By Yinka Kolawole
TOTAL loans granted by banks to Micro, Small and Medium Enterprises (MSMEs) in Nigeria amounted to just over 0.1 percent of total banks’ credits to the private sector over the past five years.
Figures obtained from the Central Bank of Nigeria (CBN) showed that out of the aggregate loans of N135.9 trillion disbursed to the economy between 2011 and 2015, only N159.75 billion went to the SMEs. Specifically, CBN Statistical Bulletin 2015 revealed that loans to SMEs for 2012 to 2015 represented 0.1 percent but a trend of consistent decline had been recorded since 2003.
Specifically, 2004 was 3.6 percent; 2005 2.5 percent; 2006, 1.0 percent; 2007, 0.9; 2008, 0.2 percent; 2009, 0.2 per cent; 2010, 0.1 percent and; 2011 0.2 percent. The figures indicated a drastic decline in credit to the SME sub-sector after the banking consolidation exercise in 2006.
Mandatory credit allocation
It is evident that SMEs had robust access to finance from banks during the period of mandatory credit allocation, pre-consolidation. The percentage of loans to SMEs dropped drastically during liberalisation period and reduced further post-consolidation period despite increase in loans to the economy. Mandatory allocation to the tune of 20 percent of total bank’s credit to small scale enterprises wholly owned by Nigerians was abolished with effect from October 1, 1996.
Banking MSMEs: Although majority of banks acknowledge the strategic role the MSME segment plays in driving economic development and the huge opportunity that exists in banking MSMEs, banks’ involvement in financing this segment remains low. Banks have attributed their limited funding to challenges such as informal nature of the MSME leading to a limited knowledge of the segment and the higher risk involved in lending to the segment.
Njideka Esomeju, Head, Emerging Business, Diamond Bank Plc, acknowledged in an interview with Vanguard that there are enormous opportunities in financing MSMEs in Nigeria. She, however, noted that banks are businesses with profit expectations from shareholders, and thus will finance businesses that satisfy that objective. “If this objective is not met, banks will not lend,” she added.
According to her, the informal nature of most SMEs makes it difficult to finance MSMEs, adding, “They lack requisite information such as proper accounting records, financial statements, bankable business plans, security and operating in disconnected value chains makes it difficult for banks to assess the credit worthiness of the SMEs.”
Hindrances: A study conducted by KPMG Nigeria and Enterprise Development Centre (EDC), a centre of the Pan-Atlantic University, revealed that banks are reluctant to lend to MSMEs because of their weak governance, prerequisites for bank loans and cost of credit, amongst others. The study showed that 80 percent of MSMEs surveyed do not have a functional Board of Directors since many of them operate as sole proprietary firms.