Despite benefitting from capacity building initiatives and intervention funds from the government and multi-national agencies, the country’s 37.07 million Micro, Small and Medium Scale Enterprises (MSMEs) are still groping for life. The MSMEs account for about 48.5 per cent of the Gross Domestic Product (GDP) and 7.27 per cent of total export. To boost the sector’s capacity, experts say banks should change their model of lending to it and operators should adopt online payment solutions, among other options. Assistant Editor CHIKODI OKEREOCHA reports.
From his vantage position as an operator and Credit Bureau Association of Nigeria (CBAN) Chairman, Mr. ‘Tunde Popoola, no doubt, has a deep and compelling insight of Nigeria’s financial services sector.
So, when Popoola, who doubles as MD/CEO of CRC Credit Bureau Limited, one of the three licensed private credit bureaux, canvassed a new model of lending to Micro, Small and Medium Enterprises (MSMEs) by banks, it was obvious that efforts so far put in place by the government and multi-national agencies to address MSMEs’ huge financing gap may have failed to yield the desired result.
According to Popoola, as much as 90 per cent of private enterprises and MSMEs in Nigeria have limited or no access to credit, a development, which he said, has constrained MSMEs’ capacity to play their role as economic growth drivers. To justify his call for banks to change their lending model in favour of MSMEs, he said more than 80 per cent of loans in Nigeria were concentrated in high networth individuals, big commercial entities and specific sectors, particularly the oil and gas. He added that this was why the rate of bad loans or non-performing loans was more in the oil and gas sector.
Popoola, who spoke at a recent media event in Lagos, said there was the need for banks to target the estimated 37 million MSMEs in the country. Noting that retail loans remained a viable area for banks to play, he said it was necessary for banks to focus more on MSMEs, which are the engine of economic growth.
Citing a World Bank report, he said loans provided by banks to the private sector were only 14 per cent of the Gross Domestic Product (GDP) in the country, as opposed to 149 per cent in South Africa, for instance. He said if MSMEs were empowered with unhindered access to credit, they would be in a better position to spur more productive activities and, ultimately, create jobs, reduce poverty and engender sustainable economic growth.
Globally, MSMEs are regarded as the backbone of any economy. They are credited with the capacity to contribute to improved living standards, bring about substantial local capital formation and help in achieving high level of productivity and capability. MSMEs have also been identified as a vehicle for employment generation. Everywhere, MSMEs are the biggest employers of labour. They also provide opportunities for entrepreneurial sourcing, training, development and empowerment.
However, these features of a vibrant MSME sub-sector have continued to elude Nigerians and the economy, as a plethora of challenges continue to undermine the profitability and competitiveness of operators in the segment. Harsh policy environment, high operating cost due to lack of basic infrastructure, particularly power, multiple taxation, lack of technical/financial management capacity and lack of access to credit, among others, have stunted the growth of the 37.07 million MSMEs. This is despite the Federal Government’s policies and programmes targeted at engendering the development of the non-oil sectors where MSMEs are dominant players.
Even before the falling of oil prices compelled a strategic refocus on the MSME segment as a way of diversifying the economy, the role of MSMEs as growth engine was never lost on the economic managers and operators in various sectors. And it was based on this recognition, for instance, that the Central Bank of Nigeria (CBN) in August 2013 put the right foot forward with the launch of the N220 billion MSME Development Fund.
The Fund, according to the apex bank, is aimed at addressing the sub-sector’s huge financing gap. According to the World Bank, approximately 70 per cent of MSMEs in emerging markets lack access to credit. Although the gap varies between regions, it is said to be particularly wide in Africa and Asia. But, in Nigeria, as much as 90 per cent of private enterprises and MSMEs have limited or no access to credit, Popoola said.
This must have been why 10 percent of the N220 billion fund is devoted to MSMEs’ developmental objectives such as grants, capacity building and administrative costs. Ninety per cent of the commercial component was expected to be released to Participating Financial Institutions (PFIs) at two per cent for on-lending to MSMEs at a maximum interest nine per cent per annum.
The objectives of the Fund were to channel low-interest funds to the MSME sub-sector through the PFIs, enhance their access to financial services, increase productivity and output of micro-enterprises, increase employment and create wealth, as well as engender inclusive growth. Eligible activities to be financed under the Fund include agricultural value chain, services, cottage industries, artisans, trade and commerce and any income generating business as may be prescribed by the CBN from time to time.
Interestingly, the current administration, as part of its effort to support MSMEs and give more impetus to its ongoing diversification campaign, has since followed up by launching a series of funding and capacity development initiatives designed to boost MSMEs. These include the take off of the new Development Bank of Nigeria (DBN) with initial funding of $1.3 billion (provided by the World Bank, German Development Bank, the African Development Bank and Agence Française de Development) to provide medium and long-term loans to MSMEs
Apart from inaugurating a 22-member Council for the country’s MSMEs, with Vice President Yemi Osinbajo as Chairman, the Federal Government also set up the MSME Clinic, which brings relevant government agencies and their managements together with small businesses operating in various cities across the country. This was to enable the agencies provide direct support to these businesses. The interactions allow the agencies better understand the issues facing small businesses, and provide a platform for speedy resolution.
Essentially, the MSME Clinic was structured to focus on finding a one-stop-shop, which addresses different challenges confronting operators in this sub-sector. And the move was to bridge the information gap between the authorities and MSMEs with the aim of encouraging small businesses to be more efficient and capable of competing at the global level.
However, on funding, which appears to be the greatest constraint for MSMEs, it is doubtful if the sub-sector has been able to gather momentum on the strength of the N220 billion lifeline. The Nation learnt that difficulties in accessing the fund due to stringent rules have made it extremely difficult for operators to access the fund. Most MSMEs could not meet up with the stiff conditionality such as Certificate of Occupancy (C-of-O) for properties, which they usually don’t have.
But things are gradually changing. According to Popoola, Nigeria is now sixth in the world on the Getting Credit Indicator, ranking 145th out of 190 countries on the Ease of Doing Business, compared to 169th in last year’s report. “This is due to efforts by the Presidential Enabling Business Environment Council (PEBEC) initiatives of which the Credit Bureaus played an integral part last year,” he said.
The CBAN boss also said credit bureaux have helped increase access to credit. According to him, individuals now have greater access to loans based on their good credit history.
“This is particularly important to MSMEs who may not be able to meet the collateral and security demands of banks, but have a good credit history. These MSMEs would still have access to credit based on the strength of their good credit history and it is the credit bureaus that enable this,” Popoola said
While reiterating that access to credit is critical to economic growth and could be considered to be the motor for driving private sector development, the expert, however, added that more often than not, credit applications get rejected due to insufficient credit history and information for the lender to use to make a reasonable judgment as to whether to extend credit or not.
Automation also a viable option
Apart from changing the banks’ lending model to favour MSMEs, experts have also canvassed the need to encouraged MSMEs to embrace the use of technology to streamline capturing of their transactions and also automate their payroll calculations.
For instance, the Regional Director for Sage West Africa, Mr. Magnus Nmonwu, said automation will help MSMEs in Nigeria minimize the risk of non-payment of tax or incorrect remittances of taxes to the relevant government agencies.
Sage is a global market leader for technology that helps businesses manage everything from money to people – whether they’re a start-up, scale-up or enterprise.
Nmonwu said the ability of MSMEs to generate financial statements, tax certificates, reports and electronic payslips with the click of a button is also a major timesaver.
He added that an automated, cloud-based solution also means that businesses have an audit trail and reliable backups for all of their financial transactions so that they can demonstrate their compliance with tax laws.
The Sage director further stated that MSMEs could, for example, run seminars or workshops together with vendors to showcase how cloud technology eases the tax compliance burden for small businesses.
He pointed out that MSMEs’ automation had become necessary in view of the International Monetary Fund (IMF) warning that Nigerian Governments’ ability to effectively finance infrastructure and services is constrained by low tax collection.
Besides, the adoption of technology particularly online payment solutions by MSMEs has become necessary in view of a fresh window of opportunity that came the way of Nigeria’s estimated 37 million MSMEs by way of a projected N200 billion online payment revenue this year.
In 2016, about N132 billion worth of goods and services were said to have been purchased via the Internet. This, according to financial experts, made online payment a veritable market for MSMEs to tap into to grow their businesses.
Already, PayU Nigeria, an online payment platform, has moved to push an aggressive uptake of online payment solutions by MSMEs. Based on the firm’s findings, MSMEs stand to benefit from a projected N200 billion revenue that may accrue to the sector from online payments in the current year.
