Economic Update

The banking industry in Nigeria has pledged to increase lending to the country’s micro, small and medium enterprises (MSMEs) and make loans for the segment more affordable, although details of the initiative, such as how it will be funded, have yet to be finalised.

Despite accounting for – by some estimates – around 50% of GDP and providing employment for almost half the national workforce, Nigeria’s MSMEs continue to face an uphill struggle in accessing credit.

In a recent survey prepared by the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) and the German Agency for International Cooperation, more than 80% of entrepreneurs questioned cited poor access to finance as their greatest constraint and single largest obstacle to growth. The business owners surveyed, who numbered almost 10,000, listed collateral and documentation requirements set by lenders as the main hurdles to obtaining loans, followed by “cumbersome and time-consuming procedures”.

Interest rates are also a heavy burden for many. The monetary policy committee of the Central Bank of Nigeria (CBN) chose to leave its benchmark lending rate unchanged at 12% in mid-March, while commercial banks kept their own loan rates much higher at an average of around 19%, lower than in neighbouring countries such as Ghana – where it averages well above 20% — but nonetheless out of the reach of many small borrowers.

In a statement issued in March, Fitch forecast the volume of bank loans in Nigeria to expand by 18-20% in 2013, although the ratings agency said most of the increased lending would be directed towards state-backed projects, led by ventures based in the power sector, rather than smaller-scale private enterprises. In early April, fellow ratings agency Standard & Poor’s (S&P) predicted even stronger loans growth, saying it expected the figure to rise by between 20% and 30%. Despite the promising forecast, S&P analyst Matthew Pirnie added that financing would be confined primarily to “a narrow group of corporates”.

Change could now be on the horizon, however, following an announcement on April 9 from the CBN’s Bankers Committee that it was looking at introducing low-cost loans specifically for MSMEs. The move is aimed at making it easier for small-scale businesses to obtain credit by easing existing restrictions.

Alex Otti, managing director of Diamond Bank, told reporters after the committee’s meeting in Abuja, “Further discussions are ongoing to see how we can collectively make lending cheaper or lower in the industry so that we can encourage the micro, medium and small-scale industries to thrive and generate employment, reduce inflation, reduce social tension and increase productivity generally in the country.”

While the committee, which comprises the heads of the country’s main lenders, has pledged to lower interest rates on loans for MSMEs and make credit more widely available, Otti said the details of the policies were not yet finalised.

The question of how the low-cost loans are to be funded will be a key issue, with observers asking whether banks could look to the government or the CBN to provide cheap money in an agreed programme of MSME lending, rather than committing their own funds to the scheme. It is also unclear whether all of Nigeria’s banks intend to sign up for a proposed low-cost loan project.

Reginald Ihejiahi, managing director of Fidelity Bank, feels the time is ripe for expanding the loan portfolio to include the “important” smaller-business segment.

“The electricity situation will improve with the ongoing reforms of the power sector. Access and price of credit is falling somewhat,” he told OBG in mid-April. “The macroeconomic environment is benign, with favourable foreign exchange and interest rates. We are also seeing an increasing trend towards outsourcing among large corporations in Nigeria, which opens the door for many SME service providers.”

Ihejiahi believes banks could do even more to assist MSMEs, especially those in the agriculture sector, by helping them to develop sound business models. “Dedicated teams should bring advisory services to SME customers at a given bank, engaging in rational discussions on business conduct, market dynamics, growth prospects and realistic capital requirements,” he said.

By boosting support services to small-scale clients while also providing access to low-costs loans, Nigeria’s banks will be able to expand their lending portfolios. However, they may, in turn, look for some measure of backing from the state, either in the form of guarantees for a cut-price lending scheme, or direct access to cheaper funds.