Micro, Small and Medium Enterprises (MSMEs) have remained critical enablers of national socio-economic growth. However, there are identified financing gaps hindering MSMEs in Nigeria, but there are also ways to close these gaps.
Most customers of Nigerian banks, especially those in the MSMEs sector, regard their banks as mere vaults where they deposit and withdraw their funds. This reputation comes from the banks’ perceived unwillingness to offer loans and advances to their customers. This perception persists despite the various programs and windows, which many banks avail their customers to access business or personal financing. The issue here is, does the bank customers’ perception reflect reality or is it a mere farce?
To capture the consequences of the poor access to finance in Nigeria, I will recount a story a financial analyst once told us about two young Nigerians who set out on their separate entrepreneurial journeys and how these journeys were botched because they needed extra funding to upscale their businesses.
Chukwuemeka is a graduate of Biochemistry from one of the federal universities in the south-east region of the country. On the completion of his National Youth Service Corps (NYSC) assignment in 2010, he went into distilling aromatic schnapps – a popular drink that has become a major part of every social or cultural celebration in the area. Since this venture was micro-scaled, it kept Chukwuemeka’s head above the water, nothing more.
Then the National Agency for Food and Drug Administration and Control (NAFDAC) came, requesting he get certification. He sought for funds from his bank to upgrade his production up to the standard the agency stipulates for distillers to no avail. His accounting books did not ‘qualify’ to get loans from the bank. So, it forces him to give up on the schnapps production and go into the labour market.
Unlike Chukwuemeka, Kayode, a pig farmer in Lagos, was ‘lucky’ to get a loan from one of the microfinance banks in his area which he ploughed into his farm. They tenured the loan for two years and it came at almost 40 percent interest rate. Kayode had thought that he could pay back the loan from the proceeds of the sale of his piglets when they grow. At the end of the tenure of the loan, Kayode could not liquidate the loan, and the bank secured a court judgement and sold off the animals and the land which he had used as collateral for the loan.
These stories, unfortunate as they seem, are realities that many entrepreneurs, especially those in the MSMEs sector, can relate with. According to the Credit Bureau Association of Nigeria (CBAN), only four percent of the 40 million MSMEs in Nigeria have access to credit from the Nigerian banks.
Of all the challenges facing the MSMEs in the country, especially those in the manufacturing, production and agricultural sectors, access to finance remains the biggest. Those in the commerce sector are a bit more favoured by the banks as their needs for funds are mostly short-termed.
Unlike the large corporate companies, who have more access to finance than them, the MSMEs find the cost of access to financing too exorbitant to make good profit. Some of the consequences of this poor access to finance for the MSMEs are reduced productivity and profitability, stunted growth, and a high rate of business collapse, to mention a few. How does this poor access to financing come about?
The major hurdle for the MSMEs in getting financing is the pigeon-hole that banks try to fit all loan requests. This pigeon-hole, which includes boxes like consistent cash flow position, availability of collaterals, debt-to-income ratio, customer concentrations, availability of credit, personal guarantees, operating history, operating sector, sufficient management among others must be ticked favourably by these loan seekers to qualify for the loan. Expectedly, very few MSMEs can tick most of these boxes to qualify them for credit extension by the banks.
Other obstacles which banks always float include rise in the volume of non-performing loans (NPLs). The CBN, in pursuit of domestic macroeconomic and financial stability encourages Deposit Money Banks to increase lending to the real sector which includes MSMEs.
However, the capacity of some MSMEs to meet up with their loan repayment obligations is also a crucial factor when using an advanced credit facility. According to the CBN, commercial banks’ NPL ratio increased to 5.3 percent in April 2022 from 4.84 percent in February 2022.
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As a key player in the financial services sector, the main concern is how to change this unpalatable situation. To address these hurdles, we need to interrogate these challenges and know the issues that lead to their existence. Take qualifying criteria, for instance, the boxes that we expect the prospective borrower to tick are not bad in themselves as it is meant to give the bank some level of comfort that the loan, when disbursed, will not prove too risky to retrieve. Will it not be bad business for the banks to give a loan they could not recover? How can we raise the banks’ level of comfort so they could lend more to the MSMEs?
It is important to note that some government interventions like the Development Bank of Nigeria (DBN) come with partial credit guarantees to boost the comfort level of the lender banks. We can latch on to such guarantees to boost the access to financing for the MSMEs.
Banks have the responsibility to minimise the risk of default, and this can be done by training the owners of these MSMEs on how to effectively manage their finances. At Wema Bank, we have an SME business school where we equip business owners with the right knowledge, skills and tools that would enable them to effectively conduct their business operations in such a way to attract easy funding from banks and other financial institutions.
As banks, we can also deploy better risk assessment tools by measuring the customers’ credit potential using his or her cash flow. From the cash flows, banks can advance some credit, small at first and scale up after successful outings of the previous. This is how Wema Bank has navigated the comfort issue.
On availability of funds, what banks have in general is smaller than the financial gap that exists in the sector, but if the banks lend all that is available, the sector will burgeon.
The federal government, through many programs and agencies, provides funding aimed at boosting the operations of the MSMEs. Some of such interventions is the CBN’s Micro, Small and Medium Enterprises Development Fund (MSMEDF) that seeks to assist entrepreneurs with financing needs ranging from N100,000 to N50 million at an interest rate of nine per cent per annum. DBN has disbursed over N482 billion to over 208,000 MSMEs in its five years of operations.
Poor access to finance and other limitations notwithstanding, the fact remains that the global MSMEs sector is the engine room for driving economic growth.
According to the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) and the National Bureau of Statistics (NBS), in a joint report released in January 2022, there were over 39.65 million MSMEs in Nigeria as at December 2021. The agencies added that the sector accounted for the employment of over 54 million skilled and unskilled labour, 96.7 percent of businesses while contributing about 45.31 percent to national GDP.
Indeed, the role this sector plays in the economy is the reason banks and other financial institutions should rally around it to ensure that its biggest challenge, access to finance, is adequately addressed so it would realize its full potential.
Mabawonku, chief financial officer, Wema Bank, writes from Lagos
