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‘Lending To SMEs Should Be An Economic Development Initiative’



Mr. Muda Yusuf, director-general of Lagos Chamber of Commerce and Industry (LCCI), in this interview with TAIWO OGUNMOLA-OMILANI, spoke on effects of electioneering campaign on investors and other related issues.


The economy is out of recession. What impact has that made on the private sector?

We are excited by the exit from recession because of the positive signalling effect to the global investing community. It would improve the perception of the economy by foreign and domestic investors. It will also improve the profile of the country as an investment destination. This impacts positively on investors’ confidence. However, the gross domestic product (GDP) numbers and the exit from recession are not ends in itself; they are means to an end.

What matters in the end to business is the impact on the cost of doing business, productivity of the economic players, competitiveness of firms and the sustainability of investment. For the citizens, what is paramount is the welfare effect of the GDP numbers. The impact on food prices cost of healthcare, transportation cost, power supply and the purchasing power. These are some of the ultimate outcomes that would determine whether the exit from recession will be celebrated.  This is what distinguishes growth from development.

What was responsible for the exit of recession?

A number of factors are responsible for the progress made so far: rebound of oil price and oil output, better forex liquidity and commitment of government to ease of doing business. However, in order to sustain the current positive outlook, we need to ensure the following: alignment of procurement policy of government to support domestic investment; investment policy that would protect domestic investors such as tax policy that is investment friendly, interest rate policy that is investment friendly, and trade policy that will reduce cost of operations across sectors.

 There are fears that government will engage in borrowing to fund the 2018 Budget through bonds and treasury bills. Do you share the view that this will lead to crowding out the private sector?

Investments in treasury bills and federal government bonds have become more attractive than investments in the real economy such as manufacturing, agriculture and solid minerals.  It has created a serious crowding out effect on private sector credit. Even the financial institutions would rather invest in treasury bills and bonds rather than lend money to entrepreneurs.

This condition has been created by the high rate at which the government borrows – the high yield on treasury bills and federal government bonds which are in the 20 per cent threshold. And income from the investments in these government securities is tax free. Not many investments can match this kind of returns. Although steps are now being taken (though belatedly) to reverse the situation.

This dynamics of the debt market has become a constraining factor to the financial intermediation role of the banking industry. This is detrimental to wealth creation and employment generation. For now, the biggest burden of debt is from the domestic debt. This is as a result of the high cost at which government borrows. Borrowing should be restricted to concessionary loans with good moratorium and tied to specific projects. This is a better debt management policy.

Another major implication of the high yield on treasury bills and government bonds is the burden of debt servicing.  In the 2017 budget for instance, the sum of N1.8 trillion was earmarked for debt service, which was 85 per cent of capital budget; while in the 2018 budget it is N2 trillion, which is 74 per cent of capital expenditure proposal. These are huge sums with enormous opportunity costs for the economy.  It is a trend that is clearly not sustainable. The good news is that these concerns have been captured in the Economic Recovery and Growth Plan (ERGP) document for the attention of the government.

What is the impact of CBN policies on credit delivery to SMEs?

The CBN has put in place several intervention funds as part of its development finance functions. We have interventions funds for the Micro, Small and Medium Enterprises (MSMEs), manufacturing, power sector and aviation. Specifically, for the SMEs there is currently the MSME intervention fund of N220 billion. Part of this has been earmarked for the anchor borrowers scheme to support agriculture. These are laudable initiatives.

But the big challenge is that of access to the funds. The utilisation rate has not been impressive, which is why it is important to identify the constraints to access. The first major factor is that under the present framework, the banks bear the credit risk of the interventions funds. This has weakened the zeal of many banks to disburse the funds because of associated risks, especially for the real sector of the economy and the SMEs.

The conditions for lending are therefore typically very stringent, making access difficult. This is an impediment that should be addressed if the financing opportunities in the intervention would be unlocked. There should be a framework to de-risk the lending, possibly through credit guarantee schemes put in place possibly by the CBN. This is an option to be considered. Lending to SMEs should be seen as an economic development initiative, not strictly a commercial undertaking.

Lenders should therefore come into this space with a developmental mindset, not a commercial mindset. The CBN and the government have a major role to play in fostering this mindset. A second major challenge to lending to SMEs is the limited knowledge of many sectors of the economy by the commercial banks. It is difficult for banks to lend to a sector that they do not have good knowledge of.  This is perhaps why it is difficult to source domestic capital for sectors like the solid minerals, hospitality and entertainment, ICT, etc.

For SMEs in production such as manufacturing and agriculture, productivity is an issue. Poor productivity heightens the risk of failure and the risk of loan defaults. Invariably, this affects the disposition of the banks in lending to real sector. Infrastructure issue is a critical factor constraining the productivity of SMEs and this affects access to credit.

Another critical factor affecting access to credit of SMEs is the crowding out effect of government borrowing in the financial markets. Where the government is borrowing at over 20 per cent, how can the private sector borrowers compete, least of all the SMEs? The current yields on treasury bills and federal government bonds have created a major disincentive to lending to private sector, especially the real sector and the SMEs that are typically perceived as very risky.

This phenomenon has created a profound disconnect between the private investors and the banking system. This is perhaps why domestic credit to the private sector as a percentage of GDP in Nigeria is one of the lowest in the world, at 14.2 per cent, according to a recent World Bank data.  The average for sub-Sahara is 45.8 per cent. For the middle-income economies it is 96.5 per cent; while for the high income economies it is 146.6 per cent.

Yet, another challenge of access to credit is that many SMEs cannot prepare a business plan. Yet, this is often a requirement by the banks for lending.  But the reality is that the inability to prepare a good business plan does not diminish the entrepreneurial competencies of these SMEs. Indeed, most successful micro and small businesses cannot articulate a business plan in writing, although a few engage consultants to do this for them when the need arises.

What are your predictions for the private sector in 2018?

The fundamentals of the economy are improving with numerous opportunities and potentials. Crude oil prices and output levels have recovered, foreign reserve is improving, and inflation is on a gradual but steady decline. It is expected that these exciting outcomes will be sustained into a better part of 2018.

For the country to sustain the present recovery and growth, the following enablers should be put in place: aggressive investment in infrastructure to boost productivity in the economy, reduction in multiplicity of exchange rates, alignment of procurement policies at all levels of government to support domestic investment, investment policy that would protect domestic investors, tax policy that is investment friendly and interest rate policy that is investment friendly.

Current reforms in such critical sectors as power, agriculture, solid minerals and oil and gas should be sustained. The executive orders signed in May last year should be fully enforced to improve the way government does business and thereby improve the business environment.