Tag: Heritage Bank

Heritage Bank has an innovative approach to financing small businesses, a package which is akin to the Paris Club for small and medium scale enterprises (SMEs). The organisation’s Group Head, SMEs, Bayo Ogunnusi in this interview with Bukola Afolabi speaks on the prospects and challenges of the business thus far.

Six months into your operations, how would you describe the business climate thus far?

In this part of the world when you are selling a new product, it is always difficult to convince Nigerians. So that is part of the challenges we are facing but gradually we are overcoming that. People are now seeing the results. Even our customers that have benefitted from the scheme are now giving referrals and we hope that in the next few months all other banks can identify these opportunities so that we can all do it together for SMEs in the country to grow astronomically. Heritage Bank alone cannot fund all the SMEs in Nigeria.

There has been a renewed focus towards banks’ support for SMEs since the CBN increased the Cash Reserve Requirement (CRR) for public sector funds to 50 per cent, do you think that is the way to go?

We all know that in the banking sector, a lot of focus used to be on the corporate and commercial customers and only few banks had been focusing on SMEs. As it is now, the CRR for public sector funds has been increased to 50 per cent and what that means is that a lot of banks now need to focus on SMEs. However, understanding how to deal with SMEs, funding SMEs and knowing how to deal with them, are all different things. So, a lot of banks don’t know how to deal with SMEs.

But in Heritage Bank, we have the expertise, knowledge and we know the way SMEs operate. Currently, in Nigeria, SMEs contribute about 47 per cent to the Gross Domestic Product (GDP). In China it is about 62 per cent, Egypt about 80 per cent. Supporting SMEs is the way to go, there are 17 million micro, small and medium scale enterprises (MSMEs) in Nigeria and the number is growing by the day. A lot of people are losing their jobs and are setting up their own businesses. But the challenges of power, infrastructure and funding have always been problems. Fortunately, the federal government is trying to help solve the challenge of epileptic power supply and in a few years’ time, that challenge would be solved and factors of production would favour SMEs and anybody that wants to invest in this country should focus on SMEs because in the next 10 years, revenue from that sector will be the mainstay for the economy.

But despite efforts by your bank and other banks in the country, as well as various schemes by the government, the unemployment rate in the country is still very high and a lot of SMEs still complain about access to finance. What is responsible for that?

I can tell you that laziness is responsible for that. Everybody wants to work and earn salary, but if you check properly, we all have passion and talents that are good enough to start businesses. What we are doing in Heritage Bank is to tackle unemployment. If I fund an SME, I help you grow your business. So if I can fund 1,000 SMEs and if each of them employs additional 20 workers, that is 20,000. That is the way we are going to solve the problem. What was obtainable ab initio was that banks were afraid of funding SMEs because of lack of structure.

Don’t you think that why we have high level of exposure in the sector is because these facilities are mostly given to SMEs at high cost?

What we have also done in Heritage Bank was to look at the high cost of doing business for SMEs. Most times it is not the interest rate, even though that is also high, the cost of doing business in this part of the world is very high. What we also did at Heritage Bank that is novel is that we try to work with SMEs in group of members. If you come to us as a group of SMEs, the interest rate can be renegotiated. Interest rate is also a function of the risk that you perceive. When a bank perceives that a business has high risk, it puts a premium on the loan.

So what is the thinking behind your Investment Protection Fund for SMEs?

The major reason why banks are not funding SMEs is because of risk. They believe that funding SMEs involves a lot of risks because if you give them money, they might not understand how to run the business they want to go into.  So, what the banks do is to ask for collateral. But what we have done is to bring up an innovative idea of how to finance SMEs without collateral.

We are partnering some organisations like RSL Derivatives and what we are doing is to identify the SMEs. We offer advisory services to them, we help them structure their business and also with their cash flows. There is also a club called the Paris Club SMEs that was set up by Heritage Bank and RSL Derivatives. Now, if you qualify, you are given a certificate of membership and with that, you can approach Heritage Bank and we finance your business.

Now, once we finance your business, it doesn’t end there, we are going to be working with you, there are advisors that are going to be checking on your business on a weekly basis. So, it is not going to be business as usual, where people get loans from a bank and do whatever they like. We are going to work with you. Now, if we give a customer a N20 million facility, we withhold 10 per cent which is put in an investment protection fund that is insured by Leadway Insurance Plc and managed by Stanbic IBTC nominees.

This 10 per cent investment protection fund is like the collateral. For RSL Derivatives, their job is to ensure that the customers are fit to take monies from the bank, to monitor their performance on a monthly basis and give us the report and also recover bad loans. However, our objective is to grow the business and not just to fund it.Of course, a lot of people walk into banks and say they want money and by the time you get their business, you find out that they are not doing anything. Some people come with fraudulent mindset and that is why we visit the customers, diagnose the issues they have before we now prescribe solution to them.

What are the major sectors you are focusing on?

The 10 sectors that we have identified are like a guide to us because by the time you concentrate on some sectors, you may send the wrong signal. We are a bank that supports SMEs, so anybody that is operating an SME in whatever sector can come into Heritage Bank. As it is, it is not about the sector, it is about the operator. Somebody can be selling recharge card on the road today and in five years time, he becomes a major dealer to MTN if properly mentored, structured and properly developed.

Managing Director/Chief Executive Officer, Heritage Bank, Mr. Ifie Sekibo, has emphasised the need for the promotion and protection of Small and Medium Enterprises (SMEs) through the establishment of a solid framework supported by clearly articulated government policy.

According to him, this is the first step in creating an active SME sector that could spearhead the much- needed, revolution Nigeria and, indeed Africa urgently requires in the area of building the next generation of African corporate leaders.

Sekibo spoke as a guest speaker at the 2nd US-Africa Trade & Investment Forum/Africa Investment & Development Awards which took place recently at St. Regis Hotel, New York, USA.

The Heriage Bank boss who spoke on ‘Small & Medium Enterprise Funding in Africa – a banker’s experience’, observed that in sub-Saharan Africa, SMEs are more credit-constrained and this typically affects growth possibilities as significantly low number of start ups who apply for financing actually succeed. Studies, he noted, indicate that more than 70% of the SMEs lack access to medium-longer-term finance, creating an SME funding gap of more than $140 billion in Africa alone.

“Using Nigeria as a case study, between 2003 and 2009, SME loans as a percentage of total credit, decreased from 7.45% to 0.18%. Yet by 2012, Nigeria had about 17.6 million MSMEs employing about 32.4 million people.

“Although it is generally accepted that SMEs enhance competition and entrepreneurship, and their development has a positive impact on innovation and productivity growth, policy and infrastructure factors to mitigate risk and costs that SME sector cannot internalise needs to be seriously worked upon by all relevant stakeholders.”

He further revealed that in Nigeria, most SMEs die within the first five years of existence while another smaller percentage goes into extinction between the sixth and tenth year, with only five to ten percent surviving, thriving and growing into established corporate status.

He listed the leading cause of such sub-optimal output to include: poor access to funds, weak institutional support, unstable macro economics, complicated and unstructured legal framework/regulation, inadequate business information, infrastructure, business environment and human capital factors, among others.

He listed these as including the African Development Bank (AfDB), ECOWAS Bank for Investment and Development (EBID) and the relatively new African Guarantee Fund which was officially launched in June 2012 as a focused intervention fund to enhance international funding access to lending institutions with strategic and demonstrable focus on the SME space, among others.

“Five out of the top 10 fastest growing economies in the world are in Africa. The 39 fastest growing economies in 2013 have an average size of $78 billion. Growth in these countries is largely driven by SGBs – Small Growing Businesses such as Agriculture, Solid Mineral, and Retail Distribution. Small is no longer risky, it is the way to building the next generation of African corporates”, he concluded.