John Adebayo (not real name) is a small business owner who recently approached his Nigerian lender for a serviceable loan facility to enable him boost working capital of his small business as the year-end fast approaches.
Adebayo trusted his banker to the extent that every information or advice from the man on suit is considered without much doubt, but as Covid-19 pandemic ravages businesses, he (Adebayo) could not have opted to access higher interest bearing loans while there are other on-lending facilities accessible at lower interest rate.
Interestingly, this is how most banks relationship managers are sweat-talking their credit worthy corporate customers into accessing high interest bearing commercial loans, just to earn higher interest income and boost their profits.
The interest rate on Bank of Industry (BoI) facility is 13 percent, Development Bank of Nigeria (DBN) (14.6%) for 3 years and below while it is 16.6 percent for facilities above 3 years. For African Development Bank (AfDB) loan, the interest rate is 13.5 percent; while commercial bank loan interest rate ranges between 19 percent and 25 percent.
While MSMEs carry high financing costs of all sizes when sourcing for funds from commercial banks, many bank relationship managers still prefer not to sell cheaper on-lending funds like that of BoI, DBN and AfDB because of their desire to make more money from interests and grow profit margins.
“The appetite for on-lending of development funds is gradually gaining momentum, given the low interest rate environment, albeit banks would want to lend their own funds to meet minimum loan-to-deposit (LDR) of 65 percent before exploring the on-lending windows,” an informed banking industry source told BusinessDay.
Our source noted that many bankers appetite for on-lending was low “because the return on such loans to banks do not adequately compensate for the risk they take in the loans, as banks take full risks for the loans and would be required to pay back both principal and interest in the event that the customers defaults.
“When interest rate was high and banks could make credit margins as high as 12 percent or above on loans funded with the deposits, the 7 percent margin on most on-lending does not seem attractive, especially as such loans have capital charge and carry the full cost of risk, among others.”
Commercial banks, due to their wider network of branches and closeness to MSMEs than any other player in the finance sector, are veritable vehicle of reaching to the MSMEs who create job and wealth for the citizens.
DBN said it disbursed N100 billion to over 100,000 MSMEs in the country last year, noting the disbursement resulted in creation of 3,192 jobs in the financial year ended December 2019. It said 52 percent of loans disbursed in 2019 were to youths and women owned businesses.
BoI said the total amount it disbursed to the MSMEs segment in the country in 2019 rose by 56.3 percent to N53 billion year-on-year from N33.9 billion disbursed in 2018. BoI has disbursed a total of N234 billion to 10,145 enterprises, thereby facilitating the creation of an estimated one million direct and indirect jobs.
The AfDB said it disbursed a total of $345.685 million to seven African countries to assist in their interventions against the Covid-19 pandemic crises stripping African economies bare.
The Board of Directors of AfDB had approved a $288.5 million loan to help Nigeria tackle the COVID-19 pandemic and mitigate its impact on people and businesses. The loan is meant to bolster the Nigerian government’s plans to improve surveillance and response to COVID-19 emergencies, ease the impact on workers and businesses and strengthen the social protection system.
Uche Uwaleke, a professor of capital market at Nasarawa State University Keffi, told BusinessDay, “What is required is public awareness campaign targeting MSMEs regarding availability of these concessional facilities either through the DMBs or Development Finance Institutions.”
He however said, “The reality is that our Development Finance Institutions (DFIs) such as BoI are under-capitalised and their scope and size of interventions/lending are limited. So, they face outreach constraints due to low capital base since they don’t mobilise deposits from the public.
“Besides, their model of lending, especially that of BoI, does not necessarily involve cash and may not suit many borrowers. If banks are luring borrowers to themselves, it can also be understood since DMBs are required by the CBN to maintain a minimum of 65 percent Loan to Deposit ratio. Besides, DMBs are participating financial institutions even with regard to the CBNs interventions.”
“It is not that bankers don’t know these on-lending funds exit for customers to access but it is simply not attractive to them because of the pressure to make more money from interests paid by the customers,” another banking industry source told BusinessDay.
Our source however expressed worries that some bankers prefer the short-term gains of the loan facilities to their institutions than considering the longer-term benefits to the entire economy.
For BoI, it recognises that MSMEs are the target players in fast tracking development of the Nigerian economy, particularly as they constitute over 90 percent of enterprises in the country.
The DBN does not give out loans directly to the public, rather its loan can only be accessed through all Participating Financial Institutions (PFI). These PFIs include development finance banks, commercial banks and microfinance banks.
The CBN had granted three months moratorium on all principal and interest repayments for intervention facilities as Covid-19 pandemic ravaged many small and medium enterprises (SMEs).