News Column

High Interest Rate, Bane of SMEs Development

July 30, 2014

Phillip Oladunjoye

The Small and Medium Scale Enterprises (SMEs) have severally been described by economists as the engine of development of any economy all over the world.

This, however, has not been the case in Nigeria as the sub- sector is shackled with numerous challenges. The highest of these challenges according to analysts is lack of access to cheap fund.

For instance, Vice President Mohammed Namadi Sambo recently decried the high rate at which commercial banks charge interests which hamper access to financing by small and medium scale entrepreneurs.

The Vice president reportedly made this observation at the Mecca Guest Palace Hotel, in Mecca, Kingdom of Saudi Arabia when he received a delegation from the Islamic Development Bank (IDB) led by its Chairman, Dr. Ahmed Mohammed Ali.

Sambo said lack of access to financing remains one of the stumbling blocks to the growth and development of SMEs in Nigeria, adding that there have been situations where international financial institutions channel funds through local banks for on-lending to SMEs only for the banks to turn around and charge high interest rates.

The SMEs, he explained, thereafter end up supporting the banks by increasing their liquidity, urging the Islamic Development bank to evolve ways through which the small scale entrepreneur could have easy access to cheap funds to finance his business.

Sambo further stated that the Federal Government has a robust national master plan for small and medium scale enterprises adding that, he sought ways to see how the IDB would provide direct financing support for the small and medium scale entrepreneurs in the country.

He also noted that the current rebasing of Nigeria's GDP had shown Nigeria as one of the fastest growing economies, saying there was therefore the need for the bank to take advantage of this favourable economic climate to further support the nation in its quest towards rapid socio-economic growth and development.

The Vice President added that with the successful completion of 10 new thermal power plants in the country, there was also the need for adequate gas infrastructure to support industries in the country, calling on the bank's support in financing both gas and transportation infrastructure to allow for local processing and transportation of gas within the country.

Sambo called for the bank's support in realizing several other power and agricultural projects and programmes, which the administration was currently executing, including the Gurara Phase II 260mw hydro power project; the 3050mw larger Mambila hydro-power project, the Itisi Dam Irrigation and Hydro-power Project and the Zungeru 700mw hydropower project.

The Chairman of the Islamic Development Bank, Dr. Ahmed Mohammed Ali, said the bank has interest in many sectors, including education, healthcare, project financing, power and gas

He noted that at the moment, the bank was engaged in a gas pipeline project that would connect the southern and northern parts of Cote D' I'voire, which is at pilot stage and that they hope to also work with Nigeria in the future if the project works.

He further noted that the Islamic Development Bank is currently financing a number of projects in a number of countries across the world including Nigeria, adding that the bank has invested about $68 million on corporate projects in Nigeria and about $100 million to support the small and medium scale enterprises in the country among others.

Similarly, the Central Bank of Nigeria, CBN, said Micro, Small and Medium Enterprises MSMEs have the potentials to boost production, create jobs, reduce poverty and ensure inclusive economic growth and development in the country if adequately funded.

The CBN governor, Godwin Emefiele, said this at the signing of Memorandum of Understanding, MoU with the 36 State governments on "MSMEs Development Fund" in Abuja recently.

Emefiele said that in spite of global recognition, MSMEs in Nigeria had not received adequate financing required to play their pivotal roles in national development.

He said a joint report by the International Finance Corporation, IFC, and McKinsey indicated that financing gap of the critical sector of the Nigerian economy was N9.6 trillion as at 2010.

The governor said the CBN initiated the funds as an innovative way of improving access to finances at single digit interest rates by MSMEs in order to unlock their potentials and unleash them for growth.

He said state governments would be able to access up to N2 billion each for on-lending to eligible beneficiaries through participating financial institutions in their states.

The CBN, Mr. Emefiele assured, would ensure that the funds got to people at the bottom of the country's economic and social pyramid at a maximum of nine per cent interest rate.

He also said 60 per cent of the funds would be given to women, who often turn out better yields than their male counterparts.

According to him, the CBN would be committing considerable human and material resources to monitoring the disbursement and utilisation of the funds in a robust and verifiable manner.

"Participating financial institutions will be required to submit periodic returns on disbursement as well as analysis of the social impact of these funds on our people," he said.

He implored the state governors to assist the CBN to achieve its goals by ensuring that the funds were deployed in an efficient manner to beneficiaries.

Akwa Ibom State governor, Godswill Akpabio, who spoke on behalf of other governors, commended the CBN for initiating policies that bordered on poverty reduction in the country.

Akpabio, however, stated that the N220 billion set aside for the initiative was relatively small, considering the size of the country, the rate of unemployment and its economic potentials.

He urged the CBN to review the procedures involved in the disbursement of the fund to enable it get to the targeted population without difficulties.

Oyo State Governor, Abiola Ajimobi, on his part urged the CBN to carry out needs assessment of the states to establish their real needs, adding that the number of MSMEs varied from state to state.

Ajimobi said there was the need to disburse the funds according to the size and needs of the MSMEs in various states of the federation.

For Emmanuel Uduaghan of Delta State, the funds should be channeled through the states owned microfinance banks to allow easy access by the people.

Uduaghan said if microfinance banks were encouraged to handle the funds, more jobs would be created at the grassroots and more people involved in economic activities at the local level.

Governor Rauf Aregbesola of Osun State said the best way to address the country's economic challenges was by empowering the MSMEs and creating opportunities for the youths.

The governor stated that if about 50 million youths in the country were involved in economic activities, the country's earning would be increased.

Meanwhile, Head of SME, Stanbic IBTC Bank, Akintunde Oyebode, said lack of capacity and challenges with infrastructure impede SMEs in Nigeria, adding that training and advisory were two areas Nigerian SMEs were particularly disadvantaged, while high cost of doing business also takes its toll on Nigerian businesses.

He noted that due to the nature of the segment, SMEs were usually poorly capitalized with little or no assets, noting that a big barrier to funding was usually the lack of tangible collateral.

He said another big challenge is the absence of accurate and verifiable financial statement, with which formal lenders evaluate the credit worthiness of the borrowers.

To solve this, he said lenders need to develop non-traditional methods to evaluate borrowers in this segment, and leverage on available clusters like cooperatives and market associations to provide comfort to the lenders.

He said lenders must also identify that finance must be supported with the right level of technical assistance, noting that the most successful lending models werre usually those backed by the right level of technical assistance to ensure the borrowers maximize the funding provided.

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Source: AllAfrica

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