Tag: Enhancing

Limited access to credit has been a major challenge to Micro, Small and Medium Enterprises (MSMEs). To get round the problem and unleash MSMEs’ potential to create jobs, boost production and reduce poverty, the Central Bank of Nigeria (CBN) created the N220 billion MSMEs Development Fund in August 2013. How can operators access the fund with ease? Assistant Editor Chikodi Okereocha reports.   

The Federal Government, through the Central Bank of Nigeria (CBN), wet the appetite of operators when it launched the N220 billion Micro, Small and Medium Enterprises (MSMEs) Development Fund in August 2013. The lifeline, expectedly, offered hopes of closing the financing gap in the sector. It was acknowledged globally as the engine of economic growth because of its potential to create jobs, boost production, generate income and reduce poverty.

MSMEs before the scheme

Before the roll out of the scheme, about 80 per cent of MSMEs  had no access to the financial market, according to a survey by the International Finance Corporation (IFC) and Mckinsey & Company, a United States (US)-based multinational management consulting firm. Between 2003 and 2012, commercial bank loans to small scale enterprises dropped at an exponential rate. Analysis of the yearly trend in the share of commercial bank credit to small-scale industries indicated a decline from about 7.5 per cent in 2003 to less than one per cent in 2006 and a further decline in 2012 to 0.14 per cent.

To make matters worse, commercial banks charge as high as between 22 and 25 per cent. Micro-finance Banks (MFBs) charge higher, insisting on between 30 and 40 per cent interest rates. The exorbitant interest rates charged by the commercial banks is said to be partly responsible for the shutting of many industries. Others simply relocated to neighbouring countries where they are sure of interest-friendly credit facilities.

Despite the high cost of credit, Nigeria’s  MSMEs estimated at 17.6 million employed about 32.4 million people as at 2012. It also contributed about 46.54 per cent of nominal Gross Domestic Product (GDP), a figure which raised hope that the N220 billion would, perhaps, be a shot in the arm of operators in the MSMEs sector. CBN Governor Godwin Emefiele amplified this expectation when he described the intervention as an innovative way of improving MSMEs access to finance, shoring up their potential for job creation and enabling them reduce poverty in the country.

Access becomes an issue

However, MSMEs’ ability to play this critical role on the strength of the N220 billion lifeline has come under serious threat due to difficulties in accessing the fund. Some of the operators lamented that it is easier for the camel to pass through needle’s eye than to access the fund because of the stringent conditions and guidelines for accessing it.

For instance, the Nigerian Association of Small Scale Industrialists (NASSI) lamented that accessing the fund has become extremely difficult. “The problem with funds like that and over the years, we have had so many funds like that, you cannot access them. So, they remain a mirage. And this N220 billion has continued to be a mirage, which means you can’t touch it. The CBN guideline as published makes it impossible for anybody to access that fund. That is what happened to all kinds of funds domiciled in the CBN, nobody can access them,” the National President of NASSI, Chief Chuku Wachuku said.

Chief Wachuku, a Consultant Economist, told The Nation that by giving the fund and other similar funds to government agencies to administer instead of putting them directly into private sector organisations or development finance institutions, such government agencies would create bureaucratic empires.

“You are going to have managing directors and deputy managing directors with all the attachments and appurtenances thereto and then the money will just go. But, the correct thing to do is to find a critical strategy to get these funds directly into the businesses to create employment and when you create employment you create wealth,” he argued.

He also said putting the funds into development finance institutions would have been more ideal because they understand the concept of small scale enterprises. Noting that Deposit Money Banks do not understand the concept of short-term financing, he, however, urged the development finance institutions, such as the Bank of Industry (BoI) and Bank of Agriculture (BoA) to understand that they are intervention agencies of the Federal Government set up to give effect to the fiscal policies of government. “Their duty is not to make money or show increased balanced sheet; once they do that, we are going to call on the Presidency to scrap them,” he said.

Operators call for invovement in fund’s administration

Wachuku said putting such funds directly into private sector organisations, or development finance institutions, would mean getting the fund as quickly as possible without too many bottlenecks. He said this would be done by working with members of the Organised Private Sector (OPS), who would translate the interventions into real industrial growth. “I am using this opportunity to call on the Presidency to re-evaluate these huge sums of money pumped into public sector agencies and put them directly into private sector organisations,” he stated.

He wondered why the government continued to pump more intervention funds into government agencies despite the fact that they he not lived upto expectation, pointing out that “the correct thing to do is to find a critical strategy to get these funds directly into the businesses to create employment and when you create employment you create wealth”.  He insisted that everywhere, the government cannot create employment rather; employment and wealth creation must be private sector-driven.

Members of Enugu Chamber of Commerce, Industry, Mines and Agriculture (ECCIMA) are also kicking, saying that access to the fund has remained a challenge for close to two years after it was launched. To ease access to the fund, the Director-General (DG) of ECCIMA, Mr. Emeka Okereke, said OPS members should be brought into its administration. He argued that since the fund is a developmental initiative, OPS members should be involved in its administration. According to him, this would allow ECCIMA and other private sector organisations vouch for the integrity of their members wishing to access the fund.

This, Okereke said, would go a long way in reducing incidents of loan default, as the OPS would be engaged in setting eligibility criteria for accessing the loans. The ECCIMA chief also said there was need for banks to create SMEs desk to help operators package their business proposals very well to attract the required funds. Noting that the N220billon MSMEs intervention fund is not charity, he said OPS members must possess all the basic criteria for accessing the fund including presenting a bankable proposal.

The Director-General said most MSMEs lack the capacity to package their feasibility studies very well. Besides, they lack good management structure and accounting system to make them attractive to financial institutions for any form of assistance. Reminded that the Bank of Industry (BoI) had earlier signed a service agreement with Business Development Service Providers (BDSPs) to help operators package their loan requests, develop bankable business plans and proposals for to facilitate their access to finance, Okereke said most of the MSMEs don’t have the financial resources to hire experts or professionals to their feasibility studies.

Also worried by lack of access to the fund, the Abuja Chamber of Commerce is canvassing the inclusion of the OPS in setting criteria for assessing the fund. Its Vice President, Public Relations, Jude Igwe, commending the N220billion scheme launched by President Goodluck Jonathan as a policy in the right direction, advised that the OPS should be engaged in setting eligibility criteria for assessing the loans.

CBN’s guidelines

Under CBN’s guidelines, the fund, which attracts nine per cent interest rate,would be administered through private or state owned Micro-Finance Institutions (MFIs), Finance Houses, and Cooperative Finance Agencies. Such MFIs or micro-finance banks must pass CBN’s competency and proficiency tests in order to certify them capable of distributing these funds to MSMEs. State governments will be able to access up to N2 billion each for lending to eligible beneficiaries through Participating Financial Institutions (PFIs) in their states.

In other words, the CBN will not be lending directly to farmers or businesses. What the fund does is a wholesale fund. It provides funding to the PFIs. MFIs or micro-finance banks can also come to the fund. The CBN will assess them; give them the money at low interest rate. The PFIs would undertake that they will lend at low rate of interest to micro-entrepreneurs, the low-income earners, farmers, artisans and the active poor who operate in the informal sector.

Also, PFIs can only finance agricultural value chain activities, trade and commerce; cottage industries, artisans, among others. The apex bank in a bid to ensure that productive sectors of the economy attract more finance necessary for employment creation and diversification of the country’s economic base, also said a maximum of 10 per cent of the commercial component of the fund should be channeled to trading and commerce.

Although, CBN requests that 60 per cent of the fund, representing N132 billion, be earmarked for providing financial services to women-owned businesses, Emefiele said PFIs would be required to submit periodic returns on disbursements as well as an analysis of the social impacts of the fund. He added that the finance sector regulator will also undertake regular on and off site checks to ascertain the veracity of the reports received.

That is not all. The CBN also demanded that borrowers provide 100 per cent near-cash cover in treasury bills or fixed deposit, a situation said to have made it difficult for most finance house operators to draw from the fund. Most of the finance house operators are therefore, reluctant to draw from the loan. In their own thinking, the CBN cannot force people to invest in treasury bills or keep fixed deposits because they want to borrow. Because of this, only commercial banks are said to be meeting the drawn-down policy and are accessing the loans. The snag however, is that this arrangement defeats the objective of setting up the fund.

However, Wachuku argued that this should not be so, pointing out thatthe economy of the emerging nations or even developed nations appreciate, that economies must necessarily depend on MSMEs and the informal sector because it’s the engine of growth. He said 70 per cent of all new net jobs in the US are created by small and medium enterprises. He also said in Nigeria, SMEs contribute 90 to 95 per cent to GDP, but their only problem is that whereas they contribute this percentage to GDP, the wealth addition stands at only 46 per cent.

Indeed, in developed economies of the world, the private sector is the engine of economic growth, propelling the economies of those countries by creating the bulk of job opportunities. Government only creates the enabling environment for the private sector to thrive through unfettered access to credit facility to MSMEs in those countries. Government also provides the necessary infrastructure, including guaranteeing the security of lives and property. But this is not the case in Nigeria where the government remains the largest employer of labour.

Conclusion

The hope was that the fund, seen by not a few stakeholders as a practical approach to boost the employment and wealth creation capacity of operators of MSMEs, would reverse this trend. But as things stand, OPS members believe that the initiative can still deliver on its promises if private sector players are brought into the administration of the fund.