Analysts seek paradigm shift in financing model to nurture start-ups
A paradigm shift is needed in Nigeria’s financing model if the country truly wants to grow start-ups and already established micro, small and medium enterprises (MSMEs), analysts say.
Analysts add that the poor financial model used in the country, which tends to put more money in the hands of large enterprises, briefcase importers and politicians, will not only muzzle high-impact MSMEs, but will also continue to cut jobs and perpetuate rent-seeking tendencies in the economy.
They particularly point at short tenor of loans, untenable collaterals, reluctance to fund small-scale manufacturers and exporters, double-digit lending rate as well as attachment of difficult conditions to publicly available funds, as things that must be changed if the country wants to earn more revenue from business owners, create jobs, expand, and attract more investors.
“We need a forward-looking financing model in the country now that oil has crashed,” said Ike Ibeabuchi, managing director of a small-scale chemical factory in Nigeria.
“Your model determines what you want. There was a deliberate financial model in China that targeted funding start-ups and MSMEs at less than five percent interest rate. Funds were easily accessed. This is why it is the MSMEs in China that do most of the things people hear about and most of the products they use. But here, banks and governments tell beautiful stories about funding MSMEs in the media, but go to them and you will see a different thing,” Ibeabuchi said.
In spite of the compelling growth potential of MSMEs, funding has remained an albatross. Up to the moment, Africa’s largest economy cannot sufficiently fund its 37 million MSMEs, which account for almost 50 percent of the gross domestic product. The Manufacturers Association of Nigeria (MAN) puts the average lending rate to its members in 2014 at 23 percent. The business community says that rates generally hover between 18 and 30 percent.
“We cannot talk about MSME development without talking about easing access to finance for these MSMEs,” said Obinna Igwebuike, partner, Sawobona Advisory Services.
“The Central Bank of Nigeria (CBN) needs to articulate clear lending objectives to the MSME sector and have a system that not only supervises, but also provides reports on the levels of commitment and compliance to the MSME lending objectives,” he said.
Available data show that MSMEs represent over 75 percent of Nigerian businesses. But owners of this category of business often resort to personal savings, relatives and even outside the country for funds.
Microfinance institutions, which are traditionally given the responsibility of funding micro and small business, charge high interest rates and often do not have the financial muscle needed by business owners.
“In the US what they want is your annual turnover, your feasibility studies and business plan. They want to know how lucrative your business is. Once they see that your turnover matches your request, they will give you a loan but will also monitor it. Here, Nigerian banks are not ready to monitor; all they need is your collateral and off you go,” said Jon Kachikwu, chairman, Small and Medium Enterprises Group (SMEG) of the Lagos Chamber of Commerce and Industry (LCCI).
According to the latest World Bank data on its ease of doing business report, only 14 percent of MSMEs in the country have access to a loan or overdraft account.
As earlier reported by Start-Up Digest, the CBN said in September 2015 that only 3.5 percent of bank finance flows to agriculture and 0.2 percent to MSMEs, and virtually nothing to exports. This is in spite of the fact that agriculture contributes about 22.9 percent to GDP; MSMEs, 48.47 percent, and exports, 7.27 percent.
The cost of doing business for MSMEs has also continued to increase with new currency restrictions.
Friday Opara, director, strategic partnership, Small and Medium Scale Enterprises (SMEDAN) said: “Government has tried in the past by providing different funding options but all failed. Until these funds are easy for access, there will be no growth for MSMEs.”
“Nigeria should borrow a leaf from Asia that has a well structured equity and venture capital,” Opara added.
ODINAKA ANUDU & JOSEPHINE OKOJIE