TheCable

In the last few years, the 27th of June, has been a day for reflection by governments, stakeholders, policymakers and all those concerned with small businesses, due to the vital role they play in every economy. Undisputedly, Micro, Small and Medium-sized Enterprises (MSMEs) play important roles in the global economy. According to the International Trade Centre (ITC) the joint agency of the United Nations and World Trade Organization dedicated to supporting the internationalization of small businesses, MSMEs account for more than 90 percent of all businesses and around 70 percent of jobs worldwide.

This category of businesses also stimulates economic growth and provide employment for large sections of society including women, young entrepreneurs, and poor communities. In recognition of the importance of MSMEs in encouraging innovation, creativity and decent work for all, as well as achieving the goals of the 2030 Agenda for Sustainable Development, the United Nations General Assembly, in 2017, declared June 27 to be MSMEs Day by adopting resolution 71/279.

The vulnerabilities that small businesses face, especially in accessing international market opportunities, alongside trade procedures when compared to bigger businesses, are quite known. In recognition of their importance, the Sustainable Development Goals (SDGs) of the 2030 Agenda contain a global call for action, towards improving the access to finance, value chains and markets for MSMEs. The MSMEs Day is therefore dedicated to raising awareness of the importance inherent in supporting the development of MSMEs in developing countries, and also a celebration of the gigantic contributions they make to the vitality of the global economy.
Given the rippling socioeconomic effects of Covid-19, the theme is for this year’s MSME Day is titled “MSME 2021: key to an inclusive and sustainable recovery.”

In Nigeria, there are officially41.5 million MSMEs, comprising of at least 41.4 million micro enterprises; and 73,081 small and medium enterprises. Together, they contribute about 50 percent of GDP, are responsible for 59.6million jobs, which represent 86.3 percent of national workforce. They also contribute 7.64 percent of export receipts.

The Nigerian government has overtime been aware of their importance, hence the establishment of the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in 2003, as the primary agency of government for the promotion of MSMEs in the country. To underscore its importance, the agency was once under The Presidency of Nigeria, as against being under a Federal Ministry.

The challenges that MSMEs in Nigeria have to contend with, are not different from those faced internationally; including access to finance, value chains and markets. A PWC report in 2020 identified obtaining finance, finding customers and infrastructure deficits are the most pressing problems of MSMEs in Nigeria.

Small businesses are the most viable options for addressing some of Nigeria’s most pressing social and economic problems, hence the need to continuously address the challenges they face. With unemployment at 33.3percent and youth unemployment at 42.5 percent, the need to address their challenges, and in the process, create jobs that reduce the unemployment level in Nigeria, cannot be overemphasized. Nigeria’s GDP declined by 23 percent and household income fell by 25 percent, due to Covid-19. In 2021, the Credit Bureau Association of Nigeria estimates that only 4 percent of Nigerian MSMEs have access to credit.

With the understanding of what their primary challenges are, the question then arises- what other approaches can be feasibly adopted to increase access to finance for MSMEs in Nigeria?

Before attempting answers, there is need for some overview of previous approaches, so that what may be proposed are not simply a repeat of previous efforts.

In Nigeria, Microfinance Banks (MFBs) are tasked with the provision of financial services to micro enterprises, among others. The 900 Central Bank of Nigeria (CBN) licensed MFBs tasked with providing financial services such as deposits, loans, money transfers and insurance to the poor and low-income household and their micro enterprises at affordable cost, have largely been unable to provide the required level of financial support to MSMEs.

The MSME Clinics is another of such efforts for MSMEs in Nigeria. Launched by Acting President Osinbajo on January 24, 2017 in Abuja, it is an initiative of the Office of the Vice President, in partnership with the Federal Ministry of Industry, Trade and Investment and 11 Federal Agencies, to create a platform for Micro, Small and Medium Enterprises to interact with Federal Agencies, and obtain practical and on-the-spot solutions to their business challenges. The initiative has access to finance as one of its key objectives. And not to be forgotten is the Bank of Industry(BOI), Nigeria’s oldest development financing institution which traces its history to 1964, and has the Ministry of Finance Incorporated (MOFI) Nigeria (94.79 percent), the Central Bank of Nigeria (CBN) (5.21 percent) and private shareholders (0.01 percent) as owners. The BOI Microfinance Bank Nigeria is a subsidiary of Bank of Industry Nigeria that offers a broad range of financial services to MSMEs and various low-income earners.

The Credit Reporting Act, enacted on the 30th day of May 2017, is another of such government efforts. The Act provides a statutory framework for the licensing and regulation of the operations of credit bureaux in Nigeria. The law provides legal teeth to the activities of the Credit Bureaux, which were previously regulated by the “Guidelines for the Licensing, Operations and Regulation of Credit Bureaux and Credit Bureaux Related Transactions in Nigeria 2013”. Designed to promote a credit reporting system, and the facilitation of the sharing of credit information, this legislation is expected to address the challenges that organisations face with providing credit history and credit information, in support of loan applications.

The Secured Transactions in Movable Assets Act, 2017 that gave legal backing to the National Collateral Registry (NCR) platform, is also worthy of mention. A 2015 initiative of the CBN and the International Finance Corporation, NCR registration allows MSMEs to convert and register their movable assets into collaterals for credit, and still retain control and use of such assets, thereby increasing their access to finance. So far, lending banks have availed credit amounting to ₦1.80 trillion, US$1.36 billion and €10.92 million, to 273,435 borrowers, comprising: 262,904 individuals; 1,421 large, 4,260 medium, 1,433 micro and 3,417 small businesses under the NCR. Though commendable, the numbers are a far cry from the over 39 million MSMEs that lack access to credit.

Another of the more recent efforts by government to increase access to finance for small businesses in Nigeria, is the CBN MSME Development Fund of 2013. Launched on August 15, 2013 with a share capital of N220 billion, the Fund was established in acknowledgement of the important contributions of MSMEs to the economy, and the existing huge financing gap they are faced with. The 90 percent commercial component is given to Participating Financial Institutions (PFIs) at 2 percent interest rate for on-lending to MSMEs at a maximum interest rate of 9 percent per annum. 10 percent of the fund is devoted to developmental objectives such a grants, capacity building and administrative costs. Cottage industries, agricultural value chain, services, artisans, trade and commerce and any income generating business as may be prescribed by the CBN from time to time, are the eligible enterprises for the fund.
Another effort of the federal government to increase access to medium to long term financing for MSMEs, was the establishment of the Development Bank of Nigeria Plc. (DBN) in September 2014. DBN was established in partnership with several international finance institutions such as the World Bank, African Development Bank (AfDB), KfW Development Bank (Germany), Agence Française de Développement (AfD) and the European Investment Bank (EIB).

As commendable as these government efforts and intentions for increasing MSME access to finance are,96 percent of Nigerian MSMEs still do not have access to credit in 2021. While these government and development finance driven efforts are commendable, the fact remains that for a business, commercial banks remain the most feasible and preferred source of finance due to various factors such as spread, efficiency of service among others. That the bigger and more thriving businesses which MSMEs aim to become get most of their financing from private commercial banks, validates the need for increased access to commercial bank financing, for small businesses.

A number of studies have identified meeting the requirements of the credit policy, as the major challenge that MSMEs in Nigeria face, in accessing finance at commercial banks. In particular, the challenges include no official registration with the Corporate Affairs Commission (CAC); lack of credit history due to non-registration with any of the three licensed Credit Bureaus; absence of audited financial reports; faulty business plans; and no insurance coverage. Are there approaches that commercial banks can adopt to increase small business lending, without unnecessarily expanding risk? Yes, there are.

Despite the digital presence of the CAC, commercial banks still have more presence, and can be better reached by MSMEs in Nigeria. This is also because not all Nigerians have access to internet, as internet penetration stands at 46.6 percent, with over 50 percent of Nigerians not having internet access. The banks can therefore partner with the CAC to have some level of presence at commercial banks, physical or virtual, were business registration services can be provided for MSMEs at an affordable rate. With this in place, small businesses who have met loan requirements but lack formal registration, should no more have their credit applications declined.
A similar approach can be adopted by the banks and the three licensed credit bureaus, which are CRC Credit Bureau Ltd, CR Services Credit Bureau Plc, and XDS Credit Bureau Ltd. MSMEs that have not been registered with any of the bureaux, and therefore have no credit history to support their loan applications, can be registered at the credit bureau desks situated in commercial banks. This in turn increases their chances of accessing finance.

In the rural and semi-urban areas where many MSMEs in Nigeria operate, it is easier to find a commercial bank than an auditing firm. This gap can be filled if the banks can partner with affordable auditing firms, who can audit the financial records of small businesses after contacts have been initiated through the banks. The audit firms can also provide some corporate governance advisory to MSMEs. Small business operators with good business ideas, but poorly written and presented formal business plans, can benefit from a similar business support package. The many Nigerian graduates of business faculties can be mentored and engaged by the commercial banks to render these paid but affordable services, leading to job creation.

As many commercial banks now have insurance affiliates or partners, the extension of such services to MSMEs at affordable rates, should address the challenges they may have for small business insurance, and lead to increased lending in the process.

As banks are businesses with shareholders, it is worth reiterating that these services are to be provided at a fee, albeit affordable. The numbers and scale available- over 41 million- mean that such collaborative efforts not only address the challenge of financing for 96 percent MSMEs in Nigeria without access to credit, but also simultaneously increase the bottom line of the banks. This approach understandably requires some modification in approach, from banks and credit officials, perfunctorily looking to just ‘tick the boxes’ when loan applications are made by MSMEs, to looking at ways in which they can support such challenges, through partnerships. This modification in approach can also be promoted within the framework of sustainable corporate social responsibility. This may also require the recruitment of credit officials with entrepreneurial backgrounds, by commercial banks. That way, they are more understanding of the challenges MSME face, especially micro enterprises, and can therefore make more informed credit decisions. Credit officials with finance only backgrounds, are more likely to quickly reject MSME loan applications.

And there is a role for government in these, as setting lending targets for banks towards certain sectors does not really work. The absence of titled documents and proper street identification in rural areas and unplanned urban areas where many MSMEs operators either reside or do business, makes registration verification more challenging. While increased town planning and government legislation are required, some of the more immediate measures that can be adopted to address these challenges include allowing structured notification by local government authorities, Traditional rulers or Community Leaders, to serve as some form of legal documentation for residences of such areas. Google Mapping and other relevant technology can be used to complement this process, that can unlock capital for MSMEs in Nigeria.

For advocacy, SMEDAN can partner with the CBN in getting the Bankers Committee, which is the exclusive forum for the chief executives of Nigerian banks and the directors of the different departments of the CBN, with CBN governor as chairman, to adopt these propositions. Given the limitations already identified with development financing, the drive by SMEDAN to establish an MFB for increased MSME lending, may not be the most efficient approach. As the Development Bank of Nigeria is already in place to do the same thing, SMEDAN could push for a larger role in the activities of the bank.

These propositions are not in any away a suggestion or assumption that all MSMEs will be able to access finance from financial institutions, especially commercial banks. It is however a drive towards initiatives that take into consideration, the domestic circumstances that are prevalent in Nigeria, towards ameliorating the low access to finance by small businesses.

If the suggested approaches are adopted, commercial banks will reduce the number of declined loan applications, by providing finance to small businesses that are financially feasible with good business plans. Non-financial issues such as business registration, audited accounts, insurance cover, credit bureau registration, among others will therefore no longer be major reasons for declining loan applications by MSMEs.

Aside the profit banks will make from increased lending, given that idle deposited funds hardly generate profit, the banks will also make some profit when they provide some of the recommended support services to eligible small businesses such as auditing services, CAC physical or virtual business registration desk and Credit Bureau physical or virtual registration desk. These services should however be provided at very affordable rates, and the scale of transactions, given the millions of MSMEs in Nigeria, should make it financially worthwhile for the banks.

As every country will have to find ingenious ways of addressing its peculiar challenges, policy changes by commercial banks through in-house MSME support, can sustainably address the access to finance challenge that MSMEs have in Nigeria.

Uwanaka writes through [email protected]