lagos State Entrepreneurs Trust Fund, The GroFin Fund, the Bank of Industry, YouWin Connect Nigeria and Tony Elumelu Entrepreneurship Programme are also other options but they tend to be few and far between.
