Uneven playing field: Small players find it hard to access cheap funds

Governments and big companies have taken the opportunity to borrow in the bond markets, locking in cheap financing for years to come, but the smaller ones find it difficult to access funds both in the banking sector and bond markets. JOHNSON OKANLAWON and OLAONIPEKUN AWEDA report.

Despite all that is being said to the contrary, hopes for a single-digit lending rate appear lost for now in the country, as the tight monetary policy continues to put pressure on banks.

Banks recently adjusted interbank lending rates upwards following the increase in banks Cash Reserve Requirements to 50 per cent for public sector deposits by the Central Bank of Nigeria in continuation of its monetary tightening stance.

This already compounds a situation, where businesses especially small firms, find it difficult to get funds at favourable rates, due in part to external factors including infrastructure deficit and poor security among others.

The Head of Investment Research, Cowry Asset Management Limited, Mr. Edgar Ebinum, said that the development will curtail banks’ lending power and consequently push interest rates northward. “This, if sustained will definitely hamper banks’ earnings, particularly from interest and trading income.

The increase in interest rate will exert upward pressure on inflation as manufacturers incur higher cost of fund,” he said. Investigation showed that banks tend to shy away from lending to smaller companies, restricting loans to highly rated companies with lending rate between 16 to 25 per cent.

Chairman of Vitafoam Nigeria Plc, Dr. Bamidele Makanjuola said that in the past three years, about N1.2bn was paid out by his company as interest on loans and overdrafts to banks as against N742m paid as dividends to shareholders.

The company that manufactures flexible and rigid foam products said the funding profile is exerting enormous pressure on the company’s working capital and profits. Indeed, most Nigerian banks have built armchair banking models around lending to big businesses which major in oil deals, importation of goods and government bodies.

To the Managing Director, Emattol Agro Services Nigeria Limited, Mr. Olorode Oluwasegun, who runs poultry farm, the process of getting loans is somehow cumbersome.

He said, “If you are asking for N10m, you may be asked to present N5m in terms of assets. How would they expect such from a small scale entrepreneur looking for a loan to operate? The agric loan of one digit interest policy of the Federal Government is not followed nor adhered to by banks, even up till today. “When dealing with a bank, at least, they will know my company worth and staff strength. They can also monitor the goods and can even store these goods in their warehouses to assure them that we will not run away with their money. But now, it is so difficult to access loans.”

Data from the Central Bank of Nigeria website showed that in 2012, Nigeria had about 17.6 million medium scale enterprises employing about 32.4 million people, and contributing about 46.54 per cent of nominal Gross Domestic Product. A recent survey by the International Finance Corporation and Mckinsey (2010) suggested that 80 per cent of the enterprises are excluded from the financial markets. Between 2003 and 2012, commercial bank loans to small scale enterprises dropped at an exponential rate. Analysis of the annual trend in the share of commercial bank credit to small-scale industries indicates a decline from about 7.5 per cent in 2003 to less than one per cent in 2006 and a further decline in 2012 to 0.14 per cent.

A number of reasons have been proffered for this financing gap. National Mirror learnt that banks readily attribute their risk aversion stance for not lending to medium and small enterprises to demand-side constraints, which include the lack of managerial capacity, inadequate collateral, and poor record keeping, amongst others.

However, there also exist supply-side issues such as high transaction costs and lack of understanding by the banks of the nature and operations of the enterprises. Other constraints plaguing the sector in the country include infrastructure deficit (especially, power and transport), policy inconsistencies, bureaucracy, multiple taxation and levies, weak intellectual property protection and contract enforcement and insecurity.

To the Director of Development Finance Department for Central Bank of Nigeria, Mr. Paul Eluhaiwe, the combination of the private and public small and medium enterprises financing efforts have not yielded the desired impact. He attributed under development of small enterprises in the country to high interest rate and high cost of doing business.

The National President of National Association of Small and Medium Enterprises, NASME, Alhaji Garba Ibrahim, pointed out that small firms’ value added per worker fell below $3,000 in contrast to large firms at $7,600, while domestic firms stood at $2000 against foreign firms, which is above $12,500.

According to him, the overall inefficiency in the business environment imposes a huge indirect cost on manufacturing in Nigeria at over 10 per cent of sales, which is twice as high for firms in the country as they are for firms in South Africa, Brazil, Russia and Indonesia. He said that the contribution to the Gross Domestic Product of services sectors is encouraging but are they signs of real emerging sectors with a capacity of creating jobs. Garba noted that the official unemployment rate has steadily risen from 12 per cent in 2006 to 21 per cent in 2010, saying that the National Bureau of Statistics definition of unemployment as less than 39 hours worked in the past week, is unusual and is therefore not comparable to other countries.

The Managing Director of Nigerian Export-Import Bank (NEXIM), Mr. Roberts Orya, described the challenges to higher risk associated with small enterprises which operate in a more competitive environment and their lower capacity to withstand adverse developments in the economy.

He implored small traders and large export merchants to partake in the newly introduced ECOWAS Trade Support Facilitate (ETSF), which is designed to deepen Nigeria’s trade and help small exporters expand their businesses as well as taking them to the formal sector.

Reacting to the high interest rates of banks, the Coordinating Minister for the Economy and Minister of Finance, Dr. Okon Ngozi Okonjo-Iweala, said, “The first thing I have to say is that we have a central bank that is autonomous and it is the best practice to make these decisions. We may not be happy about it and I am bold to say we are not happy about high interest rates! “As I said before, it is tough for our entrepreneurs to function.

Even before the withdrawal of this liquidity, they were already charging over 20 per cent interest rates and I think that is alarming. … we need to interrogate why. Structurally, what is the issue? And we are not willing to ask our banks that question. So, as the minister of finance, I have been very concerned about that. Even if the Monetary Policy Rate is 12 per cent, inflation is coming and there is no reason for the rise.

It is too high. She noted that real interest rates in the country is so high, deposit rates are extremely low, as people are earning as low as five per cent and three per cent. “But they are giving certain segments high deposit rates. But the fact that we are leaving the banks as we are running a free market system does not mean that you have to have this kind of behaviour. “Private sector credit has gone down.

I plan to have a meeting with the banking sector operators to really understand what is going on. That is why we are really going to set up the development bank. I am not trying to bash them (banks), but I am puzzled as to why. I think there is a structural problem within the banks and our banking system and their pricing,” she added.

The Central Bank Governor, Mallam Sanusi Lamido told private sector operators last week that the CBN has been working assiduously towards developing a robust regulatory and supervisory framework and initiatives for improved access to finance for the sub-sector.

“Some of these are the revised microfinance policy, regulatory and supervisory framework, certification programme for micro finance banks, designated nonfinancial businesses and professionals, competency framework, payment system transformation, development of a moveable collateral registry, the financial ombudsman bill currently before the National Assembly.

“To further de-risk and encourage lending to the small enterprises sub-sector, the CBN has also intervened with a number of initiatives such as the power and airlines intervention fund to help address the constraints of electricity, small and medium enterprises credit guarantee scheme and financial inclusion strategy,” he said.

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