Financing gaps and opportunities in the MSME sector
There are still a lot of opportunities for profitable financing activity in the informal sector of our economy, if only we can identify the gaps and opportunities. Credit markets, formal and informal, are essential institutions for the finance of development. However, the impact of the challenges experienced by economic agents in the informal sector in securing appropriate financing needs to be elaborated, understood and managed, if not completely obliterated. First, it is important to know that not every kind of finance is appropriate for every kind of business.
No matter the source of capital, be it loan, grant or even gift, there are implications or some terms to be observed. For a gift, the implication may be that it is the last time the recipient may get any more gifts from the source, and so the condition is to be sure the gift is well utilized. Second, financing difficulties may hamper efforts to increase productivity. Third, inability to secure appropriate finance may completely terminate an otherwise good business idea.
Countries that understand these realities pay more attention to the sources and cost of credit, across their economic landscape. Without any doubt, Nigeria is one of such countries that understand the importance of credit to the informal sector. Provision of finance for the sector is definitely not one of those areas we experience policy amnesia or outright confusion. Nigeria has one of the most active informal sectors in Africa, with over 37million MSMEs. Even the worst critics of the successive regimes will concede that they have demonstrated an understanding of the importance of finance to MSMEs by the numerous funds created to support the sector, since the 70s.
For instance, we have the Small and Medium Enterprises Equity Investment scheme (SMEEIS) – a voluntary initiative of the Bankers’ Committee launched in 1999. It compels all banks to set aside ten percent of their profit after tax for equity investment and promotion of small and medium enterprises. There is a N220 billion MSME Development Fund, which was launched in 2013. In addition, the CBN has set up a N200 billion Small and Medium Enterprises Credit Guarantee Scheme, to promote access to credit by the operators in the SME sector. I have elaborated on the early post-independence packages elsewhere in this column. There is indeed enough evidence to show that the government of Nigeria is strong in the pursuit of adequate financing for the sector. Yet, the first thing one hears our MSMEs complain about is finance. The reason is simple- informality. Borrowers are ill-prepared and lenders do not actively seek out the financing gaps and opportunities in the sector and customize solutions.
As I have said elsewhere in this column, it has long been established that finance is not the most pressing problem of MSMEs. A recent study promoted by the Enterprise Development Centre of the Pan Atlantic University showed that unconducive environment is a far greater challenge to MSMEs than finance. Notwithstanding, it is very important that we continually update our understanding of the financial circumstances of those engaged in small businesses that have the potential to create the most jobs and wealth.
There are two parts to the credit markets in every economy. On the one hand is the formal credit market, comprising banks and non-bank financial intermediaries facilitating the interaction between lenders and borrowers. On the other, is the informal credit market, consisting basically of individuals, the leading players of which are the money lenders. Others are the numerous Rotating Savings and Credit Associations (ROSCAS), in which individuals contribute a standard sum and at the end of the agreed period, pay their collection to a member. Others then take turns to collect until everyone has taken his turn and the cycle resumes. There is also the Accumulating Savings and Credit Associations (ASCAS), in which each member contributes either the same or different amounts and each person takes only his own contribution at the end of the agreed contribution period, and the contributions continue. In Nigeria, there is the Esusu, which is the well-known itinerant banker that charges interest to “help” one save one’s money. There are also many cooperative societies engaged in one form of credit service or the other to members.
Rural credit markets in Nigeria have evolved significantly from one dominated by the unregistered moneylenders and pawn brokers to one that is rapidly embracing formal structures due to the encroachment of formal institutions. The financial reforms of the 1990s led to the licensing of moneylenders, finance companies, microfinance and mortgage banks. By introducing new institutions and instruments it furthered the assault on financial exclusion, which actually began in the late 70s, when the federal government introduced the Rural Banking Programme. It significantly watered down the influence and supremacy of money lender and pawn brokers in the informal credit market. The programme aimed at taking banking to the unbanked to promote development. Attempts at financial inclusion have always been here but we did not follow through on an economy-wide basis. The rural banking programme failed to achieve much of its objectives for some inevitable reasons.
Under that programme, the banks actually provided the local people the opportunity to save their money – a much needed intermediation service. They also mobilized rural deposits for investment – another plus for the programme. However, they did not lend to the rural people that gave them the deposits. We therefore had a situation in which deposits were taken from the rural poor to fund economic activity in the urban rich. Why was this the case? The answer is informality. The banks were unable to understand informality and identify the financing gaps and opportunities for creative financing. The risk of lending to the sector appeared too much for them. It still does today.
In essence, the challenge of financing the MSME sector has many dimensions. There is the availability and cost dimension. There are the environmental and even cultural dimensions. Above all, there is the lender mindset dimension. If the bankers of the 70s knew about collateral-free landing, which they are now doing through their microfinance subsidiaries, the rural banking programme would have produced a different result. Surely, the onus is on lenders to be bold and creative to see the gaps and opportunities in the sector and design appropriate response. While government must get serious with key environmental issues like national identity and street numbering system, we must pursue new creative idea like Collateral Registry and Credit Referencing or Bureau. We have already seen from Grameen Bank that one good idea can change the financial sector of an economy.
Without doubt, wherever the bank rate or MPR is jerked up to double digit supposedly to ward off inflation and attract foreign capital, the informal sector, has nothing to offer beyond the potential for default. The solution is in tackling the features of informality that have made it impossible for them to benefit from the numerous financial packages now available. I had also said elsewhere that the provision of functional infrastructure and common services will probably serve MSMEs better than these financial packages, which though very important, come with a litany of preconditions, made to look impossible by the fact of informality.
Emeka Osuji