As the Head, Emerging Business, Diamond Bank, Njideka Esomeju oversees products and services focussed on small and medium enterprises (SMEs). In this interview, she x-rays the issues about SME financing including efforts of Diamond Bank in this regard.
By Babajide Komolafe
DIAMOND Bank is one of the banks with significant involvement with SMEs. What would you consider the greatest prospect or opportunities for financing SMEs in the country?
The opportunities in financing MSMEs in Nigeria are enormous, considering that there are over 37 million of them present in very sector. MSMEs are responsible for most of the new products and processes, provide most of the employment opportunities (they employ 84.02% of the total labour force) and their contribution to national GDP (48%) is a key indicator of the economic growth of that country. So financing this group of people translates to contribution to national development.
And what would you consider as the biggest challenge for banks in terms of financing SMEs in the country?
The informal nature of most SMEs makes it difficult to finance MSMEs.
Credit worthiness of the SME
They lack requisite information such as proper accounting records, financial statements, bankable business plans, lack of security and operating in disconnected value chains makes it difficult for banks to assess the credit worthiness of the SME. Requiring specialised skills/tools to take their often unstructured information, convert same into usable quasi-structured financial information for use in credit assessment.
In addition to these are insufficient assets and low capitalization, vulnerability to market fluctuations, lack of capacity and high mortality rates alongside poor or no succession structures are other reasons why lending to this sector is challenging.
In your view do you believe SMEs recognise and addressing this challenge?
Trends show that quite a number of SMEs are becoming aware of these challenges and are positioning their businesses to be bankable. There are a lot of capacity building initiatives/events and programmes hand holding and teaching SMEs to align their business to be more appealing to banks and other investors. We provide a lots services in this regard.How is your bank helping SMEs to address these challenges?
We at Diamond bank have a dedicated resource specifically for MSMEs – The Emerging Businesses division. They are responsible for developing products and services that specifically address not only the financial needs of SMEs but also the non-financial aspect as there is a very strong correlation between the two.
Despite increased attention and support for SMEs by banks, CBN, most SMEs out there still have this perception that the banking industry is not favourably disposed to SMEs. What can be done to correct this impression?
The first is expectation gap/ information asymmetry. There is an expectation in the market that all banks must finance MSMEs.
Banks are business with profit expectations from shareholders, thus will finance business that will satisfy that objective. If this objective is not met, banks will not lend.
If they are forced to lend (say by law or the regulator), they will do so reluctantly. Therefore more needs to be done by all industry stakeholders (players and regulators) to eliminate or reduce this information gap.
The second factor is MSME strategy adopted by banks. For some banks actively financing MSMEs, the strategy employed contributes to the misconception mismatched expectations. There are three distinct strategies in play on MSME financing in Nigeria.
First group of banks have no clear MSME strategy and rely solely on government or regulator led MSME programs like the CBN MSMEDF.
The only financing to MSMEs are those directed by CBN, federal or state governments, BOI etc. When these interventions end, their MSME engagement ends until the next version comes up. In this space, the MSME’s feels disengaged and abandoned.
The second group of banks focus their attention on the MSMES serving the big corporates in their books (like the distributors of major corporates that maintain accounts with these banks). The public perception of these banks is that they don’t lend to MSMEs whereas the true position is that these banks have defined the MSME market they want to serve.
The third set of banks is the ones with a retail MSME strategy. These ones lend to all MSMEs if they meet the banks’ criteria.
Because of their inclusive strategy, the public tends to believe that these banks are the only ones lending to MSMEs. Diamond bank falls in this space, because we have a well-tailored and deliberate MSME strategy that evolves with trends.
The third factor is the implementation and conditions of existing programs. Another factor that affects effective lending to MSMEs . Any regulated intervention program on MSME lending that is not all inclusive, it fuels the perception that enough is not being done. For example, the MSMEDF excludes some sectors from participating (because of the need to encourage the real sector).
However, when the sector excluded (e.g. trading) makes up more than 60 per cent of the market it is designed to assist, the operators in that sector may get the impression that enough is not been done for MSMEs