MSMEs: From financing gap to relationship gap

Although electricity remains the most important constraint to the development of the MSME sector in Nigeria, lack of finance continues to exert enormous pressure on small businesses in the country. So much has been said about the financing of MSMEs in Nigeria. In fact the advocates of better funding of the sector are beginning to sound repetitive. To some people, it is now looking like we have over-flogged the issue. However, I hold a contrary view from such people. As long as the problem remains unsolved, it is our civic duty to continue to put it on the front burner.

The MSME sector is too important in our economy to receive passing attention. I am therefore going to update and drive further, some of the views I had earlier expressed on the subject matter of financing the MSME sector in Nigeria.
The population of Nigeria has been estimated at 187 million with a projection that puts it at 207million in the year 2020. This is a large number of people to be found in one country by any standards. And given the current resource and structural realities of the economy, it is even more important now that we focus on the MSME sector more than we did in the past. The developments in both the domestic and global economies dictate even more commitment to the sector whose role in every aspect of our economic life has long been rightly acknowledged.
To recap, Sub-Saharan Africa is reported to be one of the most difficult regions for businesses to access finance. Indeed, the region has an estimated credit gap of between USD70 billion to USD90 billion. Entrepreneurs in Nigeria, being a leading country in the region both in terms of population and size of the economy, must have an equally large share of this financing gap. As a matter of fact, what most Nigeria enterprises need are small loans made timely and at good rates. Research has it that over 60 per cent of our small business units borrow less than N5million, to finance both working capital and business expansion needs. The banking sector, being structured the way they are and largely better attuned to big ticket transactions, has been struggling largely unsuccessfully to provide the funds.
The Nigerian economy, like most economies in the world, is dualistic in nature. It is composed of a slow-growing formal sector and a very active and rapidly expanding informal sector. This structure may not be peculiar to Nigeria. As a matter of fact, there is an informal sector even in the most advances economies, no matter how insignificant they might be to those economies. But the Nigerian situation is a lot different. The dualistic nature of the Nigerian economy is more significant because of the relative importance of the informal and informal sectors.
The informal sector in Nigeria is much larger than the formal sector, especially in the utilization and absorption of idle labour. Contributing about 60 percent of the economy’s GDP, the Nigerian informal sector deserves all the attention it gets, even if it is mostly on the intellectual space and the news media. This dominance of the economy by the informal sector has very serious implications both for economic planning and development, as well as living standards and the general prosperity of the people. Not only does this negatively impact planning and development it reduces the efficacy of policy instruments and leaves the economy vulnerable to the volatility that is inherent in a commodity economy.
One of the challenges of the sector has been identified to low access to finance. The government through many financing schemes has made available a number of financing packages for the sector. Suffice it to say that there is over N2 trillion in assorted funds targeted at the sector. Unfortunately, much of the funds is not getting into the sector. Several reasons have been adduced for this failure. The catalogue of reasons we proffer, largely as alibis for our failure, read like this: the banks are formal institutions and cannot finance informal institutions; there is a disconnect between the formal financial superstructure imposed on our largely informal economic substructure; it takes the same amount of resources to analyse both large and small credit transactions, making small business finance unprofitable to banks. Others claim that the operators in the MSME sector are not adequately prepared to receive external funding, due to their nature and the way they present themselves. Yet other arguments for the inability of funds to get to the informal sector are that the operators suffer from financial illiteracy and ignorance; they lack of proper structure and leadership, and so on and so forth. And the excuses go on ad ifinitum.
Some organizations, apparently in recognition of their own contributions to the failure, and these include the banks and educational institutions, have taken it upon themselves to promote capacity building in the sector. We now have SME desks in several banks and a lot of capacity build programmes are being designed for the sector by many training institutions. This is very commendable. Much has been achieved but there is much more to be done. Most firms in Nigeria still rely exclusively on their own funds and most SME loan applications are still rejected in banks. It is therefore, my view that we need to change trajectory on this matter.
I think we should move away from looking at the financing gap in the MSME sector and tackle other gaps. And there are many of them. One of them is relationship gap. There is wide relationship gap between the deposit money banks and the MSMEs. There is need for us to connect the MSME sector to the mainstream of the financial system irrespective of the diverging constitution of the formal financial superstructure and the larger informal substructure housing the MSMEs. It is not right to focus on other financial institutions and the informal credit markets to finance the informal sector. The financing gap is definitely too large to be tackled with the banks anywhere other than the fore front.
We should review the structure of the present financing packages available and see how we bring the banks into a deeper and better commitment to our efforts to canalize finance to the MSMEs. There is no doubt that the banks are in business for their bottom lines and the directors are not there for the charity. However, I believe with appropriate guarantees and the right kind of incentives, we shall have the banks in their rightful place – leading the drive to canalize finance to the MSMEs.