Godwin Ehigiamusoe, the immediate past managing director of LAPO Microfinance Bank, speaks on several challenges hindering MSMEs’ growth and participation in the Nigerian economy, the COVID-19 impact, and how to mitigate these challenges going into 2021 and beyond. Excerpts:
The Federal Government in July announced a N2.3trn stimulus and survival fund for MSMEs to build their resilience amidst the economic challenges resulting from COVID-19. As we move into recovery mode, what interventions should the government prioritise in 2021 in order to aid this recovery within Nigeria’s informal economy?
Even before the pandemic, MSMEs faced several challenges which hindered their growth and participation in the economy. These challenges include access to finance, regulatory bottlenecks, infrastructure deficits, etc. The Federal Government’s N2.3 trillion stimulus package, while a notable effort towards addressing MSMEs’ financial constraints, does not address these challenges, which must be addressed if the informal economy is going to recover. I would like to see the following policies implemented in 2021:
Zero account opening balance with all commercial banks – Earlier this year the Central Bank of Nigeria (CBN) encouraged deposit money banks (DMB) to simplify account opening process and allow bank accounts to be opened with zero balance for 2020/2021 fiscal years to improve financial inclusion. Some commercial banks have started to implement this directive. Since 98 percent of MSMEs in Nigeria have low asset values, this policy would be a great way to onboard them into the formal financial system without being encumbered by the requirement of high opening balances. But for us to see real impact, these banks will need to go beyond the minimum requirement and proactively engage this subset of the population more intentionally.
Access to credit – Access to credit facilities such as loans remains the biggest challenge to MSMEs. In 2019, CBN increased the loan to deposit ratio (LDR) of deposit money banks to 65 percent, yet research shows that only 10 percent of MSMEs are able to access the full loan they applied for. This can be attributed to various factors such as high interest rate, insufficient collateral and the perception of risk associated with MSMEs. Incentives that encourage a review of the way in which MSME risk is evaluated and the associated requirements would help to grow these businesses. Factors like lack of credit history and collateral will always be an impediment and as such must be considered alongside other relevant factors that paint a more accurate picture of creditworthiness. Furthermore, these banks can leverage technologies such as Power BI, cash flow budget worksheet, etc which make cash-flow projections easier and faster for documentation. Microfinance banks like LAPO Microfinance Bank have experience providing loans to these businesses and understand how they operate and the support they need. This context needs to be represented when building new policies, products and services for MSMEs.
Regulatory bottlenecks – The PWC MSME Survey revealed that 57 percent of MSMEs struggle due to multiple taxes and levies by the federal and state governments. The government must address this challenge by ensuring that the 2020 Finance Bill which reduces tax for SMEs from 2021 is being implemented at all levels. Additional regulatory solutions would be the government introducing policies aimed at de-risking investments in the start-up ecosystem.
From your experience working directly with MSMEs prior to and during the outbreak of COVID-19, what do you reckon were the real impediments to broad MSME inclusion and how have those impediments evolved in the wake of COVID-19?
The real impediments to broad MSME inclusion before COVID-19 were access to finance, multiple taxes, infrastructural deficit and financial illiteracy. In the wake of COVID-19 due to the government-mandated lockdown in March, these impediments affected what little resilience MSMEs may have had. MSME financial constraints evolved to revenue shortfalls and cash inflow constraints due to the pandemic. For example, several LAPO Microfinance Bank beneficiaries disclosed that their expenses were eating into their business capital which increased the risk of non-payments. Hence, LAPO Microfinance Bank decided to extend the deadline for loan repayments to address beneficiaries’ concerns of bankruptcy or loan default.
Businesses experienced a revenue shortfall due to declined demand for their services and products. The workforce of MSMEs was also affected by the pandemic as many MSME businesses that were unable to move their services online could not afford to pay remuneration and fulfill other contractual obligations including paying salaries. Finally, the business environment became increasingly uncertain for small business owners due to the wider economic shocks of inflation and the associated rising costs of products and services.
The private sector plays a significant role in supporting the government in its efforts to provide solutions to the problems MSMEs face. What initiatives were put in place by LAPO to alleviate the challenges MSMEs experienced with the spread of COVID-19 in Nigeria?
In the wake of the Covid-19 pandemic, LAPO supported Lagos and Edo states with N20 million each for the provision of relief materials to the most vulnerable including low-income women. We distributed some face masks, purchased and redistributed several bags of rice to our clients across the country. This was done to prevent them from being forced to use their business capital for personal expenses. We placed 2,000 calls weekly to provide clients with emotional and practical business support. Finally, to ensure the gender gap in financial inclusion does not increase due to COVID-19, we incorporated data-driven policy designs, including financial product designs, selection of delivery channels, risk management products and price structure to match the financial needs and preferences of the women we are catering to. We are also creating access to basic micro-business management training, combined with maternal and child health tips to help close this gender gap.
The industry, trade and investment minister recently announced that the Federal Government had developed a draft national policy on MSMEs. From your experience, which challenges facing MSMEs would you expect this policy to prioritise in 2021 and beyond?
I want the draft national MSME policy to prioritise low access to credit and financial inclusion gender gap. I will elaborate.
Speaking of low access to credit, MSMEs are the backbone of our economy contributing 49.78 percent to the GDP, yet they cannot access credit to thrive in the economy. Let’s consider Kenya’s innovative solution called ‘Jaza Duka’, which addresses the MSMEs’ limited access to credit. Jaza Duka, launched in 2017 by Unilever in partnership with Mastercard and Kenya Commercial Bank, is a digital capital platform that empowers micro-entrepreneurs with working capital through credit in a cashless system that will enable the retailer to buy what they can sell. The platform has successfully reduced the cash flow challenges of 20,000 merchants and increased their growth by 20 percent. Furthermore, 62 percent of participants can access formal bank credit lines for the first time and create workaround solutions to Covid-19. We need similar innovations here and the Federal Government must promote and encourage the development of these private sector-led innovations. I commend the government’s new policy of a 5 percent interest rate on intervention loans but it must make sure that this policy is implemented and can be accessed by small business owners even in rural areas.
Financial inclusion gender gap is a major challenge that must be resolved if the country is to achieve the targets set in the National Financial Inclusion Strategy (NFIS). MSMEs owned by women face additional challenges, including restricted access to collateral and limited access to financial services. For example, there is a 14 percent gap between men and women that own bank accounts. The COVID-19 pandemic exacerbated these challenges as several studies confirm that more women have been pushed out of the formal financial system. The CBN in partnership with Financial Inclusion Special Interventions Working Group (FISIWG), Enhancing Financial Innovation and Access (EFInA) and Women’s World Banking (WWB) recently launched the framework for Advancing Women’s Financial Inclusion in Nigeria.
To ensure this financial gender gap does not widen, the draft national policy must leverage the framework which sets out eight strategic plans towards addressing the systemic barriers of low income, financial illiteracy and lack of trust in formal financial institutions which hinder women’s financial inclusion. Furthermore, the government must partner with social enterprises like LAPO to create financial products and services best suited to the income and education of financially excluded women. From my experience, women’s financial inclusion can only be improved by tailored financial products and services which address foundational barriers such as education. I believe that if the government successfully implements this framework, its earlier efforts of allocating 60 percent of the Micro, Small and Medium Enterprises Development Fund (MSMEDF) would achieve the desired goal of increasing women’s financial inclusion and participation in the economy.
Accessing finance to start up a business remains a major challenge due to associated costs that are often too expensive for MSMEs, according to the PwC MSME Survey 2020. 50 percent of the respondents who took part in this survey said they applied for loans but could not afford to accept the offer. What can be done to address the costs of accessing financial services like credit to deepen reach?
As discussed earlier, access to credit remains the biggest challenge facing MSMEs in the country. For example, MSMEs face rejection in their loan applications due to unavailability of collateral, lack of credit history, onerous loan application procedures, amongst other issues, and inadequate records and poor governance. The government can address the cost of accessing financial services through the following means:
Strengthening the capacity of microfinance banks and partnering with these banks to create affordable and accessible financial products. Furthermore, the government can also increase wholesale funding to credit-constrained microfinance banks.
Providing MSMEs with guarantee facility to leverage affordable credit from lending institutions.
Strengthening the regulatory and enabling environment. This would require implementing a national identity system and simplifying tax laws to avoid MSMEs facing multiple taxes.
Encouraging innovations such as mobile platforms that help MSMEs to create a credit history. This lowers the risk commercial banks associate with small businesses. An innovation that has helped MSMEs access finance with minimum documentation is India’s online lending platform ‘Flexiloans’, which is based on a marketplace model to ensure MSMEs with no credit history can access loans.
Does this mean that government initiatives and policies targeted at improving access for MSMEs are not being enforced or effective, or do these policies need to be revised to ensure better, more tailored access?
For over 30 years, government and its agencies have come up with several initiatives to address the challenges of MSMEs, constrained access to credit inclusive. To achieve the desired objectives, initiatives and policies towards improving access for MSMEs need to be revised and the implementation gap must be closed. For example, the CBN introduced a policy mandating commercial banks to improve access to mainstream consumer credit. This new policy directing banks to lend at least 65 percent of their deposits was a critical step in the right direction, as it has birthed a variety of new loan schemes, including Access Bank’s Payday Loan, GTBank’s Quick Credit, etc.
But policies like these, while useful in deepening broader access, have limited impact for MSMEs, such as low-income women who have low education and no trust in formal financial institutions. Relevance is a core consideration and without it such policies would not achieve the desired effect on the subset of the population that is most marginalised and in need of financial services. So, we not only need policies but also products and services that are tailored to the needs of the financially excluded. Lending institutions should prioritise the requisite capacity building and awareness raising to ensure that people are able to use these products and services and get the most out of them.
