How CBN’s new lending rules will help boost MSMEs growth

In July this year, the Central Bank of Nigeria (CBN) mandated deposit money bank operators in the country to give out 60 percent of their deposits to businesses as loans.

The directive implied that deposit money banks’ loan-to-deposit ratio (LDR) must be 60 percent. Last week, the CBN raised  the ratio to 65 percent in a bid to improve lending for micro, small and medium enterprises and to the real sector.

LDR is the percentage provision the bank is willing to give as loans out of its total cash deposit with the CBN.

Last Wednesday precisely, the CBN announced a refundable debit of N499 billion on the accounts of 12 banks.

The deductions were made over the failure of these banks to meet the September 30, 2019 deadline the CBN stipulated for them to maintain 60 percent loan-to-deposit (LDR) ratio.

The move was also made to facilitate more investments into the country’s real sector and economy while also building a resilient financial system.

Experts in the MSMEs sector have lauded the initiative by the apex bank, but stress the need for compliance by the money deposit banks.

“Lack of adequate finance has been the major challenge limiting MSMEs growth in the country. With the CBN’s compulsion on banks to lend more will oil MSMEs – which is the engine of growth,” Femi Egbesola, national president, Association of Small Business Owners of Nigeria (ASBON), said.

“The problem with the directive is for the banks to comply. The policy has been on since July and we are yet to feel the impact,” Egbesola said.

He stated that if the banks comply with the policy, lots of ailing businesses in the country will spring back to life to create employment.

“It is a good policy,” said Anyansi Igwe, a small-cale leather maker in Lagos.

“The challenge, however, is how much cost banks will be willing to lend,” he added.

Over the years, business owners, especially small and medium scale enterprises, have constantly complained about the inability to access funds for expansion and business development.

Data from MAN also shows that the lending rate to the manufacturing sector was 22.21 percent in 2018.

“I do not think it is a good decision to sterilize the shortfall of the amount required in meeting up with the LDR ratio as it negatively impacts the funding cost of the bank whilst also improving their LDR ratio without achieving the initial objective of improved lending,” Gbolahan Ologunro, Equity analyst at CSL stockbrokers, said.

The Manufacturers CEO’s Confidence Index (MCCI) report released by the Manufacturers Association of Nigeria (MAN) for the second quarter of 2019 which represented the view of about 400 CEOs of MAN member-companies across the country expressed the challenges of business owners regarding funding.

The report states that the issue of funding has been a constant problem for manufacturers who need it for business expansion, improved productivity, procurement of raw materials and business development purposes.

It highlighted that 76 percent of the CEOs interviewed said the rate at which commercial banks lend to manufacturers discouraged productivity in the sector, while 66 percent of the CEOs claimed that the size of loans allotted to industry players by commercial lenders further contributes to low productivity in the sector and also discourages foreign and local investments.

Speaking on the impact of the move, Ologunro said, “ I do not see a significant change as banks are still likely to adopt a cautious stance in extending credit to SMEs given the fragility of the macroeconomic environment.”

“The cost of lending is a critical challenge that the CBN appears to have shrugged off, they need to look into that to incentivize SMEs to increase their demand for loans” Ologunro added.

Nigeria is one of the few countries with a high-interest rate as it has retained its double-digit monetary policy rate at 13.5 percent and as a result, small and medium enterprises are unable to access loans from commercial lenders as these banks lend at 20 to 35 percent rates with a 12 months tenor.

Analysts say measures should be put in place to control the imbalance regarding foreign exchange as well as the unstable rate of the naira to the dollar. This is because many business owners source raw materials internationally and have to pay using the dollar which further increases their cost of production.

The National Bureau of Statistics (NBS)’s recent MSME report shows that 85 percent of businesses could not have access to external financing within 2013 and 2017.

In fact, only 5.3 percent of SMEs had access to bank credit, even with 40 percent of them having relationships with banks.

Ibrahim Maigari Ahmadu, chief executive of Liverstock247.com, Nigeria’s first livestock online marketing and listing platform, said interest rate is high just as there are many gridlocks to access to funds.

“Nigerian commercial banks are risk-averse. They put so many bottlenecks on the way when you want to access funds,” he said.

“Interest rate is very high, which is a major inhibiting factor. Collaterisation is structured to knock you out,” he said.

 

Gbemi Faminu