By ADEBAYO OBAJEMU
With government push for more lending to the real sector especially Small and Medium Scale enterprises, Financial Technology firms are rising to the challenge by providing credible platforms to implement this strategy. Banks have found themselves under increasing pressure to meet the Loan Deposit rate, LDR, requirement of the Central Bank of Nigeria, CBN, and are resorting to the Fintechs for rescue.
Small and medium enterprises SMEs, in Africa constitute 50% of the continent’s GDP, 60% of employment figures, and about 90% of all businesses. In Nigeria, they constitutes up to 84% of employment figures.
Over the years, accessibility to loan facilities for Small and Medium Scale enterprises (SMEs) from financial institutions has mostly been enjoyed by large corporations, while the small businesses have had to struggle to stay afloat, but many have gone under as a result of lack of finance.
The Central Bank of Nigeria (CBN) has on many occasions emphasized the need to increase credit culture in order to record significant improvement in area of financial inclusion for SMEs.
The Senior Manager, Development Finance Department of CBN, Mr. Chinedu Zephaniah, while speaking at a workshop organised by Bankers’ Committee on funding Nigeria SMEs in 2018, said SMEs have direct impact on the growth of any economy and contribute about 48 percent to Nigeria’s Gross Domestic Product (GDP), with employment generation.
He said CBN has about N3 trillion earmarked for economic development, out of which N220 billion is targeted at SMEs. He lamented that poor business structure and weak financial system have made it difficult for financial institutions to support SMEs.
“At the moment, we have disbursed N170 billion to support SMEs but the percentage of people that pay back their loan at appropriate time is not encouraging,” he said.
Zephaniah said when people pay back as and when due, it will avail others the opportunity to access the fund.
“We realize that women have peculiar financial exclusion circumstance in Nigeria, that is why 60 percent of the 220 billion is earmark for them and it is nine percent.”
However, BusinessHallmark’s findings from visits to ten small scale soap and shoe manufacturing concerns indicate a gross ignorance of the Central Bank’s N220 billion earmarked for SMEs.
Kunle Ojebode says he produces high quality shoes which he personally takes to big companies and banks to sell. According to him, he has previously approached three banks for N500,000 loans without success, hinging their inability to extend credit to him on lack of collateral.
His story is not different from Eunice Chukwu, a herbal medicine business woman at Iyana Ipaja. Despite the fact that her business is gradually growing and attracting increasing clientele, she has not been able to get loan from banks, but she has succeeded getting credit from one of the online lending fintech facilities.
Many banks, it was learnt, are unwilling to offer credit to SMEs because they often lack collaterals, and the risk level is high.
On the matter, Dr. Ibikunle Adewale, an economist with Fred& Ibikunle Consulting told this newspaper that when SMEs collect money to create wealth and refund it as and when due, the confidence of lending institutions will be high and collectively achieve tangible growth. He tasked financial institutions to focus on creating business knowledge and managerial capacity among SMEs.
“Most businesses failed not because of lack of financing but lack of competent and managerial skill on the part of promoter”, he said.
Speaking further he said Nigeria has huge potentials that can be unlocked, adding that with simplified credit offering through the `Funding Nigeria SMEs` intervention programme, all stakeholders and large economy will tap into the huge growth benefits.
To help SMEs, the Central Bank of Nigeria (CBN) on July 4, 2019, sent a letter to all the banks in Nigeria directing them to maintain a minimum Loan Deposit Ratio (LDR) of 60 percent by the end of September 2019.
According to the CBN, this is in order to ramp up the growth of the Nigerian economy through investment in the real sector which will help to encourage SMEs, Retail, Mortgage, Consumer lending. The bank also warned that failure to meet the above LDR would lead to a levy of additional cash reserve requirement equal to 50 percent of the lending shortfall of the target LDR.
A month after the Central Bank of Nigeria’s directive to all commercial banks that their loan book should be 60 percent of total deposit, the apex bank further jacked up the ratio to 65 percent. In a letter sent to all deposit money banks, the apex financial institution said each bank must attain a new minimum ratio by December 31, 2019.
“The Central Bank of Nigeria (CBN) has noted the appreciable growth in the level of the industry gross credit, which increased by N829.40 billion or 5.33% from N15,567.66 billion at end-May 2019, to N16,397.06 billion as at September 26, 2019, following its pronouncements on the above initiative,” the regulator wrote.
But financial experts say it is too early to know the overall impact this policy may have had on the growth of SMEs and their access to credit.
“In order to sustain the momentum and in line with the provisions of our earlier letter, the minimum Loan to Deposit Ratio (LDR) target for all Deposit Money Banks (DMBs) is hereby reviewed upwards from 60% to 65%.” That was the apex bank’s latest letter to deposit money banks after the expiration of earlier directive on 60& LDR policy.
The letter added, “All DMBs are required to attain a minimum LDR of 65% by December 31, 2019.” According to the letter, the ratio will be subject to quarterly review, in order to encourage SMEs, Retail, Mortgage, and Consumer Lending.
The CBN said any bank that failed to meet the stipulated ratio, would be fined half of their shortfall and added that each bank should continue to practice quality risk management, in the face of the increased pressure to give out loans.
Dr. Olufemi Omoyele, a financial expert said of LDR , “On the positive note, this could mean good news for small businesses like manufacturers who have always complained about access to finance as one of the major issue affecting the growth of their businesses. But one has to be very cautious about being excited as the banks are silent on the interest rates at which these loans will be given looking at the fact Nigeria’s interest rates are still double digits.
However, it is worthy to note that in 2018, the Bankers Committee of the CBN agreed that banks could give loans to the real sector at 9 percent interest rate.
“On the other hand, most Nigerian banks already have LDR of over 50 percent except for the likes of UBA and Zenith. This could mean that the new requirement may not boost lending in any way but instead what we would see is bank being forced to give loans to subprime creditors.
He said lending to the SMEs and consumers, borrowers that some banks judge as too small and too risky, will likely increase banks’ asset risk. Consumer lending in Nigeria is hampered by lack of good household credit records and weak recovery enforcement. Midsize banks that tend to have higher exposure to consumer and SME loans also tend to report higher nonperforming loan (NPL) ratios than large banks.
“However, higher LDRs will support loan growth recovery in Nigeria and support banks’ revenue,” says Omoyele.
According to him, Nigerian banks loans contracted 6.7 percent in 2018 and they expect loan volumes to grow by about 5 percent this year. However, they do not expect the new directive to prompt banks to lend excessively over the next 12-18 months because most banks already meet the requirement, notwithstanding our expectation of relatively strong deposit growth.
Nigerian banks have a high concentration risk, with 47 percent of total system loans having been extended to 100 large customers. The volume of small loans (up to NGN100 million or about $277,000) contracted by 31 percent during 2015-17 (the latest available data), while large loans increased by 26 percent over the same period. The contribution of small loans has fallen to 6 percent from 11 percent.
Most SMEs entrepreneurs spoken to say in recent times, they have enjoyed credit from fintech companies. This newspaper’s findings reveal many small and medium scale enterprises have enjoyed credit from fintech platforms. With fintech platforms, a growing number of entrepreneurs and small business owners can now get a loan without collateral in a seamless and fast way.
This is enhance by the existence of credit bureau which is expected to blacklist any defaulting borrower from accessing credit from any financial institution in the country, as well the as CBN directive for banks to net off any loan to a bank from any account of the borrower in any other bank in the country.
Over the years, accessibility to loan facilities for Small and Medium Scale enterprises (SMEs) from financial institutions has mostly been enjoyed by large corporations to the detriment of SMEs. As the paradigm shifts to tech-enabled platforms, a growing number of entrepreneurs and small business owners can now get a loan without collateral in a seamless and fast way.
This helps small business owners to bypass the headache of commercial banks requesting collateral and guarantors that may never be easy or available at all.
In a 2018 PwC report, SMEs contribute 48% of national GDP, account for 96% of businesses and 84% of employment in Nigeria. This clearly shows that a healthy SME industry is vital for the growth of any economy.
Here are few digital platforms lending to SMEs in Nigeria:
- Lidya – SME-only digital lender
Lidya is one of the leading platforms for small & medium business lending in emerging markets which was launched in November 2016 with a mission to close the credit gap, both in Nigeria and across emerging markets.
Businesses which are looking for $500 to $50,000 in working capital can apply online or via their mobile phone and get a decision within a few hours pending all requirements are satisfied. To assess credit risk,
Lidya uses close to 100 data points to evaluate businesses, build a credit score unique to each business, and disburse loans based on credit profile of such enterprise.
Loan amount: N150,000+
Interest rate: 3.5% per month
- Kiakia – Quick digital credit
The Abuja-based digital lender offers swift loans to small and medium enterprises in Nigeria. Backed by Sterling Bank Plc, the lending platform also allows savers to lend out funds at negotiated interests through intuitive conversations.
Minimum Loan amount: N50,000
Interest rate: 3.5% per month
- Renmoney – loan for micro-businesses
Renmoney provides micro-business loans up to N4 million. To get a Renmoney SME loan, your business must have a good income statement history and can boast of regular monthly earnings for repayments.
Minimum Loan Amount: N100,000
Interest rate: 2.8% per month
- Carbon – Carbon for Business
Carbon, formerly Paylater recently launched Carbon for Business to serve startups, small and medium-sized enterprises (SMEs) and FinTechs with a loan to scale their businesses.
Carbon, like others, generates your credit Bank Verification Number (BVN) to determine your loan worth.
Loan amount: Up to N20 million
- C24 – retail loans for consumers
C24 is a financial institution that provides retail loans for consumers in need of quick financial solutions. The company is focused on delivering services that can be accessed online, from any internet-enabled device anywhere within Lagos, Nigeria.
Loan amount: Up to 5 million
Interest rate 4% per month
- QuickCheck – Online quick SME loans
This loan app helps Nigerians access instant online quick loans without collateral and is accessible to both employees and SME owners.
Loan Amount: N1,500 – N500,000
Loan Interest: 5% per month
- SMEDAN – Government-backed SME loan
SMEDAN is a government-backed initiative that offers quick business loans to Nigerian SME businesses in need of financing. The core mission of the organisation is to promote entrepreneurship among Nigerians and also provide capital to start the business.
Aside funding, SMEDAN also provides business owners with hands-on training and support to help them run their business.
Minimum Loan Amount: N100,000
Interest Rate: 4%/month
- Eazzicash – Business loan
EazziCash offers immediate financial needs for small business owners under two products classes. These are EazziAssist and EazziPawn.
Maximum Loan amount: N5 million
Interest rate – Not stated
- FastCredit SME loan
FastCredit offers business loans to micro, small and medium enterprises to support business growth. The loans are backed by guarantors and are for a maximum tenor of 6 months for business owners that meet the criteria.
It presently operates in all the Southwestern states in Nigeria except Ekiti state. SMEs will need to show proof of business and residential address to be able to get instant FastCredit SME loan.
Minimum Loan Amount: 100,000
Loan Interest Rate: 4%/month.