ANTHONY Chinwe, a former top banker and now CEO of De SME Facilitators, is like a guide for Nigeria’s unsung economic heroes: small and medium-sized businesses (SMEs). Think of them as the engine room of the country, full of potential but often struggling to get the fuel they need to really take off. In this insightful chat, Chinwe breaks down the secrets to helping these businesses thrive, from getting the right funding to finding markets for their goods.  The former Group Head of  Small and Medium Enterprises, SME banking at Fidelity Bank Plc also shares what the government can do to finally let these crucial players shine.

The ICIR: You have led the SME desk in one of the banks. What are those critical things that make SMEs’ loan requests fail to receive approval?

Chinwe: Our organisation  – De SME Facilitators – happens to be one of those registered with the Bank of Industry, (BoI) with the mandate of preparing SMEs and getting them to put their proposals in bankable form to easily access suitable loans.

One of the things we have noticed about accessing credit is meeting the five C’s conditions. For a credit to do well, a borrower must have the capacity to pay the loan he or she or the entity applied for.

The cash flow must be robust or can be stimulated to be robust so that it will be able to pay over time.

The borrower must have the character, that is, the integrity, willingness, and genuineness to apply for the loan for the purpose for which it was approved. Character is very important. It’s about the most important in the credit lexicon.

The fourth ‘C’ is collateral, which talks about the stability, quality, and nature of the collateral. It’s a secondary comfort position that comes up when the primary repayment source fails.

And the fifth is the capital, which speaks to the promoters’ commitment to the project. That’s how much they have in their equity contributions, and how strong is it? Of course, other things could come up depending on the nature of the transaction. So, these are the five fundamental credit issues that need to be addressed.

Oftentimes, SMEs lack collateral, which is not their fault but the problem of the Nigerian financial structural environment.

Oftentimes, SMEs lack collateral, which is not their fault but the problem of the Nigerian financial structural environment. This is because what we take as collateral not all SMEs can afford it. For instance, not all SMEs can afford a legal mortgage as collateral or have enough shares to mortgage or pay down as collateral. As such, you walk around their cash flow and create that flexibility to enable you to lend to them based on their cash flow. You need to understand their business and build their loan around it, rather than emphasising too much on collateral.

Another thing is packaging their record-keeping, as they can’t employ real professionals to put their financial records in order. We assist them and deploy the services that take care of such challenges. Of course, there are three types of access to finance, which can be categorised into equity, debt, and hybrid, which have features of equity and debt. Again, SMEs lack access to equity financing and can’t easily go to the stock market to access funds. This is where we have been advocating that the government should create a platform that will enable SMEs to access equity funding. However, once SMEs can package their transactions and projects in such a bankable way, they can access loans.

The ICIR: Banks seem to prioritise corporate organisations over SMEs. How can they make lending to SMEs easier?

Chinwe: If you look at the cost of transaction per unit, you will see why microfinance banks and other lower-ticket institutions charge higher. You could go to a microfinance bank and borrow N300,000, and they tell you their fee is 15 per cent per month. Whereas if you borrow from a commercial bank, it will be much lower.

The reason for small ticket transactions attracting higher interest is because of the cost of administering the loan. There are administrative services we deploy in the loan process that are virtually the same whether you are lending N300 million or N300,000. There are processes you go through that are the same. So, for big-ticket transactions, you earn more in revenue from the transaction, which will be enough to take care of those administrative expenses and leave a substantial gap to increase your profit.

Also, most corporate entities have suitable hands in their structure and staffing and are well-developed. You could see transparency in the management of their finances, and they have professionals handling their funds and key departments in their organisation. Whether it is marketing, production, accounting, or so forth. As a lender, they give you fewer issues. You can rely more on their record, and you can see the process more clearly. Those are the things that make lending to them a little easier than to the SMEs.

However, the good thing about SMEs is that when you grow them, you have the opportunity to grow along with them because they have a high growth rate. An SME that is well-managed will, in a short time, transform into a large enterprise. Banks that have grown internal capacity to understand the problems of SMEs develop credit products suitable for their needs because SMEs are different from large enterprises in terms of structure, processes, staffing and all that. You need to understand them very well, study them, and come up with credit products that address their peculiar needs and also take care of the nature of their businesses.

The ICIR: Are Nigerian banks developing products for SMEs?

Chinwe: Back in the days when I was in banking, the Fidelity Bank was good at developing loan product papers suitable for special needs, whether it’s school or SMEs that are into manufacturing. Fidelity Bank used to have the capacity to develop suitable product papers that address the needs. However, all banks have their target market and the segments they lend to more.

What I believe is that the regulatory authority should play a more active role in compelling banks to distribute their loans in a way that will favour the areas that are targeted by the government to create jobs.

Most of the jobs in Nigeria are created by the SMEs. They are the engine of economic growth and agents of innovation.

The ICIR: How effective are the BOI and BOA in giving out loans to support SMEs?

Chinwe: The Bank of Industry (BOI) is very effective and they have done a whole lot to ensure the sectors they focus on come alive. They finance machinery and working capital and have even gone beyond their mandate, financing some agricultural value chains that, ordinarily, the Bank of Agriculture (BOA) should do.

It’s good that the government is working towards resuscitating, revitalising, and recapitalising the Bank of Agriculture to make it effective, just as the Bank of Industry is currently doing. A Bank of Agriculture, a Bank of Industry, and a functional mortgage system are the three institutions that will help the manufacturers and business communities. The people who may be complaining that the Bank of Industry has not given them loans may be that they haven’t done what they were supposed to do in presenting their transactions in a bankable way.

The ICIR: What should the government do to maximise SMEs’ potential towards achieving the N1 trillion economy?

Chinwe: The government should provide a regulatory environment that will enable them to access suitable funding, whether it’s equity, debt, or hybrid, specific to their needs. Secondly, the government should create an enabling environment through a legal, regulatory infrastructure that will enable SMEs to access markets, especially international markets, where the nation can benefit through foreign exchange enhancement to the GDP, job creation, and all that SMEs can bring to the table. They need to create that environment and bring up facilities that will enable SMEs to access the market more smoothly.

The government should provide a regulatory environment that will enable them to access suitable funding, whether it’s equity, debt, or hybrid, specific to their needs.

For instance, a friend who conducted research revealed that if you go to African markets in the United States, most of the goods in stock are from Ghana. He informed me that 60 per cent of the goods sold in that market, coming from West Africa, are from Ghana. Why is it easier to export from Ghana to the United States than from Nigeria? Have we leveraged the AGOA (African Growth and Opportunity Act), which allows duty-free access to the United States and eligible Nigerian exports from our end? What are the bottlenecks in the export of products of the agricultural value chain in Nigeria?

Also, is it that the goods don’t meet international standards? Then, what are we doing to create a proper certification framework that makes our goods acceptable in the international market? All these are some of the things that the government should look into and partner with the private sector to address to make it easier for SMEs to access markets, particularly foreign markets.

The African Continental Free Trade Area (AfCFTA) agreement – a treaty that aims to increase trade and economic integration in Africa – is on stream for us to maximise the benefits.

Another thing the government needs to do is apply a cluster approach to create workspace for businesses of a similar nature. Japan started what they call a one-village, one-product policy that enabled them to develop peculiar agricultural or mineral products that were obtained from different villages. That’s the law of comparative advantage. Sometime in 2010 to 2011, when Modupe Adelaja was the Director-General of SMEDAN (Small and Medium Enterprises Development Agency of Nigeria), she came up with an amended version of that policy that would be domesticated in Nigeria. That is, one local government, one product, but it was never driven to a conclusion by way of implementation.

When you create a cluster, there are advantages of linkages and having common shared services that would aid in the improvement of technology and innovation, and in bringing down the cost of doing business. The government has to take practical steps to set up clusters for different products in different areas. Every region, state, and local government has things they produce that give they a strategic advantage over other people. If allowed to run and merge with the larger economy, it will boost the entire Nigerian economy. Those are the areas – cluster creation, market access, and access to suitable funds – that the government should look into.

some of these SMEs produce their electricity and water, construct their roads, and provide their security. All these are the challenges that hinder and stifle businesses.

Why it’s important is that some of these SMEs produce their electricity and water, construct their roads, and provide their security. All these are the challenges that hinder and stifle businesses. The present government seems to be doing a lot and working on reforms. But if the right things are in place and there’s a segment of the capital market dedicated to SMEs even if you have a furniture company and you retired and your children are not interested in running it, you should have a platform that will enable you to sell it not as a scrab but as an ongoing business just as one will sell a big company in the capital market.