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Bankers Committee divided over interest rate peg for SMEs

By Babajide Komolafe

The Bankers Committee is divided over the proposed pegging of interest rate for small and medium enterprises (SMEs) in the country. The Bankers Committee is an umbrella of Banks’ Chief Executive Officers’ and the Central Bank of Nigeria. The Committee held its last meeting on Tuesday in Abuja.

Though at the post meeting media briefing, it was announced that the Committee is planning to provide credit to SMEs at lower interest rate, Investigations has however revealed that the announcement was a compromise as most of the banks were opposed to the proposed interest rate peg.

Briefing journalists, along side Managing Director of Citibank, Omar Hafiz and Director of Banking Supervision, CBN, Tokunbo Martins, Managing Director/Chief Executive, Diamond Bank, Mr. Alex Otti said that the proposed plan to provide micro enterprises access to bank credits at lower interest rates was part of the decisions reached during the meeting. Mr. Otti said members were convinced that the move would help in redressing the constraints against optimal performance of these enterprises to create more jobs with the attendant multiplier effects on the economy.

CBN governor, Sanusi
CBN governor, Sanusi

However, it was gathered that during the meeting the CBN Governor, Mallam Lamido Sanusi, who is also the Chairman of the Committee, proposed that the Committee should peg interest rate for SMEs in the country as part of banks contributions to the society.

The proposal, it was gathered, was prompted by increasing pressure from the prívate sector over the high interest rate regime in the country, occasioned by the tight monetary policy of the CBN.

Investigation further revealed that the Banks’ CEOs initially were silent over the proposal until two of the top five Banks, aparently briefed in advanced by the CBN Governor, spoke in favor of the proposal. When it was obvious to the other CEOs that their silence might be misinterpreted for acceptance, one of them spoke, outlining the demerit of such proposal.

At this point the other CEOs appealed to the CBN Governor, to allow them discuss the proposal at their Bank CEOs meeting, and reach a concensus. But the Governor was said to have  insisted that the proposal should be announced at the post meeting media briefing, to which the CEOs agreed.

Further investigations revealed that the CEOs on the following day, extensively discussed the proposal at Bank CEOs’ meeting in Lagos, with most of the CEOs voicing their opposition to it. They were said to have argued that such a proposal would increase the competitive edge of the big Banks over the smaller ones, since the big Banks have Access to cheap funds than the smaller Banks.

The CEOs also argued that should the CBN compel the industry to accept the proposal it might lead to a situation whereby Banks would present sets of loan application forms for SMEs, with one showing that the loan was booked at the regulated interest rate, and the other showing the real interest rate at which the loan was booked.

Some of the CEOs also argued that such policy might not go beyond the tenure of Sanusi as CBN Governor, and since his tenure would end April next year, it means the policy might not last more than nine months. They cited the example of a similar policy in the past, the Small and Medium Industries Equity Investment Scheme, introduced in 1999, by the then CBN Governor, Chief Joseph Sanusi. They noted that after the tenure of Joseph Sanusi, the scheme was first watered down, and then abandoned when Lamido Sanusi bécame governor.

In deed none of  the previous attempt by the CBN to either peg interest  rates or  compell Banks to lend favourably to a particular sector of the economy was sustained. One such attempt was the MRR plus four per cent introduced in 2002. It was prometed by the visit of the  then President, Olusegun Obasanjo to  the Bankers Committee where he appealed for lower interest rate.

The Policy though commenced effectively October 2002 was never effective, as banks subsequently introduced all manner of fees and charges which made interest rate to remain high. The policy was eventually suspended in 2008  by the Profesor Soludo led CBN. The suspensión was announced via a circular titled, “Re: Moderation of Interest rate”.

The said circular stated, “It will be recalled that the CBN on July 31, 2002 issued a circular with the above title. This was based on the developments in the economy as at that time as it sought to moderate interest rates in the system. The circular, in reference to a tripartite agreement between the Federal Government, the CBN, and the banks reminded banks to keep faith with their agreement to restrict their lending rates to a maximum of 400 basis points above the Minimum Rediscount Rate (MRR).

Subsequent developments in the economy led to the adoption of a market based framework for monetary policy management with the Monetary Policy Rate (MPR) replacing the MRR. Although the new regime of monetary policy management had since become operational, this circular is intended to formally confirm to banks that the policy of restriction in banks lending rates to a maximum of 400 basis points above the Minimum Rediscount  Rate (MRR) had long ceased to be operational.

Before the MRR plus four policy was SMIEIS, which requires all banks in Nigeria to set aside ten (10) per cent of their Profit After Tax (PAT) for investment and promotion of small and medium enterprises. The 10 per cent  of the Profit After Tax (PAT) to be set aside annually shall be invested in small and medium enterprises as the banking industry’s contribution to the Federal Government’s efforts towards stimulating economic growth, developing local technology and generating employment. The funding to be provided under the scheme shall be in the form of loans or equity investment or a combination of both in eligible enterprises.

Initially, activities that could be funded with the money were restricted to industrial activities. Though banks indeed set aside the funds, the amount invested was small, and this was attributed to lack of bankable SMI projects and also to the restriction of the kind of business activities that could be funded.

Consequently, the guideline was amended to expand the activities that could be funded to “Every legal business activity is covered with the exception of:  Trading/merchandising; Financial Services. Furthermore, the name was changed to Small and Medium Enterprises Equity Investment Scheme (SMEEIS).

This however did not facilitate increased discursement or investment of the fund by the banks till the scheme was subsequently rested in 2009. As at June 2009, out the N42 billion set aside by banks under the scheme, N28 billion, representing 66 per cent was disbursed.


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