Rebuilding trust to achieve greater access to finance in Nigeria
Achieving greater access to finance has been the center of debate in the Micro, Small and Medium enterprises (MSMEs) ecosystem in Nigeria for quite some time now. Several government policies and regulations speak to the need to increase financial access if not for anything else, at least to close the financially excluded gap in the country. In this piece, my central focus is to illustrate the challenges in the Nigerian ecosystem as it relates to accessing finance through banks and attempt to propose some opportunities for consideration for more financial institutions to begin using on a larger scale, to achieve greater access to finance. Some of the proposals I will put forward are already underway within the banking sector in Nigeria and other parts of Africa. However, I believe it takes a critical mass of financial institutions to make the necessary impact required to place MSME’s in their rightful place in Nigeria.
Exogenous shocks often occur randomly and have long lasting effects on the respective industries, sectors or even countries impacted. So, crises whether health as in the case of the ongoing COVID-19 pandemic, financial, or both is never a good experience to live through due to the devastating effects it has on communities, businesses, and families. However, it is my belief that in some instances crisis such as the last Global Financial Crises which occurred over a decade ago was a much-needed tragedy to showcase the “true” performance of organizations and the regulatory environment globally. The regulatory framework of the financial system in Nigeria evolved over four decades ago, in response to numerous reasons but mainly the demands of interest groups and market developments. Focusing on the banking industry as it pertains to access to finance over a decade ago and the lingering effects today, the banking industry cumulatively created loans predominantly for the oil and gas sector for obvious reasons owning to record high production of crude as well as price per barrel. Once the market took a turn for the worst, borrowers had a difficult time repaying and non-performing loans were on the rise. Simply put, creditors got their fingers burnt!
Fast-forward to present day, banks have learned from the mistakes of the past and have now been more cautious in the creation of risk assets. The regulatory environment improved significantly with the introduction of credit rating agencies, national collateral registry among others. But here is the truth, there is a HUGE missing middle in Nigeria when we discuss access to finance.
Trust remains the necessary ingredient in achieving greater access to finance and global acceptance. On the global scene there is an undertone of “distrust” in Nigeria and dare I say Africa more broadly speaking and the “perception” has ultimately become a reality. The organization for economic co-operation and development (OECD) scored Nigeria credit grade of 6, which is essentially categorized as a speculative-grade sovereign rating. To be sure, this suggests an elevated risk of Nigeria being unable and/or unwilling to meet its external debt obligations.
In my numerous discussions with operators in the MSME ecosystem, some of the experiences shared in their journey to access credit have been nothing short of heartbreaking. For instance, there are individuals who have taken loans and have fully repaid, but due to lack of the required increased collateral from the bank to enable secure a higher loan amount for the expansion of their business, these individuals were unable to grow their business and have unfortunately remained in the “Micro” segment. While although in the minority, others are stuck in the “Small”. Recall that there are 41 million MSMEs in Nigeria where more than 98% are considered “Micro”. Other examples include not fully being able to understand the nuance of the businesses MSME’s operate, capacity building requirements and of course incomplete documentation.
Financial institutions should begin to play the role of a “partner” to assist MSMEs reach their full potential keeping in mind “Rome wasn’t built in a day”
So how can trust be reestablished in the fabric of the Nigerian economy to enable transparency reign in every sector? In the next few paragraphs, I will attempt to propose a few options for consideration that if agreed as a community of financial institutions and regulatory bodies (critical mass) will ultimately lead to greater financial access and perhaps a reduction in financial exclusion in the country.
Capacity Building for MSMEs and Financial Institutions – There has been a lot of trainings over the years offered by numerous training institutes, universities, financial institutions on skills acquisitions targeted at MSMEs. While trainings are quite helpful, I would like to put forth a consolidated and comprehensive approach whereby the curriculum of the respective training outfits are agreed upon, approved, and accredited by international standards fit for purpose for the respective jurisdictions. Once this is achieved, the next step would be to place a much higher weight in the credit appraisal process when seeking a loan. Similarly, employees of financial institutions should also undergo training to better understand the respective business models and unique set of challenges MSMEs face in operating within Nigeria. In other words, financial institutions should begin to play the role of a “partner” to assist MSMEs reach their full potential keeping in mind “Rome wasn’t built in a day”.
Cashflow lending – While collateral coverage is a regulatory requirement, loans should not be solely denied based on inadequate collateral coverage. Some banks in Nigeria have started to on lend funds to MSMEs based on the cashflow of their business. Financial technology companies or Fintech’s have been operating successfully for quite some time now here in Nigeria and a host of African countries. Is there room to deepen these efforts? I sincerely believe given the demand and the elevated level of commerce on the continent; greater emphasis should be placed on this mode of lending.
Psychometric assessment – Studies conducted by researchers in the World Bank have successfully demonstrated in countries like Ethiopia that using these types of assessment tools have given greater access to finance to female entrepreneurs in Africa. In a host of African countries women are still not permitted to own land. (This is a mind-boggling cultural quagmire but a topic for another day). Nevertheless, here in Nigeria there are currently financial institutions experimenting with these types of lending protocols with some success. We need to deepen the use and scale to ensure greater access to finance.
Advisory Services – In the United States in particular the Small Business Administration (SBA) is an autonomous government agency established in 1953 to bolster and promote the economy in general by aiding small businesses. One of the largest functions of the SBA is the provision of counseling to aid individuals trying to start and grow businesses. While they don’t operate like most banks, they have offices in public universities across the country to lend support to respective businesses who have taken loans. I have observed site visits with seasoned consultants providing invaluable services to their clients. On a personal note, I recall my days teaching at the University in Oklahoma and walking through the respective buildings on campus as I often do to take in the amenities and offering my university had. I stumbled across an SBA office and walked into speak to the personnel on duty. Not even 20 minutes into our discussion, there were 2 ranchers waiting outside to speak with the officers on duty about the challenges they had on their ranch. I do not know the details of their conversation but what I do know is that the ranchers felt a sense of relief upon exiting. In short, providing advisory services solve multiple problems for financial institutions because it provides support to the business as well as gives early warning signals if a business is under distress and what remedies can be proposed to protect the bank and the business.
In conclusion, rebuilding trust for greater access to finance takes a critical mass of stakeholders, it must be conscientious and more importantly it takes time. It is my hope that all stakeholders whether government through regulatory agencies, financial institutions, and MSMEs must all come to the table and prove to one another that collectively we can change the MSME experience and the perception of Nigeria and dare I say Africa for the better.
Professor Nnanna is chief economist, Development Bank of Nigeria