Time to lend to the real sector

On December 8, at the third valedictory lecture of the Chartered Institute of Bankers, the outgoing managing director and Group CEO of First Bank of Nigeria, Stephen Olabisi Onasanya, made an unusual call by urging banks not to focus more on profitability to the detriment of their developmental role in the society of lending to the real sector of the economy.

“Banks would need to be stronger to play their role in our economy by being catalysts for funding and development of the real sector, rather than chasing profitability by all means, even with destructive tendencies,” Onasanya said, adding that there are as yet no disincentives for banks shying away from their development role and responsibilities, even as banks that tend to focus more on those roles are unduly punished in the public/social media arena.

Coming at a time the Central Bank of Nigeria has also reduced the Monetary Policy Rate (MPR) from 13 percent to 11 percent so that more funds could be made available to the banking system to enable the banks lend more to the real sector, Onasanya’s advice could not have been more timely.

True, the real sector – usually dominated by Small and Medium Enterprises – constitutes the lifeblood of every successful economy and is responsible for providing the most jobs. Developed societies, therefore, enact policies to specially support the sector to flourish. Prominent among such policies is the ease of access to finances and bank loans usually at low (single-digit) interest rates.

In Nigeria, however, the SME sector has almost been strangulated out of existence by the inclement environment they are made to operate in. What is more, Nigerian banks have traditionally not shown interest in financing the sector. When they do, the lending rates are usually so high that most small firms end up working for the banks at best or are strangulated out of business by the loans. Rather, Nigerian banks have always preferred to invest in government bonds that generate high yields or lend to oil marketers and importers where they can make quick and eye-catching profits within a short period of time.

But considering the worrying rate of youth unemployment and the absence of formal sector jobs to absorb the millions of jobless youth and school leavers, the SME sector has been correctly identified to hold the key to solving the unemployment problem in the country. Besides the encouragement and teaching of entrepreneurial skills to the youth to enable them to become job creators rather than job seekers, the development, and special treatment, of the SME sector is seen as critical to allowing the sector take root and flourish in the country. The banks play a central role in the process by provision of loans and funding at low rates to the sector. As such, policies must be developed by the government and the CBN to nudge the banks into financing the sector.

However, there is no policy or nudge that will compel the banks to finance the SME sector if they are unwilling to do so or prefer quick and short-term profits. This is where Onasanya’s exhortation comes in handy. As a respected figure in the industry and one that has led perhaps the biggest bank in the country, his colleagues may take his admonitions for what it is worth.

Besides, this was not the first time Onasanya has advocated this position. At a CEO Business Roundtable on empowering youth and solving unemployment through education and skills development hosted by the Lagos Business School First Bank Sustainability Centre some months back, he had also passionately made this same appeal, arguing that only the development of entrepreneurial skills amongst the youth and the development of the SME sector in Nigeria can save the country from imploding under the youth unemployment crisis facing it. He particularly called for increasing the tolerance level for non-performing loans in the SME sector and the risk-taking capacity of banks to lend to the sector, while lamenting that the prevailing tolerance level NPLs – currently at a meagre 5 percent – does not help or encourage banks to lend to the sector.

As the World Business Council for Sustainable Development aptly puts it, “Business cannot succeed in societies that fail”. We, therefore, urge Nigerian banks to de-emphasise unnecessary pursuit of quick profits and prioritise their developmental role in the economy. If Nigerians with entrepreneural mindsets must be encouraged to set up businesses that will at once help solve the society’s nagging unemployment problem and contribute to the economic development of the country, government, the CBN and the commercial banks must prioritise funding and support to the SME sector.