ARE NIGERIAN BANKS FUNDING OR FAILING SMEs
As at 2012, it was estimated that Nigeria had 17.6 million micro,
small and medium enterprises, contributing about 46.7% to the country’s GDP and
employing close to 32.4 million, people.
Though most of Nigeria’s MSMEs die within its first five years of
existence, another set spring up to take their places and the endless cycle
continues, only very few survive the vicious circle to become corporate
entities over the years.
According to the
Managing Director of Heritage Bank, Mr. IfieSekibo, while speaking at the
second US-Africa Trade and Investment Forum held in New York, USA recently,
where he delivered a paper on
"small and medium enterprise funding in Africa - a banker's experience,”
observed that in Africa, SMEs are more credit-constrained.
This, he argued, typically affects growth possibilities as
significantly low number of startups, who apply for financing actually succeed,
“Using Nigeria as a case study, between 2003 and 2009, SME loans as a
percentage of total credit, decreased from 7.45 per cent to 0.18 per cent. Yet
by 2012, Nigeria had about 17.6 million MSMEs employing about 32.4 million
people.
“Although it is generally accepted that SMEs enhance
competition and entrepreneurship, and their development has a positive impact
on innovation and productivity growth, policy and infrastructure factors to
mitigate risk and costs that SME sectorcannot internalise needs to be seriously
worked upon by all relevant stakeholders,”
He also revealed
that in Nigeria, most SMEs die within the first five years of their existence
while another smaller percentage goes into extinction between the sixth and
tenth year, with only five to ten per cent surviving, thriving and growing into
established corporate status. He listed the leading cause of such sub-optimal
output to include poor access to funds, weak institutional support, unstable
macro- economy, complicated and unstructured legal framework and regulation,
inadequate business information, among others. Small and Medium Enterprises
(SMEs) are critical to the development of any economy as they possess great
potentials for employment generation, improvement of local technology, output
diversification, development of indigenous entrepreneurship and forward
integration with large-scale industries.
In Nigeria, there
has been gross under performance of the SMEs sub-sector and this has undermined
its contribution to economic growth and development. The key issues affecting
the SMEs in the country can be grouped into four namely: unfriendly business
environment, poor funding, low managerial skills and lack of access to modern
technology (FSS 2020 SME Sector Report, 2007).
Among these, shortage of finance occupies a very central
position. Globally, commercial banks which remain the biggest source of funds
to SMEs have in most cases, shied way because of the perceived risks and
uncertainties. In Nigeria, the fragile economic environment and absence of
requisite infrastructure has rendered SME practice costly and inefficient,
thereby worsening their credit competitiveness
Finance continues
to be a major factor in the growth constraints of micro, small and medium
enterprises. Though Nigerian banks seem to have woken up to the realization
that there is a dire need to focus on the importance of the growth of MSMEs for
the growth and stabiliization of the economy. For years Nigerian banks have
neglected this most important sector of the economy that is seen as the bedrock
of emerging economies like China and India.
The statistics
earlier enumerated by IfieSekibo is a pointer to the massive work Nigerian
banks have at hand in terms of sustaining the country’s more than 18 million
micro, small and medium enterprises or at least 30 % of them.
In a November 2014
report on MSME banking by renowned auditing firm KPMG, in conjunction with Enterprise Development
Centre, titled Strengthening Access to
Finance for Micro, Small and Medium Enterprises in Nigeria, Peter Bamkole,
Director, Enterprise Development Centre, in his Executive summary wrote,
“IN over a decade that
we
have been supporting SMEs at the Enterprise Development
Centre, I am intrigued each time the
issue of “Access to Finance”is being discussed, how it
constantly evokes passion, heated debate and in
extreme cases, frustration. Of the SIX broad constraints
that limit the growth of SMEs in Nigeria, lack of “Access to
Finance” has drawn more venom especially from SMEs than any
other. The six constraints which are
captured in the acronym M-I-S-F-I-T are Lack of Access to:
M – Market
I – Infrastructure
S – Support Services
F – Finance (Capital)
I – Information
T – Technology
The hypothesis here is that if these constraints are removed
or drastically
reduced, then the chances of these SMEs succeeding will
increase significantly.
One thing is certain: All the stakeholders in the sector
agree on the importance of SMEs from the perspectives of wealth and job
creation.
Consequently, financing their growth should ideally be a
logical step.
Apart from the
banks, the Nigeria government has over the years endeavored to implement
policies that will enhance the growth of Micro, small and medium enterprises.
The Jonathan administration in other not to be seen to be neglecting this very
important leg in economic growth tripod, also involving the macro and state,
has focused on promoting the growth of SMEs as a panacea for job creation.
The Federal
Government
of Nigeria has in the last few years renewed its
determination to giving small and medium enterprises in Nigeria the much needed
spin through various interventions:
Youwin, The National Enterprise
Development Programme (NEDEP), Central Bank of Nigeria (CBN)
intervention funds, etc.
The private sector on
the other hand isSME sector through capacity building, support services and SME
promotion. Notable examples are Diamond Bank
“Building Entrepreneurs Today”, Fidelity Managed SME Radio
program, Etisalat - Market Access
Nigeria & Easy business millionaires hunt, Stanbic IBTC
“Enterprise stories”& Global Entrepreneurship
Week. Other banks like Heritage Bank, FirstBank Group, etc
also have SME enhancing products they
have launched in terms of capacity building and financing, just to mention but
a few.
And many more are in the pipeline.
In spite of the
media blitz that has followed the renewed interest of Nigerian commercial banks
in thwth of MSMEs, many small business owners are still complaining of gross
inability to access these so called non - collateral funds being bandied by the
banks.
Keith Adeola, who
runs a printing press and does an average of N5M worth of business quarterly
says “ I’ve approached my bank for a N5million loan to buy equipment as an SME,
first they told me to bring a collateral. I gave them the papers to my plots of
lands in Lagos and Epe. They said the Epelands was not viable. In the end they did not give me they money.
Luckily a few weeks later, I got a cheque of N1.5milliom as advance from a
client. I purposely went to show them the cheque and insisted I would not pay
it into their bank. I went looking for a more sensible bank, who later gave me
a loan of N3 Million to expand my business”
The above scenario
exemplifies the plight of the average small business owners with banks in
Nigeria.
The micro finance
banks that were also set up to help the micro businesses are even worse than
the commercial banks considering the collaterals they expect micro and small
businesses to bring in order to access finance.
Globally, all
economies are very conscious of the importance of the SME in the country’s
economic growth. For instance, the
Eurozone makes adequate plans for its SME financing annually.
For instance the
Netherlands had projected for its 2015 SMEs financing through research findings
published online as at late 2014. Excerpts:
SME's funding needs in 2015 will be shifting from
refinancing to funding growth and expansion. At 8%, the number of businesses
that think they might be needing funding has not changed since last year. On
average, SMEs estimate they might need 320,000 euro in funding, which is
substantially more than their needs over the past twelve months, when the
average amount needed was 200,000 euro. These and other facts can be found in
SME funding statistics ('MKB-Financieringsbarometer') published by ABN AMRO and
the Society for Consumer Research ('GfK') today.
Funding growth
28% of businesses needing funds intend to use these funds to
grow and expand their business. This percentage stood at 18% in 2013. The
proportion of businesses that think they may need funding for refinancing
purposes next year is 11%, compared with 22% last year.
Form of funding
SME's most preferred form of funding is current account
loans. 65% believe they will succeed in attaining this form of funding, while
they also intend to consider other forms of funding than bank loans, e.g. lease
arrangements (13%), private loans (21%) and equity (7%).
Limited knowledge of alternative forms of funding
For 66% of businesses, the Internet is the main source of
finding the most appropriate form of funding. Most SMEs are quite knowledgeable
when it comes to classic forms of funding such as bank loans or current account
facilities. However, half of them are unaware that the bank can also help them
find other forms of funding.
Positive expectations
Overall, SMEs' expectations for 2015 are positive. More than
4 in 10 SME owners have already seen their sales grow in 2014 while the same
number expects to see their sales grow next year. About one third of SME owners
expect to see the level of their sales rise by at least 10% in 2015.
Across sub- saharan
Africa, many countries take the financing and growth of MSMEs very seriously.
This is reflected in the launch of a medium term MSME growth product by the
Africa Development Bank in 2013. At the approval of the program the ADB
released a statement along the following lines:
The Board of Directors of the African Development Bank
(AfDB) approved the Africa Small and Medium Enterprises (SME) Program, a
four-year, US $125-million funding program combined with a US $3.98-million
technical assistance package granted by the Fund for African Private Sector
Assistance (FAPA), aiming at supporting micro, small and medium enterprises
(MSMEs) in Africa. The program will provide standardized lines of credit
(LoCs), mostly in local currency, and technical assistance to targeted
financial institutions, predominantly in low-income countries spread over all
five African regions. The SME Program will avail important longer-term
resources to thousands of SMEs including women and youth, thus contributing to
job creation, poverty reduction and inclusive growth on the continent.
The SME sector is crucial to Africa's growth, contributing
more than 45% to employment and 33% to GDP. SMEs continue to face significant
challenges. Studies indicate that more than 70% of SMEs lack access to
medium-/longer-term finance, creating an SME funding gap of more than US $140
billion in Africa alone. Well performing local SME-focused financial
institutions lack access to longer-term resources from depositors, capital
markets or other potential funders hindering the provision of medium- and
long-term SME finance. Of the loans available, almost 60% is for less than one
year. Financial institutions also often lack adequate knowledge and systems to
assess and monitor SME projects and compensate this by relying on excessive –
but mostly unavailable – collateral.
In response to these challenges the AfDB, through this SME
Program, will provide the necessary longer-term finance and a technical
assistance package to address a number of the constraints faced by around 25
target financial institutions and their SME clients across Africa.
Thus, the program will benefit from the Fund for African
Private Sector Assistance (FAPA) support that will grant US $3.98 million to
provide technical support to building capacitiesof the 25 participating
financial institutions to improve their operational efficiencies, in areas such
as credit assessment and risk management, thereby contributing to better access
to finance for African MSMEs sustainable growth. FAPA is a multi-donor thematic
trust fund, financed by the Government of Japan, the AfDB, the Austrian
Development Bank and the Government of Austria, that provides grant funding for
technical assistance and capacity building to support implementation of the
AfDB's Private Sector Development Strategy. This US $3.98-million FAPA
technical assistance grant for the AfDB Africa SME Program is the highest
amount approved in the history of FAPA.
Improved access to financing amongst members of the majority
of urban and rural dwellers who depend on smaller-scale business activities
will allow further support to their living and that of their families and
communities. Women are likely to benefit of the expanded outreach as they tend
to operate more often in rural-based smaller enterprises. The social effects of
the Africa SME Program will be significant given the particular support to
microfinance institutions in low-income countries and fragile states, thus
deepening access to finance for micro and small enterprises in severely
underfinanced communities in the longer term, resulting in poverty reduction
and social inclusion. In addition, the Program will also contribute
significantly to capital market, private sector development and government
revenue.
While Nigeria seem o
be waking up to the importance of the micro economic sector. majority of
smaller African countries like Ghana, Cameroon, Ivory Coast, and even large
African economies like South Africa and Egypt have consistently taken their
MSMEs very seriously and this had helped stem unemployment in most of these
country.
In Nigeria, the
banking system has always treated the issue of MSMEs with levity. Thus certain
kinds of banks have always been dedicated to this area of economy. At a time it
was the Finance houses, which eventually crashed with it voodoo banking. Then
the Micro Banks have come, but it has become obvious that these can not
effectively tackle the fundamental problems inherent in the operations of
micro, small and medium businesses. Not only have micro finance houses not been
able to help small businesses, majority of them have packed up, which glaringly
show that the support goes beyond just lending money to the businesses.
So why are SMEs not able
to access the much needed
capital for growth?
Majority of the Financial
Institutions claim that lending
to SMEs is risky and that
a number of these SMEs
are not ready for the rigour
that goes with access to
finance. While it may be
fair to acknowledge that
this position is somehow
true, from the lens of an
enterprise development
agent like us, we will see
this as an opportunity in
waiting. Why is there no
concerted effort to de-risk the
sector? Why are the financial
institutions constantly
introducing banking products
and outpacing each other in
branding their institution as
SME focused bank rather
than understanding the
SMEs and deepening their
absorptive capacity to access
capital? Why are we not
coming up with policies that
favour those supporting the
sector?
Despite the MSME segment
being identified as critical by banks, 84% of the banks
surveyed reported that
MSME loan portfolio is less than 20% of their total loan
portfolio.
The low participation of commercial banks in providing
finance to MSMEs in Nigeria may be associated with the poor knowledge of the
segment. Only about 50% of MSMEs believe bank relationship managers understand
their needs and provide appropriate advice on credit and
other bank products. This study also reveals that most banks may not be
appropriately organised to serve this
segment. Capturing the opportunities in the MSME space would
therefore require banks to implement good internal practices and adopt
more innovative processes as traditional
methods may be ineffective in serving this dynamic market
segment. Banks with a serious focus on the MSME segment stand to improve their
chances of capturing the MSME opportunity on a significant scale by adopting
some of the following approaches:
Develop a thorough
understanding of the MSME segment to be able to offer tailor-made solutions.
Banks in Nigeria may
have began, albeit cautiously, to identify the MSMEs as an important sector of
the economy and are taking different steps to deepen their understanding and
play in this segment. This realization is not unconnected to the thinning
margins in transactions with large corporates
and the increased determination of various governments to
drive economic growth and development agenda through the MSME segment.
Government will continue to rely on
the banks to serve as a vehicle to administer developmental
funds, as well as extend other lines of credit to increase the financing
options to MSMEs.
Insights from the study revealed that for Nigerian banks,
MSME financing has gone beyond a social objective and for a few banks, MSMEs
are a critical part of the banks' strategy.
The low participation of commercial banks in providing
finance to SMEs in Nigeria can be associated with the poor knowledge of the
sector. The study reveals that only half of the
MSMEs believe bank relationship managers understand their
business and are able to provide appropriate advice on credit and other bank
products.
Furthermore, only about one third of banks have
significantly banked the segment for more than 5 years. Interactive sessions
with
the surveyed banks also highlighted that the focus on the
MSME segment is a recent occurence, with many banks still grappling to
understand this segment. Providing banking services for MSMEs beyond deposit
mobilisation and cash
management has been a challenge for banks n other markets as
well. This is primarily due to the difficulty in ascertaining whether
organisations have the capacity and/ or are willing to pay. Many banks are
realisingthat supporting this segment will require
increased focus and a dedicated business unit within the
bank to address the peculiar needs
of the segment.
In Nigeria, about 80% of the banks surveyed have constituted
a dedicated unit to serve the MSME segment since 2011. Majority of the Tier 1
banks that have a dedicated SME units operate the unit under the
Retail/Consumer
Banking or Commercial Banking division. Banks in other
emerging markets also operate dedicated units for MSMEs; according to a World
Bank survey (2006), 88% of banks in
Chile, 100% in Columbia and 88% in Serbia had dedicated
units for SMEs.
The financial inclusion initiatives in the
Nigerian banking sector has led to an increase in the number
of MSMEs with bank accounts, however, there is a need to deepen these banking
relationships as over 92% of MSMEs surveyed currently utilise only one or two
banking products from their respective banks.
At the same time, Nigerian banks are now adopting a
combination of product strategies e.g. risk assets, cash management/ deposit
mobilization as well as value-added services
i.e. trainings, advisory services, creating
networking platforms etc. to penetrate this segment. From
the focus group session with the banks, we sensed a general preference for
banks to provide more value added services (VAS), as this could be a veritable
way of establishing strong relationship with
MSMEs and depeen the understanding of the nature of their
businesses. Minimum emphasis is currently given to risk assets creation in this
segment, with more than 50% of banks having MSME loan portfolios less than 10%
(<5% for Tier 1 banks) of their
bank's total credit exposure. Banks will need to create more
awareness among MSMEs on the benefits of their varied service offerings, beyond
just the deposit products in order to address the gap between services offered
by banks and those demanded by MSMEs.
Nigeria also lags behind other African nations when it comes
to banking the MSME segment. A 2013 World Bank report estimates the share of
MSMEs in the credit portfolios of banks in Nigeria is at 5%, much lower than
other African markets, such as Rwanda (17%), Kenya (17.4%) and Tanzania (14%).
An analysis of the revenue distribution of banks in some
African markets highlight important differences. Banks in Kenya, Rwanda and
Tanzania extend more credit (in % terms) to MSMEs, compared to banks in Nigeria
and South Africa. A World Bank
2013 study also estimates that on average, credit-related
revenues comprise about 39% of overall revenues in developing markets. The
relatively better scenario in Kenya and Rwanda is driven by a flexible and
relationship-oriented banking environment.
In Nigeria, First Bank emerged as the most popular bank
among MSMEs for both deposit transaction and credit/loan activities.
The finding above suggests that there
is scope for banks to improve on their
relationships with MSMEs particularly with respect to deepening
their understanding of the various segments/ sub-segments.
Similarly, in terms of ease of doing business, the study
revealed that about 50% of MSMEs do not find it easy to access relevant
services from their banks. This could be due to banks
not having specialised MSME relationship managers at
branches, preferring to rely on retail relationship managers to serve MSMEs.
The survey revealed that only about 5
Nigerian banks have SME business managers in their branches,
however, focusing largely on financial targets (revenue, deposits and loans),
instead of developing products that address the needs of MSMEs.
Amongst alternate sources of funds for
MSMEs, Development Financial Institutions (DFIs) are not
necessarily preferred by the MSMEs. The study also revealed that only 2% of
MSMEs have obtained loans from a
development bank e.g. NEXIM, BOI, BOA etc. either directly
or through some other bank.We believe banks will improve their
likelihood of capturing the MSME bankable opportunities
through the following:
Relationship Model:
Banks need to develop a thorough
understanding of the MSME segment to
be able to offer tailor-made solutions. In developing
markets, MSMEs are typically more dispersed and banks need to be able to
identify strategic locations in which the MSMEs operate in order to determine
the market size and potential bankable revenue.
Based on these, banks can develop tailored products and
services specific to each strategic MSME sector.
In addition to the above, banks need to
intensify advisory and value-added services. Majority of the
banks interviewed noted that poor business plans and lack of experience of
business managers are some of the reasons for the high rejection rate of MSME
loan applications. This may be attributable to the level of business acumen and
financial literacy of the business managers and MSMEs at large.Many banks have
a start-up package to help MSMEs in terms of business support. For example,
majority of the Banks interviewed run business seminars, SME clinics and other
advisory services for their MSME
clients to introduce them to business skills, such as
inventory management, supply chain management, and financial reporting.What
MSMEs want
.Knowledgeable and
effective
relationship managers/bank
representatives who have an
understanding of MSME banking
requirements, particularly at the
beginning of the relationship.
.Product and
services that meet
specific needs of the MSMEs.
These products must be simple,
easy to use and reflect the
perculiarity of MSME's business.
.MSMEs often require
access
to unsecured credit due to the
hassle and bureaucracy involved
in providing collateral acceptable
to the banks - C of O in choice
locations.
.Quick transaction
processing turn
around time. Maximum of 3 days
for loan requests.
What Banks are saying
.MSMEs are a
critical part of the
Bank's strategy. Average yield
of providing banking services to
MSMEs are typically higher than
that of large corporates
.Provision of credit
to the MSME
segment is a strategic priority to
78% of the banks interviewed due
to the immense opportunity in the
sector.
Percentage of loans
dedicated
to MSME sector expected to
increase. Whilst 56% of the banks
interviewed have dedicated 5%
of their loan portfolio to MSMEs,
0ver 80% of them noted that this
will grow over the next 5 years as
provision of credit to the MSME
segment is a strategic priority
to three quarters of the banks
interviewed due to the immense
opportunity in the sector.
Insufficient documentations
and
poor information on the MSME
segment limits banks' ability to
lend. Around 40% of the banks
interviewed listed insufficient
documentation and poor business
plans as a critical reason for MSME
loan rejection.
Government intervention required
to facilitate lending to MSMEs:
Majority of banks noted that the
current government policies are
insufficient to grow the level
of credit extended to MSME.
Government therefore needs to
create an enabling environment
to facilitate lending to this crucial
sector.
The Central Bank of
Nigeria (CBN) launched the N220 billion Micro Small and Medium Enterprises
Development Fund more than two years after the idea was first conceived.
Governor of Central
Bank of Nigeria (CBN), MallamSanusiLamidoSanusi captured the development with
the following statements: "In 2012, Nigeria had about 17.6 million MSMEs
employing about 32.4 million people, and contributing about 46.54 per cent of
nominal GDP. "A recent survey by IFC and Mckinsey (2010) suggests that 80
per cent of these MSMEs are excluded from the financial markets. The state of
MSMEs in this country underscores the importance of this fund.
Suffice it to say that between 2003 and 2012, commercial
bank loans to small scale enterprises dropped at an exponential rate.
"Analysis of the annual trend in the share of commercial bank credit to
small scale industries indicates a decline from about 7.5 per cent in 2003 to
less than one per cent in 2006 and a further decline in 2012 to 0.14 per
cent." The CBN has tried many interventions for the MSMEs in the past to
address their funding challenge.
There was the Small and Medium Industries Equity Investment
Scheme (SMIEIS), a voluntary initiative of the Bankers Committee whose
membership includes all managing directors and chief executive officers of
banks in Nigeria that required all licensed banks in the country to set aside
10 per cent of their profit before tax (PBT) for equity investment in and
promotion of small and medium enterprises (SMEs). However, this fund could not
be accessed by microfinance banks till date due to lack of proper documentation
of their businesses and lack of collateral
Now, with the launch of the N220billion MSME Development
Fund, there is renewed hope that the funding challenge might finally be
surmounted.
A number of
commercial banks have already started accessing and disbursing some of the CBN
intervention fund, which has also come across severe criticisms for the 9%
interest rate it attracts, which many believe is rather high since the major
purpose of the fund is to growth the economy through the survival of MSMEs.
Similar funds in emerging economies like China and India attract as little as
1% - 3% interest rates in comparism..
FELA; LEGENDARY AFRICAN MUSIC AND CULTURE ICON 
