Editorial

Restrategizing MSME Funding in Africa for better impact

Finance has been identified in many business surveys as a critical factor for the survival and growth of SMEs in both developing and developed countries.
Access to finance allows SMEs to undertake productive investments to expand their businesses and to acquire the latest technologies, thus ensuring their competitiveness and that of the nation as a whole.
Poorly functioning financial systems could seriously undermine the micro-economic fundamentals of a country, resulting in lower growth in income and employment.
Despite their dominant numbers and importance in job creation, SMEs traditionally have faced difficulty in obtaining formal credit or equity. For instance, maturities of commercial bank loans extended to SMEs are often limited to a period far too short to pay off any sizeable investment. This is due to the short-term nature of their funds, with the attendant mismatch if granted as long-term facilities to SMEs. The tendency is for access to competitive interest rates to be reserved only for prime customers, while loan interest rates offered to SMEs remain high, bank credit in Nigeria is characterized by limited availability to medium – to long-term credit tenors, short moratorium, and high collateral requirements.
According to the results of a World Bank survey of Nigerian SMEs in 2011, only an estimated 9.5 per cent of Nigerian SMEs had a loan or line of credit in 2011, and bank financing of working capital and fixed assets was estimated to fill respectively only three per cent and two per cent of outstanding needs. Later survey of MSMEs in 2014,  shows that only 6.7 per cent of enterprises in Nigeria reported having a loan or active line of credit, compared to the global Enterprise Survey average of 36.5 per cent.
When compared to other African nations MSME financing in Nigeria is quite worrisome. In terms of segmentation, the survey said only 3 per cent of micro enterprises had access to finance, while for SMEs, it was 7 per cent; and for large enterprises it was 44 per cent. Comparing with other countries, access rate by Nigerian SMEs lags well behind other African countries such as Ghana 36 per cent, , Kenya 24 per cent and South Africa 21 per cent.
Banks generally have been reluctant to service SMEs due to perception of SMEs by creditors and investors as high-risk borrowers due to insufficient assets, low capitalization, vulnerability to market fluctuations and high mortality rates. Other reasons were absence of bankable Business Plans and lack of clear Business Models, Information asymmetry arising from SMEs' lack of accounting records which makes it difficult for creditors and investors to assess the creditworthiness of potential SME proposals, absence of corporate governance and sound management, lack of relevant skills and experience in the businesses they undertake. Some of these factors account for the high mortality of SMEs as an estimated 80 per cent of them fail within five years of operation.
The foregoing hindrances to access to finance, call for innovative approach to SME lending by financial institutions. Such innovations which should be both financial and non-financial, must be SME-centric, aimed at efficient service delivery to them.  However,  a number of SME banks across sub Saharan Africa are gradually becoming SME-friendly with the various SME-friendly products they have pushed into the market, which is in recognition of the growing importance of SMEs to the African economy and the global trend that points to SMEs as the future of banking.
Most MSME finance are currently channeled towards trading due to its short term nature. However it is now imperative for more MSME funds to be channeled to the real sector of that market; agriculture, production, service, etc. with longer term maturity, for sustainable growth and longer mortality of SMEs.