Where banks fear to tread

That the Nigerian economy is among the fastest growing economies in the world is not in doubt. OBODO EJIRO writes that in the midst of this growth, high interest rates and bank apathy to lending have made credit to small businesses lean

The squeaking sound of manual sewing machines and the hum of generators can be heard as you approach the place. 

Though there is no crowd outside, when you step in, you are greeted by a fully functional and tightly packed factory. Its major product offering is clothes. There are over fifty separate businesses, all under one roof, that make various types of male, female and children clothes, singlets and lingerie in this factory located in Lagos, Nigeria’s commercial capital. In terms of employment, well over three hundred adults work in the place.

For the small businesses which operate in the factory, desired scale of operation differs, most of them want to expand their businesses and establish new branches but lack of finance, high lending rates and lack of financial advisory services constrain them to the small cubicles they operate.

According to Mrs. Regina Udeh, who specializes in making children cloths, “I opened an account with a microfinance bank four years ago and constantly deposited small amounts with them, when eventually I needed their help, they turned me down.

I was to go for an exhibition in Accra, Ghana and approached the bank for an overdraft of less than fifty thousand Naira ($333)”. She ended her narrative by saying “I closed the account a few days later”. This is a common experience for Small and Medium Scale Enterprises (SMEs) in Nigeria.

Though some banks have maintained that lack of proper record keeping and viability of business models is responsible for low lending to (SMEs), most SMEs operators have said these excuses are not tenable.

In the case of the businesses in the Lagos factory, the level of patronage, quality of designs and acceptance of what they produce makes them a good bet any day. And the clothes makers in that place know the value of what they produce.

“The clothes we make here are sold at different markets alongside those imported from China” says Chief O.J. Chukwu, a chief task force officer at the factory; I went to Cotonu, Benin Republic, to sell some of my wares recently. To further clarify his point he added, “Our products go to different countries on the West African coast, in some cases; we even export to countries in Southern Africa.

You can see some students from the University of Lagos work among us; they know that there are few already-made jobs in the labour market, so they are learning to do this business while they continue with their education so that they can have something to fall back on after they graduate.

It is sad that poor lending to SMEs is pervasive across Nigeria as the case is not different in Aba, one of the manufacturing hubs of eastern Nigeria. Home to all types of footwear manufacturing businesses, textile and bead-ornament makers, Aba’s small manufacturers are starved of capital just like anywhere in the country. According to local businessmen, “most of the capital used to establish and sustain businesses in Aba is either from personal savings, loans from unregistered lenders or relatives”.

Indeed, most Nigerian banks have built arm chair banking models around lending to big businesses which major in oil deals, importation of goods and stock brokerage transactions. The banks are also addicted to lending to government at rates which sometimes exceed 11 percent. The implication of which is that when they have to give loans to SMEs interest is as high as 20-25 percent. The consequences have been very negative, according to Mr. Matthew Obeh, a big shoe manufacturer who supplies his wears to Northern Nigerian communities, “there are cases when businesses have had to be closed down because the owners had minor cash flow problems”.

But small manufacturers have the capacity to grow the economy and employ many. SMEs have done this in Europe and America. The long term benefit for banks is that when the small businesses become major players, they will be loyal to banks which stood by them in their formative years.

In other climes like Australian, South Korea, China, USA, and Switzerland, SMEs are encouraged in several ways; including through funding by banks. This has helped them grow. Recently, the OECD reported that SMEs contributed 45 percent and 79 percent employment in the manufacturing sector in Australia and Switzerland respectively. In India, SMEs account for about 40 percent of industrial output and 35 percent of export.

Germany and Britain have over 8,000 medium-sized enterprises, which employ close to 41 people each. In France, there are close to 4,000 medium-size enterprises which employ 14 employees on average. These concerns receive incentives from banks in the form of finance and advisory services which help them grow. Those services are luxuries in Nigeria.

Though, the Central Bank of Nigeria (CBN) has continued to say that the private sector and small businesses should be the focus of lending, there is little evidence that it will change the situation. The apex bank has continuously acted in a way that suggests that factors that could change the situation are not in its purview. The Bank has continuously emphasized that the prospect for lower lending rates is low since Nigeria’s baseline inflation and cost of production has remained high.

Baseline inflation has hovered between 10.5 and 12 percent for almost a decade and CBN has kept its Monetary Policy Rate (the rate at which it lends to commercial banks, which in turn determines the rate at which commercial banks lend) at between 9.25percent and 12percent for almost two years.

The CBN believes that, a drop in MPR could spike lending which will in turn increase money in circulation and thus fuel inflation; a situation which the economy is not suited to handle. The general thought is that since the Nigerian economy is constrained by electric supply problem, it is not prepared for a sporadic increase in demand occasioned by a rise in the volume of money in the economy. In essence, the production machinery cannot cope with a sporadic increase in demand.
 

The CBN has consistently maintained that if the price level drops (that is when electricity becomes stable and manufacturers can produce at cheaper rates), then inflation and lending rates would also drop. This promise has lingered for almost a decade, so, the general climate among SMEs is that of an endless struggle for funds for survival.

But if banks are really interested in developing small businesses, they can devise ways to improve financial access. Banks have been accused of lending at discretionary rates to big businesses. Since it is cheaper to make money off government, oil companies and stockbrokers, banks tend to shy away from simple moves that could help smaller businesses.

Government’s unfinished business As you go around the clothes factory in Lagos, you notice that a section is devoted to generators. It is clear that the statistics released by electric power authorities still mean nothing to these manufacturers, as each of them has at least one generator which supplies electricity.

Indeed, basic infrastructure should be available from government to SMEs. The unavailability of infrastructure has made the love between SMEs and government cold.

Except for financial institutions which can boost their businesses, the small manufacturers are not interested in government; they provide everything to ensure their own success. That is why they were not eager to have the name of their factory splashed on newspapers. “We are content with the progress and contribution we are making to the economy, we do not want to be levied out of business by government all we want is financial help to scale up our operations” the small producers say in unison.