| MSME - Funding, Lending & Credit |    4632 VIEWS  |
| MSME - Funding, Lending & Credit | |
| 4632 VIEWS | |
 |
Friday, June
26, 2020 / 4:50 PM / Oladimeji Peters, Chairman, CBAN / Header Image Credit: CBAN
The
Micro, Small and Medium Enterprises (MSMEs) sector in Nigeria accounts for
about 90 million jobs in the economy. However, less than 15 percent of MSMEs
have access to finance. Lack of access to financing, most notably
working-capital financing, has led to the crimping of the sector growth and a
loss in latent innovation, creativity and productivity.
The
Nigerian Government has demonstrated its commitment to improving the ease of
doing business and access to credit to consumers and small businesses through
various policies and initiatives. These include the promotion of credit
reporting infrastructure and collateral registry, enacting enabling laws - including the Credit Reporting Act 2017 and the Secured Transaction in Moveable
Assets Act (Collateral Registry Act) 2017, promoting financial inclusion, and
advancing various forms of direct and indirect interventions in loans and
grants to strategic economic agents. The commitment resulted in Nigeria making
the greatest stride in improving access to getting credit in the World Bank's
ease of doing business rankings. The country moved from 32nd position in 2017,
to 6th position in 2018.
The interventions and initiatives by the
government provided necessary enabling environment, a strong regulatory
framework, that behooved credit granting institutions to do more. Though access
to credit by MSMEs and consumers in Nigeria is still very low. Despite the
country's huge population of over 190 million people - less than 15 million
persons/entities have enjoyed at least one form of credit from formal banking
institutions. In addition, according
to a communique given by the Central Bank on Nigeria in January 2020, credit to
the private sector grew from 12.82% in November 2019 to 13.1% in December 2019.
Access
to capital is a major ingredient in growing businesses and economies. Lack of
access to finance is a key constraint on the growth of small and medium
enterprises in Sub-Saharan Africa, and an important limitation on employment,
economic growth and shared prosperity. The problem of access to credit is a
recurring complaint from manufacturers and businessmen. Aside the fact that
interest charges are high, many small businesses cannot access credit.
Figures released in 2019 by the Enhancing
Financial Innovation and Access (EFInA) revealed that about 36.6 million
Nigerian adults, which represents about 36.8 percent of the Nigerian adult
population, do not have access to credit, which compares poorly with the
higher rates recorded in a number of other developing countries. Nigerian Banks
generally seek to lend money and earn the resultant incomes. However, they have
become extremely careful due in part to the level of defaults being
experienced. While most banks today will advance credit to blue chip companies
and their employees, the willingness to lend to small businesses is hampered by
lack of credible information.
Also,
research indicates that lending is higher and credit risk is lower in countries
where lenders share information, regardless of the private or public nature of
the information-sharing mechanism. It is common knowledge in Nigeria that the
Small Medium Enterprises (SMEs) have challenges in obtaining substantial loans
from some financial institutions mostly as a result of the high interest rates
imposed by the banks as well as the collateral required that most SMEs do not
own.
In
most developed countries, they use credit histories to determine unique
interest rates to suit each customer/potential borrower. Credit histories are
accrued based on information on the person's financial responsibility in
handling previous debts, bill payments and public information. Credit bureaus
in these countries can generate what is known as a Credit Score, a number
between 300 to 850 to ascertain the creditworthiness of potential borrowers.
Credit histories equip banks with information they need to determine a customer's
creditworthiness and charge interest rates based on the individual's risk
profile.
Credit
growth drives the economic growth of the country. Credit promotes investment
which has propelled many economic booms and strengthens entrepreneurship. As
SMEs cover over 75 percent of Nigerian jobs, their ability to raise capital to
expand is crucial for economic growth and development in Nigeria. According to Statista, a leading provider of market and
consumer data in Hamburg, Germany, the value of domestic credit granted
to private sector in Nigeria was about 10.9% of Nigeria's GDP in 2018.
A
more robust solution to this prevalent challenge would be the utilization of CREDIT
BUREAUS. A credit bureau is an institution that aggregates the information
used to build credit histories, hence they are in fact the most important
players in bridging the information gap and solving the asymmetric information
challenge in the Nigerian credit market. Currently, there are three credit
bureaus in the country - CRC Credit Bureau, CreditRegistry and FirstCentral
Credit Bureau (Formerly XDS Credit Bureau). Each of the three licensed credit
bureaus today has an average repository of about 25 million records of credit
data from institutions across various sectors of the economy including but not
limited to commercial banks, microfinance banks, mortgage banks, retailers,
cooperatives, finance companies, leasing companies etc. In view of this
phenomenon, credit bureau coverage remains low in Nigeria at 8 percent compared
with 64 percent in South Africa, 25 percent in Egypt and 17 percent in Ghana.
We need to urgently change the narrative of credit concentration and increase
access to credit.
The
products and services provided by credit bureaus improves the ability of
lenders to evaluate risk and of consumers to obtain credit and other products
with speed and at competitive terms. Credit reporting expands access to
finance, especially for consumers and MSMEs and plays a key role in improving
the competitiveness and efficiency of credit granting institutions by reducing
credit processing costs and time. The availability of credit information
therefore implies a more efficient allocation of credit at lower interest rates
accompanied by higher economic growth and a more diversified credit distribution.
The
credit bureau infrastructure is also designed to provide support for the
introduction of new products in the financial system such as credit cards,
mortgage loans, personal loans, auto loans, working capital for small
businesses, etc. This should result in exponential growth in retail lending and
significantly improve production and consumption, thereby stimulating the growth of the economy. The
infrastructure is also meant to facilitate credits and post-paid services by
non-financial institutions such as installment rental payment, increase
post-paid services by telecommunications and electricity distribution companies
rather than the current largely pre-paid model, expand credit sales by
retailers with confidence, encourage installment payment of school fees and
insurance premiums.
Credit
reporting systems are essential to creating sound financial infrastructures
that facilitate lending and help expand access to credit to a significant share
of individuals, microfinance, and small and medium enterprises. Also, they help
satisfy lenders' need for accurate, credible information that reduces the risk
of lending and the cost of loan losses.
Credit
reporting is beneficial to all parties in the credit cycle. It helps lenders to
make informed credit granting decisions such that default rates can reduce,
helps individuals/borrowers without collateral to secure credit, leads to
better payment behaviour on the part of borrowers for fear of being denied
credit and help borrowers with positive information to get favourable loan
conditions. With these in place, the enhancement of financial inclusion which
would in turn promote the sustenance and growth of MSMEs, would be guaranteed.
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