For any business to survive and grow it must be able to access finance hence many businesses continue to struggle. In this piece, BENJAMIN UMUTEME takes a look at the thorny issue of access to funds.
The Small and Medium Enterprises Agency of Nigeria (SMEDAN) estimates that Nigeria has over 39.65 million MSMEs as of 2020. However, for many Nigerian business owners accessing finance is like the proverbial camel passing through the eye of a needle.
For the Credit Bureau Association of Nigeria (CBAN) only four per cent out of the 40 million MSMEs in the country have access to credit. According to the body, this is despite efforts by the Central Bank of Nigeria (CBN), credit bureaus, and financial institutions to make loans accessible to MSMEs.
It’s no secret that starting a business is hard, with 50 per cent of companies failing in their first five years. Not to mention, there’s a significant challenge for minority, women, and veteran-owned businesses, with fewer collateral options to secure loans, stringent underwriting criteria, and fewer banking relationships.
For the Managing Director of SD&D Management Limited, Gabriel Idakolo, the problem of access to finance stems from eligibility criteria as well as collateral to be pledged for a facility which most business find difficult to perfect to access loan facilities.
Idakolo told Blueprint Weekend that, “Most commercial banks and reluctant to avail facilities to start ups without proven track records which is another challenge for SMEs and banks are also always looking at big businesses and corporate customers that they are comfortable with their transaction dynamics.
“The intervention of the federal government aimed at improving access to finance will go a long way because it is coming at single digit interest rate and collateral concerns will be addressed based on laid down guidelines to ease access to the proposed facilities.”
Similarly, Associate Professor of Management and Finance at Baze University, Dele Olaolu, said, “For businesses that cannot access finance despite the several government intervention funds provided at single -digit interest rates, especially SMEs, it has been discovered over time that most of these small businesses does not meet the credit acceptance criteria set by the regulators to benefit from these funds.
“Some of these small businesses especially the start -ups don’t have formal structures in place as their management team are still dominated by the owners family members including their wives and children and this does not give room for corporate governance practices.
“Finally, the absence of required collateral, poor character of the promoters of these businesses, lack of capacity and ability to repay the loan, mostly arising from their weak cash flow projections, and poor credibility of the directors of these companies and lack of proper understanding of the business itself all contributed to their inability to access these government intervention funds.
“It’s very important to ensure all the above to prevent bad debts even before the loan is approved. This is because the lending bank assumes the credit risk of the loan granted once it’s disbursed in line with CBN regulatory dictates, while only the business risk is left for the customer to bear.
“In practice, only very few customers meet these checklists, hence the bank may not grant those requests to avoid risking its banking license,” he added.
Unfavorable business environment
On his part, a Political Economist, Adefolarin Olamilekan, told this reporter that poor access to finance is partly caused by unfavorable business environment that successive governments failed to address and high interest rate.
“For instance, the rate at which CBN pegs interest rates as monetary instruments to fight inflation technically is discouraging to businesses and others. And the import of this apex bank fiat police action is what Deposits Money Bank (DMBs) and other financial institutions literally transmit into the rate attached to credit and loan facilities to be accessed by businesses,” he said.
In a nationwide broadcast on August 1, President Bola Tinubu said his administration would energise the Micro, Small and Medium Enterprises (MSME) with N125 billion as part of measures to cushion the impacts of petrol subsidy removal. He said his government would spend N50 billion on Conditional Grant to 1 million nano businesses between now August 2023, and March 2024.
“Our target is to give N50,000 each to 1,300 nano business owners in each of the 774 local governments across the country,” he added.
The president said this programme would further drive financial inclusion by onboarding beneficiaries into the formal banking system.
“In like manner, we will fund 100,000 MSMEs and start-ups with N75 billion. Under this scheme, each enterprise promoter will be able to get between N500,000 to N1 million at 9 percent interest per annum and a repayment period of 36 months,” he added.
Tinubu N75 billion would be spent between July 2023 and March 2024 to strengthen the manufacturing sector and increase its capacity to expand and create good paying jobs.
“Our objective is to fund 75 enterprises with great potential to kick-start a sustainable economic growth, accelerate structural transformation and improve productivity.
“Each of the 75 manufacturing enterprises will be able to access N1 billion credit at 9 percent per annum with maximum of 60 months repayment for long-term loans and 12 months for working capital,” he said.
a Political Economist, Adefolarin Olamilekan
Good as the president’s pronouncement may sound, Olamilekan noted that policy inconsistency is a big challenge as it has over the years become a drawback to businesses’ abilities to access credit facilities.
According to the political economist, most times businesses discover that the government’s pronouncement does not reflect the realities on ground.
“Instructively, the lack of policy continuity and reversal by government also hamper businesses which on the long run deny them access to finance through credit facilities.
“A case in point is the government’s pronouncement of providing soft loans at 0 to 1 per cent digit interest that has never been practical. A recent pronouncement is by the National Economic Council (NEC) to give out 1 per cent digit loan to MSMEs as palliative measures.
“Similarly, this brings to the fore why we need to interrogate the various government established development finance institutions and their packages for credits facilities and conditions attached. And maybe, that is why so many businesses do not show interest in approaching them for credit,” he said.
Finance not a challenge?
In a chat with Blueprint Weekend, Prof. Olaolu insisted that access to finance had never been a challenge to businesses that operate in the country.
He said rather, the question should be why businesses still fail despite the availability of finance provided through various government intervention funds?
“In my view, access to finance at, affordable rates for that matter, is never a challenge but management of those loans and the businesses financed as a whole. And this has created a very huge business and financial risks for both the affected companies and the lending banks.”
Speaking further he said, “It’s a very wrong perception to assume that government intervention funds are “national cake” and so they don’t need to be paid back by customers.
“This is mostly the attitude of many customers that have benefitted from this intervention funds and it’s so unfortunate. Ask the CBN how many of the single-digit intervention loans disbursed to customers are performing today?
“The Commercial Agric Credit Scheme (CACS), the 100-for-100 credit to manufacturers at 5 perc cent p.a interest rate, the unsecured intervention loans for SMEs, the Pharmaloan for the health sector among others, have all gone south and are currently non-performing.
“Most of these credit facilities and other obligations extended by the Development Bank of Nigeria (DBN), Nexim, and Afreximbank, today are running as commercial loans in the various DMBs that granted them having failed all the terms and conditions of the intervention.
“Consequently, they have all been restructured as direct borrowing from DMBs with the necessary provisions made for them.”
What government should do
Idakolo urged the government to ensure proper procedures are in place to recover the facilities that are given to businesses.
President Tinubu recently directed the DSS to recover the monies given to farmers in the CBN’s Anchor Borrowers Programme (ABP).
“I would like to advise the government to put proper procedures in place so that beneficiaries of these facilities will pay back as at when due so that others can benefit. “Qualified businesses should also take advantage of this policy to enhance their business capacity and grow the economy,” he said.
Similarly, the Managing Director, Chairman Credit Bureau Association of Nigeria, Dr. Tunde Popoola, advised MSMEs to go digital with their financial records, saying that there were various funding opportunities and intervention funds by the government, fintech companies and commercial banks.
Adefolarin, who is also a development researcher, opined that there must address the ease of doing business as this alone, continues to act as an impediment to business growth.
“Similar, the Tinubu’s government must priorities the efficiency in all of the public development finance institutions, through easy; afford accessible credit facilities and conditions for businesses, removing all forms of official bottleneck and nepotism within these institutions.
“More so, the government must show sincerity of purpose in ensuring there is continuity in policy implementation as this would go a long way to boost confidence in business owners and other investors,” he said.
Government needs to provide a favourable business climate for businesses to thrive as availability of funds or credits alone is not sufficient.