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Home Opinions Market Views

Economy: Funding MSMEs in Nigeria        

CSL Stockbrokers by CSL Stockbrokers
November 22, 2019
in Market Views, Op-Eds, Politics, Research Analysis, Small Business
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According to news reports, the Federal Executive Council (FEC) on Wednesday approved the issuance of a Sovereign Guarantee from the Credit Suisse AG London Branch and a syndicate of international lenders as collateral for a 500 million Euros (N200 billion) facility to the Bank of Industry (BOI).

The loan will be executed through the Ministry of Finance, Budget and National Planning. According to the Minister of State for Finance, the loan which is aimed at financing major industrialisation projects and micro-small and medium enterprises (MSMEs) in Nigeria, will have a tenor of up to five years at affordable interest rates.

The Bank of Industry Limited (BOI), Nigeria’s oldest development finance institution, re-emerged from the merger between Nigeria Industrial Development Bank (NIDB) and Nigerian Bank for Commerce and Industry (NBCI) in 2001 with an initial share capital of N50 billion.

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The institution’s share capital has however increased to N250 billion. According to news reports, in  2017, BOI disbursed over US$421 million (N151.6 billion) in loans to enterprises. The BOI’s core mandate is to provide financial assistance for the establishment of large, medium and small projects.

Globally, MSMEs are recognised as the critical stimulators of economic growth due to their potential to create jobs, boost production, generate income, and reduce poverty. MSMEs in Nigeria however do not have the adequate financing needed to play this pivotal role in our development trajectory.

While it is expected that banks should be at the forefront of a funding revolution for businesses, that is not the case in Nigeria as bank lending to MSMEs in Nigeria remains very low. To force banks to lend to these MSMEs, the CBN issued a directive asking banks to maintain a minimum loan to deposit ratio (LDR) of 65% and placed a 150% weighting on loans to MSMEs.

[READ MORE: Agriculture: Looking beyond the provision of finance]

One reason banks are reticent to lend to MSMEs is the lack of proper collateral. Most SMEs typically use inventories as collateral, which do not present a sufficient risk buffer for banks. Other reasons include lack of proper managerial skills, low accountability, lack of financial records, the infrastructural deficit which makes running businesses expensive, lack of access to modern technology, high transaction costs and a high failure rate, making banks doubt the long term viability of MSMEs. MSMEs, for their part, cite high-interest rates and high collateral requirements as major deterrents to sourcing bank financing.

The CBN has made several attempts in the past to boost SME lending and continues to make efforts to increase lending to MSMEs but not so much success has been achieved. In April 2010 the CBN approved an intervention fund of N500bn (US$3.0 billion) to be issued by the Bank of Industry (BOI). In addition, the CBN also established a N200 billion Small and Medium Enterprises Credit Guarantee Scheme, for promoting access to credit by SMEs in Nigeria.

Banks’ aversion to giving loans to the real sector has intensified in the period of the recession and post the recession given the heightened risks involved. In our view, a more favourable economic climate, better infrastructure and favourable policies that can aid the survival of SMEs are the major triggers to boost MSME funding in Nigeria.

________________________________________________________________________

CSL STOCKBROKERS LIMITED CSL Stockbrokers,

Member of the Nigerian Stock Exchange,

First City Plaza, 44 Marina,

PO Box 9117,

Lagos State,

NIGERIA.

 


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Tags: Bank of Industry LimitedFederal Executive CouncilFunding MSMEs in NigeriaOn the MoneySMEs
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FG misses revenue target by N351.98 billion in October

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