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Feasibility of Single Digit Lending to SMEs

By Udochukwu Onyeka:

Economists and Industrialists are mostly agreed that one sure way to bring the nation’s economy out of the woods is by supporting the Small and Medium Enterprises(SMEs) in the real sector-agriculture, manufacturing, building and construction and services .
However, high interest rates and lack of adequate infrastructure among other challenges have continued to hinder SMEs from playing the desired role in the nation’s economic development such as job creation.
It was, therefore, a welcome development when the Central Bank of Nigeria( CBN) and the Bankers committee while briefing newsmen on the outcome of Committee’s meeting in Lagos, announced plans to commence single digit lending rate to the agriculture sector.
CBN Director, Banking Supervision, Ahmed Abdullahi informed that the banks have agreed to set aside five per cent of the Profit After Tax to fund the agricultural sector, adding that based on the balance sheet of the banking sector for 2016 financial year, about N25 billion was already in the pool in just one year..
Abdullahi said the move was borne out of the conviction that the agricultural sector as well as the promotion of non oil exports holds the key to diversification of the economy.
He said the money would not be given to businesses in these sectors as loans but rather it would be provided by banks as an equity contribution to such companies.
This, he noted would allow the banks to have equity stake in such businesses for a maximum of ten years.
He added that rather than charging interest, the banks would be entitled to dividends during the period of their investments.
“One of the issues that we discussed is the economy. The economy is always high up in our discussion. Issues came up about lending and how lending can be done to support economic condition as we have it today with low single interest rate.
Stakeholders are eager to see the commencement of this initiative, which they say if implemented would affect the economy positively” he stated.
According to the Nigerian Chamber of Commerce, Industry, Mines and Agriculture, in the last three years, about 1000 manufacturing companies were shut down. High bank interest’ rates and inadequate financing and infrastructure were cited as some of the reasons the companies closed shop as many of those still operating are afflicted with serious challenges and many classified as ‘ailing.’
For instance, the high interest rate has left a sour taste in the mouth of many companies operating in the country.
Managing partner, Blueline consulting firm, Fred Ekwere, said some of his clients, including some companies run by expatriates have been forced to stop operations.
According to him the expatriates have all returned to India, a development he said has truncated creating of employment for the teeming youths of the country.
Ekwere said the CBN and the banker’s committee’s intervention in agriculture sector that has many SMEs is in the right direction but wondered if it would not go the way of previous interventions when operators were unable to assess it due to stringent conditions.
He said that the banks were in the habit of sabotaging financial policies which do not favour them, adding that for the funds to get to the desired operators the CBN should be strict with the banks and even sanction erring financial institutions heavily.
Experts have identified various reasons affecting the real sector and the SMEs. Director-General of Lagos Chamber Commerce and Industry, LCCI, Muda Yusuf, has said the low output of the sector is due to policy somersault, high interest rates multiple taxation, inconsistent power supply and illegal importation of goods into the country.
“These issues have lingered for so long and something has to be done to check them and rebound the industries,” Yusuf noted.
Market watchers say the single digit lending to the real sector such as SMEs, manufacturing and agriculture are key to economic growth only when it is implemented. They said what may probably make a difference from the past interventions, would be the level of implementation.
According to them some intervention schemes to aid the sector, have been put in place in the past to revive and support SMEs but much was not achieved, as many could not access the funds, due to stringent rules by the banks that are meant to disburse these funds.
Irked by the situation in which government’s interventions have had little impact on the economy, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture,NACCIMA, conducted a survey and found that less than six per cent of industrialists accessed the funds.
Some of the intervention funds include the N200 billion Small and Medium Guarantee Scheme, N200 billion Restructuring and Refinancing Facility Scheme, N10.71billion Commercial Agriculture Credit Guarantee Scheme to six banks by the Central Bank of Nigeria. Also on the long list of intervention funds, are N100 billion textile industry bailouts, N330 million grants to assist 20,000 farmers in Lagos state.
According to a senior management staff of one of the banks who plead anonymity, those who apply for these funds and fulfil the requirements have always received them. He said the problem was that people think government or CBN interventions should come free.” When you want them to follow the right process many of them think the stress is too much. People should realise that when you are given a loan it must be paid back”, he said.
In fact the CBN and the Federal Government have always established one form of intervention or the order, but what has been the challenge according to Analysts is implementation. There are allegations that some interventions in the past were hijacked from the targeted beneficiaries.
For instance in November, 2012, the Federal Government, in collaboration with the Central Bank of Nigeria, disbursed a soft loan worth N9.4million to members of the Nigeria Cassava Growers Association, Nasarawa State chapter.
As at July 2011, the Bank of Industry had reportedly disbursed N195 billion out of the N200 billion meant for the refinancing of the manufacturing sector to 518 companies across the six geo-political zones. The CBN, through its Nigerian Incentive-Based Risk Sharing System for Agricultural Lending, had approved a take-off grant of N75 billion to boost agriculture businesses.
According to NACCIMA, the intervention funds were faced with the problem of accessibility.
For instance, despite the Federal Government’s N100bn textile bailout fund, less than 25 per cent of textile manufacturers were operating above 50 per cent capacity utilisation.
According to Director-General, West African Institute for Financial and Economic Management, WAIFEM, Professor Akpan Ekpo, it is impossible for any company operating in the country to survive with 20 per cent and above interest rate.
The professor of Economics said there was need to always adopt a developmental-state-economic philosophy to drive the entire economy to boost the real sector and other sectors of the economy.
“This type of economic system according to him would make a difference because development would be ultimate in their agenda. Using the right economic framework to implement policies is very important. Neo-liberalism has been rejected in Washington, and this economic framework contributed to why Nigeria has not recorded tangible growth in the system.
“When you liberalise your economy to the detriment of local entrepreneurs, it means you are indirectly killing local industries. Also, government must be able to check the excesses of private sector players. Government has a duty to manage the economy”, he said.
An entrepreneur Mr Joseph Dike said lending at a single digit would boost local manufacturing of goods, but said there are other challenges apart from funds confronting the MSMEs. He identified the needed infrastructure as power, road, portable water and effective mass transportation system.
Dike, in his submission, pointed out that high interest rate sometimes of over 23 per cent negatively affect operational cost of enterprises, reduced their production capacities, makes Nigerian goods uncompetitive and contributed to the ailing of local industries.
He said that apart from finance, there was a great need for mass transportation, stressing that poor infrastructure for the conveyance of cargo had stunted the growth of MSMEs and limited their opportunities.
He urged banks to practice true banking by making access to funds easy for SME operators stressing “ there is the missing middle in financing of MSMEs. These are small and medium-size businesses that should be able to access the financial services that they require to grow through their banks.
“Unfortunately this is not happening for many reasons; banks have appetite for large transactions and are averse to risks. The banks view SMEs as high risk and are unwilling to lend to them.

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