Cash everywhere, but none for SMEs

Christian Udoche finished from one of the universities in the south-west part of Nigeria in 2009.

Having searched for a job in almost every nook and cranny of Nigeria for three years, the 28-year-old Udoche decided to settle for a job in a new generation bank in Lagos, as a gatekeeper, in 2012.

At a salary of N25,000, he managed to save N5000 each month. That required a lot of sacrifice, as he would wake up at 4 am each day and would trek two kilometres from his home at a suburban Ejigbo, to Ikeja, in order to get to work at 7am.

Having worked for twenty months and saved up N100,000, Chris, as he was fondly called by friends and colleagues, went into cassava processing. His familiarity with a number of farmers at Ijebu Igbo in a neighbouring Ogun State helped him.

By mid-2014, he had hired a farmland, where he cultivated cassava. He was processing cassava into garri (cassava flour), a local food eaten raw after soaking, or with soup, and would supply same to markets in Lagos and Ibadan.

After attending a seminar on agricultural value chain in Lagos, Chris decided to bulldoze into cassava starch business. He had often heard that blue chip companies such as Nestlé, Promasidor and other food and beverage firms often needed high quality cassava starch and sometimes imported same from abroad, for want of local starch that met international standards.

He was determined to tap into this segment. After a market research, he found that he needed some processing equipment, another expanse of land and four more staff members, in addition to three he had currently. He now saw the need to borrow five million from any of his country’s deposit money banks.

He visited a bank in Marina and gave an officer in charge of small- and medium-sized enterprises his proposal. And the bank official promised to ‘look into it’.

Seven weeks after, the bank’s SME official called Chris and told him that his business plan ‘was not bankable’.

He moved to another bank in Surulere and submitted his proposal. Five weeks after, a lady put a call through to him, inviting him to come ‘and have a chat with my oga’.

“We have looked at the entire thing and can say that it was a brilliant idea,” a man in his forties, who was in charge of lending to small businesses, told Chris when he arrived at the bank.

“But you know the risk of lending to businesses like yours is very high. If anything happens along the value chain, the bank suffers,” the man continued.

“Anyway, we have resolved to help you grow,” the man said.

Chris was excited that unlike the bank at Marina, this one understood what he needed.

“We will give you the five million you requested. But we will need you to return it in 12 months,” he said.

This was a harbinger of what was to come.

“We will give you this loan at 24 percent interest rate,” he concluded.

Chris stood up and left, regretting why he had to share his business idea with bank officials who he hardly trusted.

The young cassava processor was surprised that in spite of the employment and wealth creation potential of his business, none of the local banks was able to help.

“You know how long it takes to cultivate and harvest cassava. So tell me, how can I harvest cassava, process it and sell it and be able to return the loan within 12 months?” Chris asked this writer, rhetorically.

Christian Udoche’s story reflects the fate of micro-, small- and medium-sized businesses in Africa’s largest economy. The country’s financial institutions have failed to stimulate 37 million SMEs, which contribute 47 percent to the gross domestic product.

The excuse made by deposit money banks, like the one given by the man in charge of small businesses in a Surulere bank, is that lending to SMEs is highly risky. Even when banks accept to lend, the loan is often short term and attracts a very high interest rate that will scare away any entrepreneur capable of putting two and two together.

“If you borrow at such a short tenor and high interest rate and do some addition and subtraction, you will find out that you have just laboured for the bank,” said Ike Ibeabuchi, managing director of Klopp Water Cure, a small-scale water purifying firm in Enugu State, south-eastern Nigeria.

BusinessDay’s findings show that Nigerian banks sit on one trillion naira they cannot use. This involves unclaimed monies that have been in the coffers of these banks for more than 10 years. Banks refuse to lend this out to high-impact SMEs like Chris’, but prefer to give to rent-seeking oil companies, most of which are large enterprises.

“The problem is that some banks do not look at practical ways of lending to SMEs,” said Haliru Hashiru, a small-scale bottled water producer in Kano, a trading state in north-western Nigeria.

“I went to a bank to seek funds for business expansion. The bank refused to give me money. But I saw them another day lending fifty million naira to an oil dealer. I only asked for five million, which they could not give me,” Hashiru lamented.

Nigeria’s central bank also blames deposit money banks for not doing enough to stimulate SMEs.

Just recently, Godwin Emefiele, Central Bank of Nigeria Governor, who was represented by Olaitan Mudashir Adeola, acting director of development finance, at the private sector forum in Lagos, said: “A meagre 3.5 percent of bank finance flows to agriculture and 0.2 percent to SMEs, and virtually nothing to exports. This is in spite of the fact that agriculture contributes about 22.9 percent to GDP; MSMEs contribute 48.47 percent and 7.27 percent of exports.”

However, the central bank has a number of intervention funds that cannot be accessed by small businesses. The commonest of these is the N220 Billion MSME Fund, which has been given to deposit money banks.

The private sector says the interest rate for the intervention fund is still the same as the ones originally at commercial banks.

“We accessed the N220 Billion MSME Fund this year at 22 percent interest rate,” Jon Kachikwu, CEO of Jon Tudy Enterprises told BusinessDay.

“They come to the public and tell you it is nine percent but lend it at 22 percent. This is not good for us and it cannot grow our economy,” Kachikwu said.

Banks often complain that SME operators do not have bankable business plans and need mentorship, but they fail to provide such services to them. The irony of it is that this excuse often drives these banks to lend more to the government rather than to the private sector.

A bank official explained that this has continued to happen as a result of the fact that there is an identity crisis inherent in lending to small business owners.

“They can abscond and put you in trouble,” said the official.

However, the private sector disagrees. Frank Jacobs, president, Manufacturers Association of Nigeria (MAN), suggested that the best thing to do it is to set up a separate bank that will cater for SMEs and manufacturers lending.

“Funding is very critical in our quest to economic diversification,” Jacobs said at a press conference in Lagos, recently.

In an era of crude oil price crash, which provides over 75 percent and 90 percent of government revenue and foreign exchange earnings respectively, Africa’s largest economy is thinking of economic diversification in order to raise more revenue and create jobs for millions of unemployed youths, often described a ‘a time bomb’. But analysts say it is impossible for the country to diversify while ignoring this critical segment that makes up over 80 percent of businesses in the country.

However, experts say banks often do not lend money to small businesses in Nigeria because many of the operators see loans as free money.

“We really have to change our attitude,” said Atiku Johnson, an SME consultant , who has provided advisor services to them for 12 years.

“Sometimes you give some of them loans and they see such loans as pieces of the national cake. They will either misuse them or they abscond,” Johnson disclosed.

But he said mentoring should be provided, while  consultants should be attached to small business owners who receive loans from financial institutions.

He further said that private sector and SME organisations should be allowed to stand surety for SMEs seeking funds to expand their businesses.