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CBN moves to strengthen SME growth, enhance access to financial services

By on August 22, 2013

In Nigeria, one of the greatest obstacles that Micro, Small and Medium Enterprises (MSMEs) have to grapple with is access to funds. This is further compounded by the fact that even where credit facilities are available, they may not be able to muster the required collateral to access such.

This situation has led invariably to many of them closing shop, resulting in the loss of thousands of unskilled, semi and skilled jobs across the country.

This was why in 2005/2006, the National Micro Finance Policy launched by the then President Olusegun Obasanjo, with the Central Bank of Nigeria (CBN) as its implementing agency.

It marked the beginning of the guidelines for setting up Micro Finance Banks (MFBs the regulation of MFBs and so on.

Part of the component of that policy was the establishment of a fund to strengthen the link between entrepreneurship and access to financial services for MSMEs in the country.

This came to fruition last Thursday in Abuja, when a N220 billion fund was formally launched at the seventh annual MSMEs finance conference and D-8 workshop on micro-finance for SMEs by Governor of the Central Bank of Nigeria (CBN) Sanusi Lamido Sanusi.

The objectives of the new fund Sanusi revealed is to enhance the ability of the micro finance institutions to shape themselves into low interest, long term funding organisations that would provide financing window that would improve the capacity of the PFI to meet the credit need of the micro small and medium enterprise.

The ultimate responsibility for the successful intermediation of the financial sector, Sanusi said, lies in the financial market to integrate the  micro entrepreneurs, with low income earners, farmers, artisans into the financial system to improve the effectiveness of the polity.

The conference, the CBN governor noted, is focused on financing of the SMEs because they are generally acknowledged to contribute meaningfully to growth, income and employment generation and innovation.

 

Enhancing contribution

He disclosed that “in 2012 Nigeria had about 8million MSME employing about 42.4million people and contributing about 46.5 per cent of nominal GDP.”

A recent survey, he continued, projects that 80 per cent of Nigerian MSMEs are excluded from the financial market, while their condition and capacity to add more value to the nation’s economy, underscores the importance of the conference.

Sanusi lamented that “in 2012 commercial bank loans to SMEs dropped at an exponential rate. Analysis of the annual trend in the share of commercial bank credit to small scale industries indicates a decline of about 7.5 per cent in 2003 to less than 1 per cent in 2006 and a further decline in 2012 to 0.14 per cent.”

The CBN reiterated that a number of reasons have been identified for the poor funding of MSMEs by commercial banks. These include the lack of managerial capacity, inadequate collateral and poor record keeping among others.

He said there also exists issues such as high transaction costs and lack of understanding by the banks of the nature and operation of MSMEs as well as other constraints leaving MSMEs vulnerable.

Sanusi then called on policy makers in all tiers of government to formulate and implement policies “to strengthen the MSME sub sector.

The CBN he said has been working towards improved access to finance for the sub-sector vis-a-vis micro-finance policies, regulatory and supervisory framework, the fortification programme of micro finance banks, designated financial businesses  and professionals, consistent framework. Others include the payment system transformation, development of unmovable collateral registry, the financial ombudsman board currently with the National Assembly and the encouragement of lending.

Sanusi also announced an interest rebate component for women in the fund so women businesses who borrow from MFBs are able to access these funds for interest rate subsidy to ensure they do not pay above nine per cent interest on their loans.

 

Wholesale funds

According to him, “the CBN will not be lending directly to farmers or businesses. What this fund does is a wholesale funding to the participating financial institutions. If you are a Micro Finance Bank in Benin (City), you can come to this fund. We assess you, we give you the money at low rate of interest long-term, and then you undertake that you will (equally) lend at low rate of interest. Today commercial banks charge 21 per cent and MFBs charge 30 to 40 per cent interest rate. We are not going to get anywhere near there.

“These are small businesses that are highly profitable, highly risky and MFBs tend to charge higher and the greatest challenge is not really the interest rate, but the tenor. If you give someone money for two three months, how much can he really do in such a short time. The way we plan it is that you start with a small amount, relatively low rates of interest and relatively longer tenor. When the MFB repays and establishes a track record, it is entitled to move to another level where it can get a large amount, lower rate of interest and a longer tenor.

“It is a merit based incentive based system where the Micro Finance Bank will earn the right by performing to get even better credit terms from the fund. In China they have what they call the bronze card, then he silver card and the gold card and each card gives access to a larger amount, lower rates of interest and longer tenors,” he stressed.

The apex bank boss said that with the structure of the Nigerian banking industry, there is a big gap in terms of institutions that serve different segments of the economy as Deposit Money Banks (DMBs) after consolidation became very big banks focusing on large multinationals and investing in government bonds and treasury bills and Open Market Operations (OMO) bills.

This he said, left the small scale enterprises basically without banks, adding that the MFBs can fill potentially that gap along with the regional banks.

“But they have constraints. If you deal with the micro finance banks, you will probably find that the interest rates are too high, tenors are very short. And the reason is that apart from the capital that the owners put in, the source of finance is very short term high-interest interbank borrowing.

“What this fund hopes to achieve is to provide wholesale finance to these MFBs. They will be able to access long term, low interest money from this fund and they are therefore able to lend long term, low interest. Now we will start with smaller amounts as they lend to their customers and repay and build a track record of performance, they can then access a larger and larger amount at lower rates of interest and at longer terms.”

Continuing, he said, this is the kind of model that worked with Peoples Bank of China and it worked extremely effectively, adding that this is how the CBN plans to run this.

 

Transforming lives

In his remarks, President of the Association of Micro Finance Banks of Nigeria, Jethro Akun, said the fund is aimed at transforming the lives of the rural people financially, just as it is the beginning of unlocking the untapped potentials and opportunities that govern the operations of key players in the micro finance industry.

Speaking on behalf of state governors, the Ekiti State Governor, Dr. Kayode Fayemi expressed happiness that the conference is focusing on the “rural poor.”

He said “the population of the unbanked in our country is wobbling around 70 per cent of our entire population which is pretty much all of us apart from some of us who are in the urban areas, and you know there are regional disparity to that but the critical point remains that majority of our people are unbanked in financial transactions and these clearly enhances poverty.”

He expressed delight that the CBN has initiated the quick release of N220 billion into the sector through the various micro finance institutions.

What is most commendable about this current initiative he said “is the focus on women, the fact that 60 per cent of these fund will go to women, doesn’t just make political sense, it makes more economic sense.”

 

Enviable track record

The Ekiti governor said women have a track record of micro credit initiative of 100 per cent pay back.

This history of successful repayment process by women, he said, “justifies the focus that the central bank has put on women on this particular initiative.”

For Nigeria to talk of poverty eradication in the fundamental and not in the corporative sense, , Fayemi believes focus must be “on women, because women are our greatest guarantee in rebuilding our society and eradicating poverty in our various communities, so for extending this to particularly our women that means the central bank is primarily interested in tackling poverty holistically.”

He further commended the CBN for the fact that women “will be able to access it through various micro finance institutions at very low interest rate.”

 

Mobile banking

The governors urged the CBN to further promote mobile banking to the unbanked or underbanked particularly in rural areas as this would reduce significantly the number of the unbanked population of our people collectively.

Agreeing, Dr. Sarah Alade, deputy governor, Economic Policy, at the CBN, said the conference is very important for financial inclusion, and that within the two-day period, stakeholders considered various issues and concluded that one of the problems that businesses have is access to finance.

“The participants also say they would like to see things like collateral, the relaxation from banks and you know that the cost of finance is also important to micro finance institutions. Other things like we need to also share the experience, leverage on other countries that have done so very well ,Indonesia was mentioned as one of the examples because they shared their experience with us.

“Looking at known micro finance institutions as well, the things we have learnt. And we are hoping that when we come back, taking these problems one at a time, we should be able to solve these problems. Issue of regulation was also discussed and a lot of the issues that were discussed, even at workshops, (the) central bank is looking at it in terms of financing and some of these things go beyond CBN.”

 

Strict monitoring

Alade admitted that the CBN needs to collaborate with other stakeholders and leverage on what the law allows them to do in terms of regulation, affirming that it would do whatever is within the bank’s purview and ensure better and tighter regulation.

On monitoring to ensure that the fund gets to intended beneficiaries, she said, “We have done a lot of guidelines and there is a guideline that surrounds that N220 billion, and I can assure you that we are going to monitor it. We have done interventions in the past in agriculture that domestic money banks are doing and we a on top of the issues. Once these things starts being disbursed, we will monitor them seriously to make sure that they give tote right people and that the money also comes back”.

On his own part Paul Eluhaiwe, Director Development Finance at the CBN, added that before December, the apex bank would have worked out all the issues to make it work for the country, because it is worthwhile to move the nation forward.

“The various components of the fund include grants which the Micro-finance banks need so much, the credit component, the guarantee component and the refinancing component for the sector to work. We believe that building capacity, providing resources, things will work I that sector in addition to the regulatory framework we have on ground and support and  what other financial institutions department do in  terms supervising the institutions, that is one.

“We would also look at rating, you know Rural Finance Institution Building Programme (RUFIN) is an organisation of IFAD in collaboration with CBN and have been providing rating for Micro-finance banks. In short about 32 of the Micro-finance banks in this country have been rated through them. You will recall that of the issues they talked about was rating. We will look at a situation where institutions that are rated in Nigeria would have increased substantially. That’s very important to us. Another issue is the issue of collateral for entrepreneurs to access Micro-finance services particularly loans”.

 

Moveable collaterals

He touched on the thorny issue of collateral, which most banks use as excuse to deny SMEs credit facilities, particularly fixed collaterals in this country, assuring that CBN is working with the International Financial Council (IFC) on that.

“I have secured approval of management of CBN, and we will ensure that collateral registry are movable collateral and we would be able to use it beginning from next year in this country. If this s done, operators will be able to operate because there would be funds and capacities would be built to create sustainability in the sector. The entrepreneurs themselves who are supposed to benefit, with movable collateral they will have access to more financial services” he added.

 

Funds guideline

In a circular, the CBN said the fund will be managed by a Special Purpose Vehicle (SPV) or managing agent.

But before this takes off, the CBN will manage the fund.

It said a large number of un-served and under-served clients exist in the Nigerian MSME sub-sector. It said to address the funding requirements of this critical segment of the economy, 80:20 ratio for on-lending to micro enterprises and Small and Medium Enterprises (SMEs) respectively has been designed.

The CBN said women’s access to financial services should increase by 15 per cent annually in order to eliminate gender disparity. It also said to achieve this, 60 per cent, N132 billion, of the fund has been earmarked for providing financial services to women.

The regulator said in operating the fund, special consideration will be given to institutions that will provide financial services to graduates of the Central Bank of Nigeria’s Entrepreneurship Development Centres (EDCs).

Also, 10 per cent of the fund will be earmarked for social and developmental objectives as grants, N11 billion;  Interest Drawback Program, N6.60 billion; Managing Agent’s (MA) Operational Expenses N4.4 billion. However, MA is expected to generate income from its operational activities to fund its future expenses on a sustainable basis.

The CBN explained that  N6.6 billion earmarked for Interest Drawback will be used to settle the rebates to financial institution’s customers under the fund who repay their loans as and when due while the N11.0 billion for grants will fund programmes that are aimed at developing the MSME sub-sector.

However, 90 per cent of the fund, amounting to N198 billion, will be utilised for the provision of direct on-lending facilities to participating financial institutions.

It said participating financial institutions can only finance agricultural value chain activities; trade and general commerce; cottage industries; artisans, among others.

The banking watchdog said to ensure that productive sectors of the economy continue to attract more financing necessary for employment creation and diversification of the country’s economic base, a maximum of 10 per cent of the commercial component of the fund will be channelled to trading and commerce.

 

 

[Daily Independent]