‘Diamond Bank has lent N20bn to over 5,000 MSMEs this year’
Ayodele Olojede is the head of Emerging Businesses at Diamond Bank. In this interview with Start-Up Digest Editor, ODINAKA ANUDU, she enumerates some of the landmark achievements of Diamond Bank in the micro, small and medium business (MSME) space.
How does Diamond Bank define micro, small and medium businesses?
There is no universally accepted definition of MSMEs. It all depends on the context or a country because different variables are considered. But a lot of banks use sales to measure sizes because it is the most convenient. In Diamond Bank, we see MSMEs as businesses that have sales of below N600 million. That is further categorised into different sizes. You have the micro, small and medium. For us, for the first category are businesses that have sales of N60m and below. The next category is N180 million and below. Between N180 million and N600 million are medium or established businesses. We use sales because it is the most visible. In Nigeria, you may have a business that is doing sales of N1 billion but has few number of employees. I will not categorise that kind of business as an MSME. So the most visible and most convenient is the sales.
What is Diamond Bank’s approach to the MSMEs market?
Available statistics show that there are about 37 million MSMEs in Nigeria, and 99 percent of them are at the micro level. In fact, over 96 per cent these do not have their businesses registered. If you do not have your business registered, it automatically creates an access gap.
In Diamond Bank, we work in partnership with lawyers to offer heavily discounted services to our customers. I am not sure any other bank is doing that.
When you want to open an account with any bank, there is a corporate search and every bank charges you for that. But if we helped you to register your business, we will wave that for you. We also help you to get tax identification number. No other bank is doing this. Another challenge that we have been able to identify is that a lot of businesses do not have business plans. This accounts for a very high failure rate for MSMEs and is even why a lot of investors are unwilling to provide the support MSMEs need. It is also why banks are reluctant to lend to MSMEs. We have had 64 seminars where we trained 16,000 MSMEs on various technical issues that would help them to be able to put in place structures and governance. We had a market forum with some of our customers at Alaba and Lagos Island. They gave us a feedback that they were struggling with how to manage their taxes. A lot of them said they were losing their identities due to tax issues. So, you find a lot of them changing business names. They cried out to us and we got a very renowned speaker from PwC and he drove the message home. He told them that what they were avoiding was what would put them into trouble. He asked them to keep their books and all their receipts because it would make them get a lot of deductibles. It minimised their fear and everyone left there feeling confident that their troubles with the tax man were over. Those are the kind of programmes we put together to help them build the confidence they need. Also, we have clinics and we have had 6,000 of our customers attend these clinics. They were one on one with consultants who looked through their books and identified areas of challenges. They left there equipped. We also have an access-to-market initiative. We understand that a lot of MSMEs have visibility issues and are not able to sell beyond their immediate environment. We facilitate access to market. We have a partnership with a vendor that develops a website for as low as N15, 000.
Our bespoke lending programme takes care of all of the challenges. We lent up to N1 billion to 560 MSMEs in eight to 10 months’ period. Our officers are trained to be able to help you put together your financial statement and your books, while taking care of issues relating to collaterals and succession plans. Outside of that, this year alone we have been able to lend N20 billion to over 5,000 MSMEs.
How easy is it to access your loans?
Getting a loan is as easy as how ready you are. I spoke about being able to keep your books.
These 560 SMEs I talked about would not have been able to access the loans. But what we did was to make it easy for them to be able to access these loans. We are saying, ‘Keep your books’. I cannot be engaging with you and I ask you to show me what you sell and you tell me everything is in your head. So, you will not be able to access finance. I want to be able to understand that the loan makes sense. I want to be able to understand that you know the difference between sales and profit. Many MSMEs have one pocket for their business, one pocket to take care of their homes and family. But you need to ensure they are able to pay back the money they took. It is different from when you are lending to a Cadbury or Nestlé and you are talking with the chief financial officer. I will not be asking him all of those questions because he is a staff member that earns a salary. But MSMEs run their businesses and everything comes from the same cash-flow
We want to ensure that they understand the economics of finance. So far, we are very comfortable and have not recorded any loss.
Are these reasons why banks avoid lending to MSMEs?
I will give money to a Nestlé or Cadbury because the administrative cost of granting that loan is cheaper since I am dealing with one person and I have one big-ticket transaction, but with MSMEs, the administrative cost is high. For me to give out how much I gave to a Nestlé, I will probably have to give it to 1,000 MSMEs. So you now begin to think of the resources I have to put in. This is coupled with the fact that they don’t have collaterals, structures and they run one-man business and have succession plans issues. So, I have to price for that. We appreciate that cost of funding to MSMEs is not so good. What we are doing is to partner with organisations that have specialties. What we are looking for are initiatives or partnerships that will bring down the risks. That is the aspect we are continually seeking ways to resolve.
Lending rate is 13 percent in Kenya; 6.5 percent in South Africa and 7 percent in Ethiopia. Ours is as high as 30 percent here. Is it about the Monetary Policy Rate (MPR)?
The state of development of any economy determines its interest rate. If I don’t use MPR as a yardstick, someone gives me funds and I pay at five percent. Where my problem is, is in the cost of operation. You are sitting down here, we are powering with the generator. I have to cover for that cost. Our overhead is where the challenges are. The countries you have mentioned do not have the same infrastructure challenge that we have. So where you have a 24-hour power supply, cost of operation comes down. It is market-driven. Those are the factors that will impact on cost of funds and operations.
Access to finance challenge is the interest rate and the tenor. Development Bank of Nigeria has been able to solve the issue of tenor to some extent, but I still have to lend to my customers at double-digit due to these issues.
What are the things we need to fix to ensure that MSMEs can get loans at single- digit rates?
I have already pointed out that cost of operation makes it very difficult. What we are doing as banks is that we are going into partnerships with organisations that focus on growth in those sectors.