By Toyin Adeniji
THE 2017 National Survey of Micro, Small and Medium Enterprise, MSMEs, report put the number of MSMEs in Nigeria at 41.5 million. The MSME sector employs over 59 million skilled and unskilled labour while contributing over 54 percent to Nigeria’s Gross Domestic Product, GDP. MSMEs play a pivotal role in the diversification of the economy, inclusive growth, and making a dent in the high rate of unemployment. Yet, numerous MSMEs have been unable to remain afloat, and have shut down as a result. The situation is often so dire that oftentimes, the life cycles of these micro and small enterprises end up being far shorter than their potential. Given this information, it only stands to reason that if MSMEs are already contributing significantly to GDP even without adequate access to finance, then there must be a high potential for growth if this problem is surmounted.
We’ve seen the impact of this access with the recipients of our Tradermoni beneficiaries. Take Helen for example – she has a store in Ketu Market where she sells beverages. Over time, she found that her profits were reducing because her customers were going elsewhere to get drinks that she didn’t have, until some of them stopped patronising her altogether. Struggling to keep up, she applied for a series of loans on the Tradermoni programme, and invested the money in her business. She used the money to expand her product range, and began to grow her business and her customer base.
Another beneficiary, Samuel, sells recharge cards at a bus-stop in Ikorodu. He ran out of money to continue to buy recharge cards to sell. He received two loans on the Tradermoni programme, and for him, it was especially a relief because: “I tried to get a loan from a bank, but they needed me to bring guarantors and I really struggled; but with this loan, the interest was so small, it didn’t eat up my business, and it’s so easy to pay back.” He invested the money in his business, and also had a surplus to use to stay afloat while he worked to revive his business.
The World Bank highlighted a lack of access to credit facilities as one of the most critical reasons that businesses like Samuel’s and Helen’s struggle. Access to credit is one of the metrics used for placement of countries on the ease of doing business index. Access to critical financial services – and their necessity for the growth of industry – could prove to be a contributing factor towards creating solid platforms or enablers for international investors and, generally, easing the Nigerian business environment. However, amidst significant strides in Nigeria’s placement in ease of doing business, there remains quite a distance between our current reality and our goals in the area of credit.
Commercial banks are profit-making institutions and are primarily interested in short-term lending and high returns. This is in sharp contrast to investments in MSMEs which typically require long term lending, and a more decentralised infrastructure to achieve any meaningful scale. Also, given the lack of sophistication associated with small and micro firms; they are often characterised by poor bookkeeping practices, limited financial skills and lack of collateral facility – all three factors which strongly influence the lending decisions of banks. Furthermore, Nigerian banks have limited information on MSMEs, and they do not have an incentive to invest in this knowledge when compared to their lower-hanging alternatives of large enterprises. They do not have proof that the small-to-medium creditor is trustworthy, and no asset to fall back on. They do not know if the person is likely to repay the money. Put simply, they are unable to assess creditworthiness at high speed and low cost.
Consequently, the bank either refuses to lend, or imposes a risk premium, an interest rate high enough to account for the risk the bank feels it is absorbing with these borrowers. But most Nigerians cannot afford the interest rates prescribed by the banks. For example, a 29.5 per cent interest rate on a five-year loan worth N10 million would mean that the borrower repays N24.75 million in total. Small business owners could find themselves sliding into a debt overhang as a result.
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This deficit – the inability to cater effectively to the credit needs of MSMEs – is inextricably linked to the difficulty of the country’s financial institutions to profile and score the citizens based on credit history. Nigerian banks have no reliable way of finding or verifying useful information like previous debts taken, transaction histories, consumption patterns, and criminal or delinquency records on prospective borrowers. When banks do not have such information on their customers, they cannot differentiate between safe and risky borrowers. The Secured Transaction in Moving Assets Act, 2017 (STMA Act) that guarantees registration of movable assets is a positive step. However, building a unified identity scheme linked with credit histories of individuals and their businesses is essential to strengthening the credit systems for small businesses. It follows that when banks know their customers, they can put them in different categories and charge them accordingly. The quality of this knowledge is dependent on the depth of data sought out, captured and analysed.
Nigeria cannot make the much-needed advancements in credit without addressing the problem where an individual can take out a loan and vanish because the state does not have a unified identity system that could also serve for consequence management. A functioning ID system can mitigate this problem by facilitating the creation of credit histories: people with a history of paying back their loans will have access to lower interest rates – a more efficient case of separating equilibrium. South Africa, whose identity management system is far more cohesive, also has one of the most developed credit markets in Sub-Saharan Africa.
While identity and credit histories are central to the solution, we cannot examine the challenges relating to accessing credit without addressing the sociocultural factors and education deficit preventing many MSMEs from accessing loans even where these loans are available. For instance, Nigerians generally have negative associations with credit and loans. A specific example is our experience at the Bank of Industry in executing the GEEP programme, a social intervention of the Federal Government of Nigeria. On initial interaction with traders in the market, sometimes their initial reactions are ‘no we don’t want credit’ – even when there is a glaring inadequacy of their current operation to meet the demands for their goods or services.
Our culture has vilified the concept of owing money as shameful, or a liability for which one is not free. This perception is equally fuelled by the fact that ‘pay-day loans’ are often tied to exorbitant interest rates that exacerbates the poverty problem.
There is a fundamental lack of trust from MSMEs on the legitimacy or fairness of lending schemes, until they have proven themselves to be so. This was a recurrent theme that emerged from our market visits on the TraderMoni programme, a component of GEEP. MSMEs and even consumers are skeptical of credit because they are scarred by experiences or stories of predatory lending due to the very weak legal framework regulating credit facilities. This is what led to our pricing of the Federal Government scheme at zero interest – building confidence and exponential adoption of the programme and benefitting the ecosystem. There is value in credit made easy. Through access to information and improved access to credit options business owners will see that.
Advancing financial inclusion in general, for MSMEs, is integral to achieving growth in all sectors of the economy – agriculture, manufacturing and services, etc. – and will contribute significantly to overall GDP growth as well as job creation. The use of financial tools – bank accounts and mobile wallets – to better the lives of people will also enable the sector to be the catalyst for finclusivity and sustainable socio-economic transformation. Development banks like BOI are well positioned to champion these goals of expanding financial inclusion; the not-for-profit motives of such institutions ensure that they can afford to play the long game and invest in critical infrastructure to foster a democratisation of credit and the expansion of financial inclusion. Development banks are a vital tool for such economic transformation. A hallmark global example can be found in Korea, where development banks provided targeted support to the economy and transformed the country from being a net exporter of primary products in the 1950s to a net exporter of manufacturing products by the 2000s.
All these efforts must be targeted at achieving development that is not only large-scale but diversified, inclusive and sustainable. Reducing barriers to credit in vital sectors like MSMEs should be a national priority for many reasons. It should not be out of place to have funds that target “atypical” high-growth sectors such as agriculture and technology innovation. Among other things, it is the responsibility of the government to provide an enabling environment for businesses to thrive – or for industries to emerge. Providing an avenue to access credit will go a long way to give MSMEs a boost in Nigeria’s quest for economic stability and inclusive growth.
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