By Charles Nwaoguji
As part of efforts to ease access to credit for the Nigerian manufacturing and agricultural sectors, the Central Bank of Nigeria (CBN), recently released guidelines on single digit interest rate which it expects will help grow the economy.
Under the new guideline, agricultural, manufacturing and the sectors considered as growth and employment stimulating, can now borrow long term as much as N10 billion at consolidated nine percent interest rate. The CBN Monetary Policy Committee (MPC) had at its 119th meeting, introduced its revised guidelines for Accessing Real Sector Support Facility (RSSDF) through Cash Reserves Requirement (CRR)/Corporate Bonds (CBs).
The Deputy Governor, Corporate Services Central Bank of Nigeria, Mr. Edward Adamu said that MSMEs accounted for an estimated 96% of enterprises in the major contributing sectors including Information and Communication, Mining and Quarrying, Agriculture, Transportation and Storage, as well as Other Services.
Adamu noted that MSMEs in Nigeria, like their counterparts in other jurisdictions, are faced with a number of hurdles that include low access to finance, poor infrastructure, multiple taxation, regulatory burden and sub-optimal implementation of the provision of the MSME policy. No doubt, previous interventions were unable to achieve desired results of promoting access to finance by MSMEs and the informal sector due to factors inherent to the MSMEs, such as absence of unique identification, poor managerial practices, inadequate financial education, lack of acceptable collateral and their inability to prepare acceptable business proposals that meet the strict lending requirements of financial institutions
In addressing these challenges is, he explained that it is crucial to improving access to finance by budding professionals in entrepreneurial activities. Given the dynamic business environment within which MSMEs operate in Nigeria, it is important for financial sector stakeholders to respond creatively by evolving new financing initiatives to complement the conventional financing instruments.
He stated that CBN’s commitment to sustainable economic growth, has been working assiduously to design and implement policy measures to address the huge financing gap in the MSME ecosystem.
“These measures or initiatives focus on enhancing access to credit by MSMEs, continuous skills development in critical sectors of the economy, strengthening of development finance institutions to effectively carry out their mandates, and promotion of infrastructure development, such as power,” he stated.
He appealed to all stakeholders will continue to collaborate with the CBN towards harnessing the vast opportunities for promoting sustainable growth and development of MSMEs across the country.
Giving further clarifications on the guidelines recently, he said the apex bank disclosed that Corporate/Triple-A rated companies will be encouraged to issue long-term Corporate Bonds (CBs), adding that Corporate Bonds (CB) Funding Programme had been put in place. The CBN also revealed that it had put in place a programme under the Differentiated Cash Reserves Requirement (DCRR) regime whereby Deposit Money Banks, DMBs, interested in providing credit financing to greenfield (new) and brownfield (expansion) projects in the real sector (agriculture and manufacturing) can request for the release of funds from their CRR to finance the projects, subject to providing verifiable evidence that the funds shall be directed at the approved projects by the CBN.
The development is, indeed, a cheering news for the stakeholders in the real sector who commended the apex bank for the initiative. Hitherto, operators in the sector have lamented over high interest rates charged by commercial banks on loans to farmers which they say is detrimental to the growth and development of agriculture in the country. According to them, the multiplier effect of this initiative will be a reduction in uncertainties and avoidable risks in agricultural investments where farmers will enjoy wider latitude of access to loans from commercial banks.
Players in the two sectors expressed optimism that the nine per cent lending rate will encourage farmers to increase production. However, there are some grey areas which needs to be addressed for the initiative to benefit the sectors. Experts say that while the banks will be willing to utilize the idle funds with CBN, they may be constrained by other factors. This is because the banks may not want to lend as there is no risk sharing. The risk still resides solely with the banks, so should they lend to projects that fail, they will still have to bear 100 per cent write off for such loans.
Experts say banks are not likely to increase lending this year as the country moves into a political era. The key thing about lending is that nobody wants to give out their financial resources at such periods when you are not sure of how the environment is going to remain. Also, as long as the underlying factors which impede growth of business activities in the country are not addressed, banks will continue to be wary of increasing lending.
In Nigeria, Deposit Money Banks (DMBs) are largely aware that the high cost of doing business in Nigeria, elicited by infrastructural decay, multiple taxation, land ownership structure, enforcing contracts, inter alia, more than anything else, significantly increase the risk of loan default. The DMB’s risk averseness to credit creation will continue to play out, at least, in the short term, considering still-attractive returns on government securities.
As laudable as the new policy may appear to be, we believe lessons should be learnt from similar efforts in recent past. In 2013, the CBN launched the N220 billion Medium, Small and Micro Enterprises (MSMEs) Development Fund. The effort was defeated as the banks said lending at single-digit nine per cent interest per annum cannot work in Nigeria. Deputy Governor, Economic Policy in the apex bank, Dr Joseph Nnanna had blamed the inability of Deposit Money Banks to lend at single digit interest rate on the attractiveness of treasury bills, an instrument used by the government to borrow from the money market.
On the flip side, there are also concerns that some of the banks will likely play smart on CBN – access the funds and divert same to more profitable and secured ventures. There are reports of abuse of the CBN’s adored Anchor Borrowers’ Programme (ABP), with allegations that some banks that collected money from CBN for onward disbursement to farmers either withheld or converted the funds to personal use. We believe the CBN should, this time round, tighten the loose ends and ensure that the single digit loan scheme works.