Banks hold key to addressing SMEs’ finance challenge

Access to finance is the major challenge confronting Small and Medium Enterprises (SMEs) and banks hold the key to addressing that challenge, according to experts who spoke at the 2015 Annual Conference organized by the Finance Correspondents Association of Nigeria (FICAN) in Lagos at the weekend.

In recent years, deposit money banks (DMBs) have continued to dominate Nigeria’s financial system. Bank credit has therefore constituted the main source of formal financing for Nigerian companies amidst relatively under-developed corporate bond and alternative securities markets.

Bank credit in Nigeria is characterized by limited availability of medium- to long-term credit tenors, short moratorium, and high collateral requirements.

Rasheed Olaowuwa, managing director/CEO, Bank of Industry (BoI), said banks generally have been reluctant to service SMEs for a number of well-known reasons. One is perception of SMEs by creditors and investors as high-risk borrowers due to insufficient assets, low capitalization, vulnerability to market fluctuations and high mortality rates.

Other reasons include inability to meet collateral and equity contribution requirement, absence of bankable business plans and lack of clear business models, and lack of relevant skills and experience in the businesses they undertake. This factor accounts for the high mortality of SMEs as an estimated 80 percent of them fail within five years of operation.

Recent surveys of SMEs and banks by the World Bank and other stakeholders have identified several factors limiting access to bank finance for SMEs.

According to the results of a World Bank survey of Nigerian SMEs in 2011, only an estimated 9.5 percent of Nigerian SMEs had a loan or line of credit in 2011, and bank financing of working capital and fixed assets was estimated to fill, respectively, only 3 percent and 2 percent of outstanding needs.

Based on later survey of MSMEs in 2014, only 6.7 percent of enterprises in Nigeria reported having a loan or active line of credit, compared to the global Enterprise Survey average of 36.5 percent. In terms of segmentation, only 3 percent of micro enterprises had access to finance, while for SMEs, it was 7 percent; and for large enterprises it was 44 percent.

Moreover, access rate by SMEs lags well behind other countries such as Brazil (30 percent), Ghana (36 percent), China (30 percent), Kenya (24 percent) and South Africa (21 percent).

In order to boost access to finance for SMEs, BoI is partnering with 10 SME-friendly deposit money banks to provide working capital for its SME customers at a negotiated interest rate of Monetary Policy Rate (MPR) + 6 percent. The banks are Access Bank, Ecobank, Diamond Bank, Fidelity Bank, First Bank, First City Monument Bank, Skye Bank, Stanbic IBTC Bank, Standard Chartered Bank and UBA.

HOPE MOSES-ASHIKE