Reviving The Real Sector Through Low Interest Intervention Funds

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With the hike in the benchmark interest rate from 12 per cent to 14 per cent at the last Monetary Policy Committee (MPC) meeting,  lending rates in the banking industry has hovered close to 30 per cent making funds more expensive for the real sector.

The hike in the Monetary Policy Rate (MPR) which is one of the key drivers of interest rates in the banking industry has seen prime lending rate overshoot 20 per cent per annum as other categories of lending have spiked to 30 per cent and beyond.

The hike in interest rates has increased the burden on operators in the Nigerian real sector, hitherto saddled with infrastructural and operating environment challenges, thus driving their costs up. The CBN had taken the path of higher interest rate to spur foreign portfolio investments in the country in order to address the illiquidity in the foreign exchange market which is another factor affecting the real sector.

Knowing that the real sector is crucial to the growth that the country needs presently, as well as the self-sufficiency that the government is working towards, the CBN had ensured that funding will be available for the crucial sectors in the economy.

With its resources and a large market, Nigeria has a great potential to be self-sufficient, however, the contrary is the case as the country is heavily reliant on import even for basic items, calling for an import substitution regime by the Federal Government as a way to reduce the county’s dependence on imports from developed countries.

The implementation of this policy focuses on protection and incubation of domestic infant industries so they may emerge to compete with imported goods and make the local economy more self-sufficient.

This has become even more evident in the light of lower foreign exchange revenue of the country which mainly comes from oil. Although the price of crude oil at the global market has been above the $40 per barrel point, Nigeria’s external reserves have continually dwindled as militancy in the oil regions of the country has seen lower than expected output.

This means lower accretion to the external reserves of Nigeria which since last year had continued to be depleted reaching a low of $25 billion. The lower level of the reserves had also affected the value of the naira as the Central Bank of Nigeria (CBN) could no longer fund some imports pushing more demand to the parallel market. This had prompted the move of the MPC to hike rate in order to lure in the much needed foreign exchange.

With interest rates at the commercial banks hovering around 25 per cents, special intervention funds have become essential so as to provide cheaper funding for entrepreneurs in the country especially as financing has always been chief on the numerous list of various challenges facing Small and Medium Enterprises (SMEs)

In view of the persistent financing gap for real sector development, the Central Bank of Nigeria (CBN) has continued to actively promote the flow of funds to the sector and improve access to finance by micro, small, and medium enterprises (MSMEs).

In recognition of the importance of SMEs in the development of the economy, the CBN is collaborating with other stakeholders to evolve initiatives that would facilitate the development of SMEs.

This collaboration is towards ensuring that SMEs in the country have access to the credit that is needed to develop the real sector. Also SMEs access to credit is mostly hindered by procedures and collateral.

In this regard, the apex bank had concluded arrangements on the Secured Transaction and National Collateral Registry, which will facilitate the use of movable assets as collateral for either business or consumer credit. This will substantially enhance access to credit through the diversification of the scope of eligible assets for collateral purposes.

Apart from this, the CBN has introduced various interventions aimed at creating credit and encouraging lending to this sector that is crucial to the survival of the country.

One of such is the N200billion SME Restructuring and Refinancing Facility (RRF) which was established to re-finance and restructure banks’ existing loan portfolios to manufacturers at 7.0 per cent per annum.

There is also the N200 billion SMEs Credit Guarantee Scheme (SMECGS) which was established to encourage banks to lend to productive sectors of the economy, by providing 80.0 per cent guarantee on loans granted by banks to SMEs and manufacturers. The CBN shall sustain the scheme in 2014/2015.

Asides this is the N220 billion Micro, Small, and Medium Enterprises Development Fund (MSMEDF) established on August 15, 2013. Disbursement from the Fund is designed to provide wholesale facilities, refinancing and guarantee to MSMEs, and is set to commence this year. The Fund will also provide liquidity support to microfinance banks/microfinance institutions for on-lending to MSMEs. Sixty per cent of the Fund will be devoted to women entrepreneurs.

In promoting agriculture and agriculture value chains, a sector which contributes a substantial portion of the GDP, the CBN launched the N200 billion Commercial Agriculture Credit Scheme (CACS) focused on the financing of large ticket projects along the agricultural value chain.

The Scheme is administered at 9.0 per cent rate of interest to beneficiaries for a seven year period, beginning 2009. Eligible large scale farmers and state governments including the FCT have continued to access the scheme. The apex bank has reiterated its commitment to continue an intensified monitoring of projects to enhance the funding of agricultural value chain.

Likewise, the Agricultural Credit Guarantee Scheme Fund (ACGSF) has encouraged lending to the agricultural sector by providing guarantee to banks. In 2014/2015, the bank will continue to sustain the scheme to further boost small-farmer activities.


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