High cost of bank credit squeezes Nigeria’s small businesses

MICRO, small and medium enterprises (MSMEs) in Nigeria are hard hit by the high cost of loans offered by deposit money banks, which range from 16 to 30 per cent per annum. 

Chukwubuike Nnoli runs Zubnol Investment Limited, a micro-business that manufactures interior decoration products and supplies them to retail stores, open markets and several outlets. In 2020, he sought a loan in a Tier-1 bank, which agreed to give him N1 million at 16 per cent per annum. He needed the money to expand his business, but he was offered N1 million and was asked to return N1.155 million in 12 months.

Chukwubuike Nnoli

“Apart from the fact that it is just a million, it costs 16 per cent. It was even around 20 to 21 per cent the year before,” he told The ICIR.

Millions of small businesses in Nigeria are foraging for cheap loans in the ugliest of places, including from street money lenders. Africa’s largest economy has 41.5 million MSMEs, according to a report published by the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency (SMEDAN) in 2019, but many of them are struggling to obtain cheap loans for expansion.

The NBS-SMEDAN report said 85 per cent of small businesses in Nigeria could not have access to external financing between 2013 and 2017.

Only 5.3 per cent of MSMEs had access to bank credit, even with 40 per cent of them having relationships with banks.

Interest rate charged to small-scale manufacturers averaged 20.75 per cent in 2020 as against 21.25 per cent recorded in 2019, according to the Manufacturers Association of Nigeria (MAN).

Founder of a start-up Liverstock247.com Ibrahim Maigari Ahmadu said the interest rate was a major problem for MSMEs in the country.

“Nigerian commercial banks are risk-averse. They put so many bottlenecks on the way when you want to access funds,” he said.

“Interest rate is very high, which is a major inhibiting factor. Collaterisation is structured to knock you out,” he further said.

The Central Bank of Nigeria (CBN) has raised the Loan-to-Deposit (LDR) to 65 per cent to boost lending to businesses and has made several funds available for small businesses. But the problem, according to Chief Executive of Jon Tudy Enterprises Jon Kachikwu, was that many small businesses would not have access to them.

READ ALSOManufacturers identify dollar scarcity, cost of funds as biggest business impediments

In 2020, PwC Nigeria estimated that the yearly financial gap for Nigerian MSMEs was N617.3 billion.

In the report entitled, ‘PwC’s MSME Report 2020,’ the consulting firm surveyed over 1,600 MSMEs, out of which 22 per cent said that obtaining finance was their biggest challenge.

The PwC noted that SME credit market in Nigeria was notoriously characterised by market failures and imperfections.

“Hence, in emerging markets and developing economies, 55 per cent to 68 per cent of formal SMEs are either un-served or under-served by financial institutions, leading to a total credit gap estimated to be $5.1 trillion.”

Benchmark Interest Rate in Selected Sub-Sahara African countries

Nigeria’s Monetary Policy Rate (MPR), which is the benchmark interest rate in the economy, is 11.5 per cent, according to the CBN. This is higher when compared with South Africa‘s 3.5 per cent; Kenya’s 7.5 per cent; and Zambia’s 8 per cent, according to their central banks. In Ethiopia, another SSA nation, the benchmark interest rate is put at 9 per cent, according to the National Bank of Ethiopia. Botswana’s rate is estimated at 3.75 per cent while  Uganda’s is 7 per cent. Similarly, Namibia’s benchmark rate is 7.75 per cent.

    In a recent interview, Director-General of the Lagos Chamber of Commerce and Industry (LCCI) Muda Yusuf said access to funding was much more difficult for MSMEs than large enterprises.

    Godwin Emefiele
    Godwin Emefiele, CBN Governor

    “For micro and small businesses, because they are perceived as high risk, collaterals are tougher and many of them cannot provide such,” he said.

    The CBN has reduced the MPR from 13.5 per cent to 11.5 per cent in the last two years, forcing banks to lend to small businesses.  However, financial experts say many MSMEs are not prepared for loans as they lack good credit history, book-keeping skills, structured documentation and technology that could drive their credibility.

    “Banks are looking at your cash flow, audited accounts, and they are looking at whether you have the technology to drive your business and if you have a good credit history,” said Managing Director/ CEO of CRC Credit Bureau Tunde Popoola, while offering his advice recently in a Zoom meeting.

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