ARE NIGERIAN BANKS FUNDING OF FAILING SMEs

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..