An interesting national conversation regarding the possibility of development finance institutions (DFIs) delivering single-digit interest loans to their customers is currently going on. The conversation is taking place largely within the financial sector, policy think tanks, the ivory tower and related spaces. But more Nigerians outside these privileged and rarefied circles should be paying attention and contributing to the conversation.
The reason is obvious. Like other parts of the world where DFI’s operates within multiple sectors of the economy, the establishment of development finance institutions in Nigeria is based on the need to achieve significant turnaround of critical sectors of the economy by unleashing the innate strengths of strategic sectors which have been held hostage by wrong policies and poor implementation, boost overall economic development, create jobs, improve infrastructure and provide a better life for the people.
In Nigeria, DFIs are ubiquitous. They have become the popular policy tool of successive governments to “kick start” – a favourite government phrase – development in strategic areas. The CBN website lists the following as DFIs under its supervision: Bank of Agriculture (BOA), Bank of Industry, Federal Mortgage Bank of Nigeria, NERFUND (National Economic Reconstruction Fund), Nigeria Export Import Bank and The Infrastructure Bank.
But this is an incomplete list because in spite of their access to non-budgetary funds, private sector-driven focus and superior governance, the Development Bank of Nigeria and the Nigeria Incentive-Based Risk-Sharing System for Agricultural Lending (NIRSAL) also operate as DFIs.
To say the obvious, the failure of the Nigerian financial system is central to the emergence of DFIs. Nigerian banks have a reputation, some of which they have earned, for their long-standing lack of enthusiasm for low interest rates. They have been the butt of constant criticism by successive governments, civil society and the public for allegedly sabotaging policies and initiatives designed to achieve a significant reduction in interest rates which are sorely needed to empower entrepreneurs so that MSMEs, the most critical catalysts for economic growth, can flourish.
But the truth is that, official pronouncements notwithstanding, it is difficult, if not impossible, for DFIs to sustain single digit interest rate regime at this time. The distance between the idea of a single interest rate and its implementation cannot be breached so easily. Consider the issue of liquidity.
According to credible statistics, the financing gap in MSME funding is over a trillion Naira while available intervention funds is estimated at over N200 billion. In other words, the gap is about five times the available funds.
The minority of entrepreneurs fortunate to have access to scarce intervention funds have the option of blending the facilities obtained at lower rates from DFIs with commercial loans from the regular banks which come with collateral and other steep conditions. But the blend is not likely to be achieved in the single digits.
The focus on improvement on treasury bills rate and the implication for funding of DFIs may also be overly optimistic. In his much-referenced interview, Nnanna enthused about a fall in the treasury bill rate from 18% to 10% to make his case. But since his statement, the rate has been inching up again to 11-12%. And with political risk rising in the run up to the 2019 elections, the upward trajectory is likely to be maintained. Notably, inflation is also going up; the latest figure by the National Bureau of Statistics, after months of marginal reductions, is a headline inflation of 11.2% year on year. The idea of achieving sustainable single interest loans in an economy defined by such headline statistics is farfetched.
Some critics may retort: “But some DFIs are already doing it!” Again, we have to be careful. How many are doing it and how long can they sustain it? It is important to make a distinction between real possibilities and political promises which have naturally spiked as the 2019 elections get closer.
Nigerian history also tells us that without strong governance and a market-driven foundation, unstructured and inadequate funding by DFIs doesn’t last or produce the expected results. The experience of the Federal Mortgage Bank which produced less than 17,000 completed mortgages in its first fifty years of existence is a cautionary tale. The deployment of unstructured subsidies is not a good strategy.
The reality we cannot run away from is that government resources, especially after the recent recession from which the economy is yet to completely recover are grossly inadequate. There are so many priorities begging for attention in an economy defined by joblessness, lack of infrastructure and poor growth. The implication is that public funding of DFIs is not a sustainable option given the gap between available intervention funds and the funding needs of MSMEs. In this situation, single digit loans from DFIs cannot be a central policy or reality.
–Adole is a policy analyst