Policy disarray as requiem for small business

Some time ago, I wrote an article in this column, titled “Doing Business in Nigeria: all motion no movement”. The article was targeting the challenges which businessmen, including foreign investors, face while trying to play in the Nigerian economic space. There is now some debate as to whether that piece came at the right time or a bit too early. While some people say it is more appropriate for this time others say it was good for the time it was written because, according to them,  “ as it was in the beginning, so it is now and, probably, ever shall be”.

I am inclined to agree with those with the latter view. They argue that the business community was on stop for much of one year waiting for the cabinet of the present administration to form. When it did, business waited for them to settle into offices and, today, it does appear that business is still waiting, though for something different: a clear policy direction, as it struggles with the policy disarray and the currency crisis that has happened on us. The biggest casualty in all of this is the small business community and their benefactors, microfinance banks.

There are a number of businesses that thrive in difficult times and, indeed, are thriving under thepresent stagflation in Nigeria. Unfortunately microfinancing is not one of them. And this is not a discovery. Microfinance is engaged in a battle with poverty and anything that accentuates or strengthens poverty invariably weakens microfinance. Recession and stagflation, whether jointly or severally, worsen poverty and therefore make microfinancing more difficult.

Indeed, there are some businesses whose foundations are rooted in comfort or plenty. They are brought into being purely by the so-called profit motive that drives all firms. They may have other objectives but these are essentially ancillary. Again, and contrary to the understanding of many, including some microfinance practitioners, microfinance is also not one of those. It may be true that the profit motive is now present in microfinancing, especially in this era of commercial microfinancing, but there is a social element in its raison d’eter. By nature, microfinance is shares the pain and joy of the economically less endowed. This is why the present times require more strategic thinking by MFB operators.

The small business community is usually the first to feel the impact of any contraction in economic activity. The advantage of an economy that is properly interlinked between small and big firms is that small firms have patronage and often enjoy dedicated markets from the big ones. However, the downside is that they feel the impact of economic contraction much more than the corporations that give them patronage. Once things get rough, cost containment principles require that corporations trim down orders from suppliers and demand longer or better credit terms. Implementation of this strategy will directly impact negatively on small businesses, which form the core of microfinance clientele. Their output will shrink. Their cash flow will thin out and their performance with regard to loan repayment will decline.

The implication of this is that the microfinance industry in Nigeria is now under extreme pressure. During the course of the present downturn, we must continue to offer suggestions on how the industry should weather this storm. When things get rough as they are now, it is not unexpected that loan repayment will become more irregular. Delinquency will escalate and bad loans will mount. Already, we have very frightening numbers for Non-performing Loans (NPL) in the banking industry. Recent reports put it at about 20 per cent as against a best practice threshold of under 5 per cent. If this could happen in the deposit money banking sector, with all its machinery for loan processing, disbursement and management, then the situation is the weaker, less prosperous, microfinance industry can only be imagined. It is therefore not unlikely that some operators may take panic measures and implement stringent and, sometimes, misdirected collection action that could worsens the plight of the industry.

It should be noted that at times like these, precipitate action will make no positive contribution. It follows therefore, that over-aggressive loan recovery drives will fail to do the deed. While recovery is basic priority, the fact is that microfinance clients are weak even in the best of times. This weakness is essentially their key qualification for becoming clients in the first instance. Therefore, expecting them to be strong enough to meet their obligations during bad times is, at best, a strategic error and at worst, uninformed bravado.

Only very few specialized businesses are doing anything meaningful in Nigeria today. They are mostly in the areas of technology, food and agriculture. Others are dis-saving and hoping the country will tackle the sources of this stagflation, which has moved from declining oil revenue to policy disarray and unmitigated and nationwide insecurity that is fast spreading. Anyone who claims to be doing profitable microfinance today is unlikely to be saying the truth. This is so because most small businesses in Nigeria are not in a position to pay back any loan granted them by the MFBs. The economy has been drained of naira because those who have it are not buying anything except the US dollar, for obvious reasons. It is only a sign of the times that some very top finance ministry officials are wondering why people are doing that.

There are some items that are no longer being produced because nobody is buying the stock in the market. Find out when your favourite developer built his last houses. They have stopped because they cannot sell their stock and devaluation has eroded their investment in the buildings. That is a lot of small business opportunities quenched. Ask the licensing office when last they registered new taxi cabs. The vehicles have become unaffordable. With the headless ban on the importation of vehicles through the more friendly land borders, the situation worsens and with it unemployment, crime and fear. Perhaps, government needs to know that the present Automotive Industry Policy, like many others, is a farce. It has no connection to our economic fundamentals. Everybody knows that the policy is already doomed.

Every imaginable small business idea has run into trouble and crumbled because of the poor foreign exchange and interest rate strategies we have added to existing infrastructure challenges. While the FX policy has wiped out the capital of small businesses, and made billionaires out of some glorified currency racketeers in fancy names of bureaux d’change (BDCs), the interest rate regime has buried small businesses and bloated the pool of the jobless. Ironically, one of the few thriving businesses in Nigeria today is currency racketeering called BDCs operation. These people are given dollars ostensibly to sell to the public but ask how many people ever buy FX from them at the approved rate. Everyone is aware of this but there seems to be a conspiracy to turn a blind eye. The continued use of BDCs to funnel Nigeria’s hard currency away is creating horrible credibility issues for government and should stop.

Add these to the unprecedented level of fear and insecurity that has gripped not only the people in the North-east but also those in other parts of the country, including of late what looked like our safe heaven, Lagos, being ransacked by kidnappers, then conclude. The fear of Fulani attackers has spread throughout the country and with it goes the livelihood of the active poor. Many people even in the South spent the Christmas season expecting very bad thing to happen to them. When farmers can no longer go to farm, and self-help seems to be the only certain source of security, then economic activity is over and poverty is born. Microfinancing and economic inclusion will come to an end and crime will grow. Today people spend more time worrying about the future of Nigeria than doing any meaningful economic activity. Perhaps we are focusing too much on Boko Haram. The real disaster is mass fear and the apparent inability of the security system to respond effectively.

Emeka Osuji