Nigerian SMEs look to financing options in absence of bank credit

Occasioned by the unfriendly interest charged by financial institutions, among other factors, Nigerian small and medium enterprises (SMEs) have moved to explore financing options that will enable them stay in business, in the absence of banks’ credit, BusinessDay findings have shown. Small and medium scale enterprises dominate the private sector of the Nigerian economy, but almost all of them are starved of funds.

‘‘We are unable to secure loan at the unfriendly interest rate these banks charge. Hence, we had to think of creative ways of staying in business. And based on the integrity we have built, we get suppliers to supply us on credit, the raw materials we need for our work,’’ Walter Emiedafe, CEO, Sapient Vendors Limited, an SME civil engineering firm based in Lagos, told BusinessDay, adding that ‘‘we give our suppliers a time frame, and repay them as soon as we receive funds from our clients. This strategy has really worked for us.”

‘‘We had to look to personal savings and venture capitalists to continue in business, as banks are unwilling to lend to the sector,’’ said Deji Agboade, principal partner, BPI Advisory, in an interview, noting that the high interest rate charged by banks, including short tenure of the loans, had not helped matters.

A consultant in the area of entrepreneurship, however, is of the view that financial institutions need not be the only source of funding for SMEs, saying big firms can do a lot to help SMEs get finance more easily by transferring resources (money and factors of production) and guaranteeing SME solvency with financial institutions.

Globally, commercial banks that remain the biggest source of funds to SMEs have in most cases, shied away because of the perceived risks and uncertainties, analysts say. In Nigeria, the fragile economic environment and absence of requisite infrastructure has rendered small business practice costly and inefficient, thereby worsening their credit competitiveness.

However, in defending their positions, some of the SME banks who spoke with BusinessDay, but pleaded anonymity, said contrary to the perception outside the financial sector, ‘‘SME financing is attractive to banks, however for various reasons. It can be quite risky, so banks are cautious in lending to the sector.’’

Experts say in Nigeria, there has been gross under performance of the SMEs sub-sector and this has undermined its contribution to economic growth and development. The key issues affecting the SMEs in the country can be grouped into four – unfriendly business environment

poor funding, low managerial skills, and lack of access to modern technology, according to a Financial System Strategy 2020 SME Sector Report.

‘‘Over time, it has been said that access to loan-able funds have been the key issue of the sector, but a critical element in improving access to finance for SMEs is capacity development,’’ Ken Opara, division head, E-banking, Managed SMEs & Consumer Sales Force, said in an ‘SME outlook for 2013’ interview with BusinessDay.

The persistent lack of finance for operations of SMEs sequel to the inability or unwillingness of the deposit money banks to grant long-term credit to operators of the real sector of the economy, led to the establishment of development finance institutions and introduction of numerous funding programmes for the development of small businesses in Nigeria, studies found.

However, in spite of these institutions and funding programmes, there continues to be a persistent cry against inadequate finance for the development of SMEs in the country.

According to a 2012 survey by Small and Medium Enterprises Development Agency of Nigeria and National Bureau of Statistics, the sources of capital for the enterprises are predominantly personal savings, representing 84.6 percent for micro enterprises and 54.4 percent for small and medium enterprises, buttressing small businesses’ inability to access credit from financial intermediaries.

A past study by the Central Bank of Nigeria shows that commercial and merchant bank loans and advances to SMEs have been decreasing over the years. According to the study, commercial banks’ loans to SMEs as a percentage of total credit decreased from 48.8 percent in 1992 to 22.22 percent in 1994.

The trend increased marginally to 22.9 percent and 25.5 percent in 1995 and 1996, respectively. There was a sharp reduction from 25 percent to 17 percent in 1997, and the decrease continued till it reached 0.2 percent in 2010. Similarly, merchant banks loans to SMEs as a percentage of total credit reduced from 31.2 percent in 1992 to 9 percent in 2000. The continuous decrease in commercial and merchant bank’s loans to small scale enterprises can be attributed to lack of collateral from the SMEs to secure the loans and the high lending rates from the banks.

NONSO NDUMANYA