SME financing: Lending criteria must evolve with operating milieu

A number of studies have shown that entrepreneurs in the Small and Medium Enterprises (SMEs) sector in Nigeria face serious difficulties in raising finance for their operations. This has led to many initiatives on the part of government driven by the central bank, the Bankers’ Committee and other interested parties, to find ways of mitigating the challenge. It was believed that since finance has been identified as one of the three core challenges facing the SME sector, providing funds at single digit interest rates would help their case. Other challenges identified through various research efforts include unconducive business environment and inconsistent government policies. Although finance is considered to be the least of these problems, government has gone ahead to take bold steps to reduce the pressure it puts on operators in the sector through the creation of a number of on-lending facilities.
Prominent among the facilities put in place for SMEs to access are the Small and Medium Industries Equity Investment Scheme (SMIEIS)conceived by the Bankers’Committee (a coalition of the Central Bank, Deposit Money Banks and Discount Houses). There is in addition a long list of other funding opportunities, which the Central Bank of Nigeria (CBN) has created as its own way of intervening in the SME financing crisis. This list include the Small and Medium Enterprises Development Fund (SMEDF), which the CBN launched on the 15th of August 2013 with an initial capital of N220 billion. The Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) is a N200 billion fund also created by the CBN for SMEs to access. Then there is the Agricultural Small and Medium Enterprises Investment Scheme (AGSMIES), which is targeting operators in the agriculture sector.
There are many other funds, including those for insurance, energy and other purposes, we need not list here. We can therefore state categorically that on the supply side, financing opportunities for SMEs in Nigeria actually abound. Anyone who looks at the supply side without a critical mind could conclude that the market is awash with cash for SMEs. But in economics, production is not complete until the goods reach the consumer. Again, economists are more used to the term effective demand, by which they imply demand that is backed by ability to pay, rather than effective supply. However, in regard to the supply of funds to the SME sector, I would prefer to use the term effective supply. Supply is not effective if the target market or consumer is constrained from effectively taking possession of the goods or services by the making of the supplier. When CBN and its agents make funds available to the SME sector but ensure that access to the funds are restricted not just by price then the supply is not effective. Therefore in praising the authorities for the funds supposedly placed at the disposal of SMEs we have to be sure that there are not overly constraining conditions that make it impossible for consumers to access.
Unfortunately, and typical of many things we do here, they rarely fully benefit the citizens. For example, it is no longer a gossip that the SURE-P fund and several Constituency Projects are mere news items to the supposed beneficiary citizens and constituents. The beneficiaries hardly know where the funds go. In a similar fashion but probably for a different set of reasons, the facilities established to promote the SME sector are not benefitting them. The SME sector has not hived any sigh of relief in this regard simply because, despite these financing opportunities, lack of access to finance is still wreaking havoc onSMEs in the country. We could therefore opine that the supply of funds to the sector has not been effective.
It is not as if the authorities have not observed the lacklustre drawdown records of the funds. Nor are they unconcerned. The CBN had, on some occasion last year, suggested a review in 2017 of some of the somewhat stringent conditions for accessing the agriculture loan, which made it difficult for operators to utilize the money. It is however not clear yet if any significant changes have been effected to the rules on that fund. Even the MSMEDF, which has an important gender component, having provided a certain percentage of the fund for on-lending to women entrepreneurs, is also not famous for the high levels of disbursement it recorded.
The original concept of the funds was to correct some market imperfections, which naturally follow the distribution of resources among economic agents by the invisible hand or market forces. Some growth sectors, and sometimes the most important ones, like women’s enterprises, often times are the ones that would fail to attract funds to themselves under the free market system. Government therefore has to intervene in such cases, like the MSMEDF, which has embedded Affirmative Action for women, to ensure balanced and equitable growth and productivity. Such contemplated changes in the Transaction Dynamics and Preconditions to Drawdown of the funds, are necessary, not just to the agriculture facilitybut all other funds that have been dormant or somewhat unattractive to operators. And they are many. Perhaps it is time to depart from and review some of the key elements of the funds to be sure we achieve our aims for the funds.
It is common knowledge and there is copious evidence to show that the banks have a high rejection rate for the loan requests placed by MSMEs. Given the inherent disability that afflicts the banks when it comes to informal sector lending, we ought to be more realistic when designing funds that target the less affluent and virtually expropriated unpropertied class. Worse still, the habit of politicians using proxies to route back financial support meant for those who are paying very high prices for their citizenship of this country is a crime.
The truth is that we have to take account of the peculiar circumstances of the environment of informality in designing loan facilities for our MSMEs. We know they are drained of blood, for lack of better phrase that describes the pain it is to run a small business in this country. Needless to say that anyone with such an ambition is on their own, no matter the national impact capacity of the business they run. They would unfailingly and compulsorily source their own power, water and security. Designing informal facilities with a formal sector mindset is a recipe for failure. Therefore, any for the supply of funds to informal sector to be meaningful, it must be effective supply, unimpaired by redundant and overly precautious banking measures.

Emeka Osuji