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Catalysing economic growth: SME credit ratings and Nigeria’s US$1 trillion economy

Catalysing economic growth: SME credit ratings and Nigeria’s US$1 trillion economy

Nigeria’s ambitious goal of achieving a $1 trillion economy by 2030 hinges on a crucial but often-overlooked factor: Small and Medium Enterprises (SMEs). These businesses are the backbone of any thriving economy, but in Nigeria, they face a significant roadblock – limited access to finance. Banks remain cautious lenders due to perceived risks, creating a system that stifles SME growth and ultimately hinders national economic development. The answer lies not in throwing more money at the problem, but in implementing a smarter, more data-driven approach: establishing a dedicated credit rating agency for SMEs.

Achieving the US$1 trillion economy requires strategic allocation of credit to catalyse sustainable growth. Among the various avenues to realise this goal is a thoughtful strategy that will pave the way for Small and Medium Enterprises (SMEs)’s financial inclusivity.

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Globally, SMEs contribute significantly to economic growth through their positive impacts on socio-economic indices. Various development economists posit that SMEs represent about 90 percent of businesses and more than 50 percent of employment worldwide as they are critical pillars for job creation and economic development. According to reports, formal SMEs contribute 40 percent of national income (GDP) in emerging economies – with these numbers significantly higher when informal SMEs are included. The World Bank estimates that 600 million jobs will need to be created by 2030 to absorb the growing global workforce, making SME development a high priority for many governments worldwide. In emerging markets, SMEs generate 7 out of 10 formal jobs. In Nigeria, SMEs account for 99 percent of the total number of businesses in the country, contributing 84 percent to employment in Nigeria as well as 50 percent to national GDP. However, access to finance remains a significant constraint for SME growth, being the most cited obstacles facing SMEs in emerging and developing countries.

The International Finance Corporation (IFC) estimates that 65 million firms, or 40 percent of formal SMEs in developing countries, face an unmet financing need of $5.2 trillion annually, which is equivalent to 1.4 times the current level of global SME lending. In Nigeria, domestic credit to the private sector as a share of GDP in 2022 stood at 14.09 percent, significantly lower than the world average of 61.27 percent based on data from 151 countries in 2020.

In Nigeria, over time, the government has supported SMEs by establishing several institutions that offers development finance and capacity development programs which includes but not limited to the Nigerian Industrial Development Bank (1962), Small Scale Industries Credit Scheme (1971), Nigerian Bank for Commerce and Industry (1973), Small and Medium Enterprises Equity Investment Scheme (1999), Bank of Industry (2001), Small and Medium Enterprises Development Agency of Nigeria (2003), Development Bank of Nigeria (2014), NIRSAL Microfinance Bank (2019), etc.

Since 2002, the Central Bank of Nigeria also intervened by establishing several schemes, including the Refinancing and Rediscounting Facility, the ₦200 Billion Restructuring/Refinancing Scheme, the ₦200 Billion Naira Commercial Agriculture Credit Scheme (2009), the Nigerian Incentive-Based Risk Sharing System for Agricultural Lending (2011), the Micro, Small and Medium Enterprises Development Fund (2013), the Anchor Borrowers’ Programme (2015), the Youth Entrepreneurship Development Programme (2016), the Agribusiness/Small and Medium Enterprises Investment Scheme (2017), the Creative Industry Financing Initiative (2018), the Targeted Credit Facility (2020), and the Tertiary Institutions Entrepreneurship Scheme (2021).

More recently, the Federal Government of Nigeria (FGN), under the auspices of the Federal Ministry of Industry, Trade, and Investment, instituted three (3) funds amounting to a total of ₦200 billion aimed at bolstering businesses across the nation. These funds, namely the Presidential Conditional Grant Scheme, the FGN MSME Intervention Fund, and the FGN Manufacturing Sector Fund, will be administered by the Bank of Industry at a competitive interest rate.

Read also: DBN, GIZ, ELAN unveil equipment leasing initiative to improve MSMEs financing

Despite recognising small businesses as an important revenue source through credit facilities, banks remain cautious due to the difficulty of assessing and managing risks associated with lending to SMEs. This caution translates into a long list of requirements as well as stringent screening measures which ultimately discourages business owners thus reducing government’s capacity to generate revenue required for Nigeria’s transformation.

Improving SME credit infrastructure, including credit reporting systems, secured transactions and collateral registries and obtaining independent credit ratings report can significantly enhance access to finance. An SME Credit Rating Agency provides an independent and unbiased opinion of an SME’s creditworthiness. The main objective is to offer a trusted second-party opinion on the capabilities and creditworthiness of SMEs, highlighting strengths, weaknesses as well as debt capacity and improvement areas. In developed countries, such ratings increase the acceptability of SMEs by banks, financial institutions, customers, and investors thus enabling them to access credit at cheaper rates and on less stringent terms.

Similarly, these independent evaluations help banks and financial institutions make quicker credit decisions on SME proposals and better manage identified risks; it also helps to effectively administer deployment of public financing programs to qualifying/rated SMEs.

The concept of a Credit Rating Agency for SMEs is not novel, several countries incorporated it to stimulate growth and development. For instance, the SME Rating Agency of India (SMERA), was conceptualised by the Ministry of Finance and the Reserve Bank of India to support SME growth by providing independent and unbiased credit opinions that banks and/or investors can rely on. Established in 2005, SMERA became the world’s first SME-focused rating agency. Having rated over 50,000 MSMEs, SMERA has successfully bridged the gap between enterprises, banks, and financial institutions. As at date, it remains dedicated to strengthening the SME ecosystem through assessment and provision of relevant information that brings about SME coordination and facilitation of finance.

INBONIS is Europe’s leading Credit Rating Agency for SMEs, established in 2015, and registered and supervised by the European Securities and Markets Authority (ESMA). As a pioneer in SME credit ratings, INBONIS is the market leader in terms of the number of companies rated in its core geographies. With a mission to fuel SME growth by improving access to long-term financing, reassuring clients and partners, and enhancing internal financial governance, INBONIS aims to expand across Europe, having already rated over 700 SMEs by providing unbiased, robust, and affordable assessments.

In 2020, the Small and Medium Enterprises Development Agency of Nigeria in conjunction with the Nigeria Export-Import Bank (NEXIM), the Bank of Industry announced intentions to establish a Ratings Agency known as the Small and Medium Enterprises Rating Agency (SMERAN). However, till date, not much is heard or known about the operationalisation of this important Agency.

With the planned recapitalisation as well as the market gap, we believe this is an opportune time to operationalise an SME Credit Ratings Agency to align with the Renewed Hope Agenda for a US$1 trillion economy – the SME Credit Rating Agency promises job creation and innovation within the MSME ecosystem thus paving the way to boost growth and productivity needed to enhance economic development.

The time to act is now. With the ongoing bank recapitalization plan, Nigeria has a unique opportunity to bridge the financing gap for SMEs. An SME credit rating agency wouldn’t just provide valuable data for lenders, it would fundamentally change how financial resources are directed. Imagine a system where deserving businesses, not just those with the most collateral, can access the capital needed to thrive. This would unlock a wave of innovation, job creation, and economic prosperity, propelling Nigeria towards its $1 trillion dream. Let’s stop talking and start implementing. Let’s establish an SME credit rating agency and empower the very engine that can drive Nigeria’s economic transformation.

Ayokunle Ilesanmi’s professional experience spans corporate & commercial banking, capital markets, strategy development and economic development. He currently serves as Chief Executive Officer at Berkshire Finance Company Limited. Previously, Ayokunle was Group Head, Financial Sector Development at FMDQ Securities Exchange PLC where he led the successful implementation of various economic development initiatives not limited to housing and mortgage markets reforms and the UK-DFID funded Nigerian Green Bond Market Development Programme.