One of the major things that the credit bureaux do is to be able to enhance access to loans for small businesses. And they do this by making information about their financial transactions readily available in database that can be shared among lenders, who invariably would then look at it, from which they generate a credit history and be able to deal with those of them who have been able to perform their financial obligations in a very tidy manner.
So, once you have a credit bureau in an economy, it eventually accentuates and accelerates the access of credits to SMEs and consumers. Secondly, to begin to approach the institutions for loans and once the institutions know that there is a credit bureau in the economy, they begin to take you from there, knowing fully well that in the past they were lending to you in the dark, but now there are opportunities for them to know more about you.
So, that moral hazard, that information asymmetry, all those challenges have become issues of the past with the presence of credit bureau in our economy, and I think this is the way Nigeria is going now. Before the last two to three years, banks were lending in the dark to everybody, and if SME is the cornerstone of our economy, because more than 90 percent of our businesses in Nigeria are SMEs, if we then go without lending to them the economy will not move forward.
So, realising that factor it has become very germane that banks have taken the availability of credit bureaux as a very good infrastructure to enable them conduct very reasonable risk management process on the SMEs. So, you will begin to see that migration in growth of lending to SMEs. From my own records, even last year alone, over half a million institutions had access to credit from the financial institutions in Nigeria, and a lot of them are related to small businesses.
When you look at an industry, you will see that some banks are developing specific products to suit it. They come out saying specifically that they have developed special desks and special products for SMEs, and all these are in response to the fact that they now have a financial infrastructure called credit bureau they can rely on to be able to get very meaningful information.
I think normally it is always higher among SMEs, which is one of the reasons banks don’t lend to them.
Micro-finance banks with products that make the SMEs pay back everyday
Those are micro businesses. They are not small businesses. The micro-finance banks focus on the micro businesses and co-operatives, and the lower level of the economy individuals – farmers, traders, the rural areas, the market men and women. That is easy to do. But when you are looking at strictly SMEs, you are looking at businesses that have employees of between 10 and above. They are defined by the number of employees, number of turnover they do, probably, the kind of assets they have. These are really the drivers of an economy because these are the ones that really employ people, they are the ones that try to use new technology or local technology, they’re the ones that pay taxes, and so on.
So, if you look at those ones, the course of the challenges they go through, lending to them always lead to a higher level of default. That is why banks price their loans to be very high because there are inherent risks in lending to them. The way forward for most countries is to have what we call government guarantee against those that are given to most of the SMEs, and you see Nigeria has started that. The central bank has started quite a lot of guarantee forms so that banks can have a way to leverage on that. So, by the time the SMEs benefit from those guarantees and are able to pay back, the issue of default would be taken care of. So, they can now easily migrate into benefiting from normal loans from the banks, but more often than not most economies will always start opening up SMEs to access loan through guarantee forms.