Unlocking Financing Opportunity for SMEs

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Obinna Chima supports the proposed initiative to enhance capital to small and medium scale enterprises

Small and medium scale enterprises (SMEs) play a major role in most economies, particularly in developing countries.

SMEs contribute up to 45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies, according to a report by the World Bank.

These numbers are significantly higher when informal SMEs are included. According to estimates, 600 million jobs will be needed in the next 15 years to absorb the growing global workforce, mainly in Asia and Sub-Saharan Africa. In emerging markets, most formal jobs are with SMEs, which also create four out of five new positions. However, access to finance is a key constraint to SME growth, as without it, many SMEs languish and stagnate.

Indeed, SMEs are less likely to be able to secure bank loans than large firms; instead, they rely on internal or “personal” funds to launch and initially run their enterprises.

Clearly, 50 per cent of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account.

Overall, the World Bank report indicated that approximately 70 per cent of all micro, small and medium scale enterprises (MSMEs) in emerging markets lack access to credit. While the gap varies considerably between regions, it’s particularly wide in Africa and Asia. The current credit gap for formal SMEs was estimated to be $1.2 trillion; the total credit gap for both formal and informal SMEs as high as $2.6 trillion.

Furthermore, a World Bank Group study suggests there are between 365-445million micro, small and medium enterprises in emerging markets: 25-30million are formal SMEs; 55-70 million are formal micro enterprises; and 285-345 million are informal enterprises. Moving informal SMEs into the formal sector can have considerable advantages for the SME (for example, better access to credit and government services) and to the overall economy (for example, higher tax revenues, better regulation). Also, improving SMEs’ access to finance and finding solutions to unlock sources of capital is crucial to enable this potentially dynamic sector to grow and provide the needed jobs.

For Nigeria, the significant drop in crude oil revenue has compelled policy makers to continue to fashion out strategies to support the non-oil sectors, with increased focus on SMEs and the agriculture sector.
In fact, a recent country assessment report on Nigeria by the International Monetary Fund (IMF), showed a sharp decline in imports contributed to a modest recovery in Nigeria’s external current account balance in the first half of 2016. Although the report indicated that Nigeria’s exports declined by 14 per cent in the first half of 2016, it also revealed that imports fell more than proportionately by 25 per cent in the first half of this year, compared to the same period last year.

To this end, in other to ensure that the gains recorded are enhanced, the Bankers’ Committee recently resolved that the Central Bank of Nigeria (CBN) as well as deposit money banks would jointly establish an Agriculture/SME Fund (AGSME Fund) from the contributions of a portion of their profit after tax (PAT). The initiative is expected to take off from January 1, 2017. The modality for the fund which would operate as an Equity Fund, will be worked on by the Bankers’ Committee and will be communicated in due course.

The CBN Governor, Mr. Godwin Emefiele, who unfolded the new initiative at a Bankers’ Committee retreat said the Sub-committee on Economic Development and Sustainability of the Bankers’ Committee would coordinate the execution of the programme and provide feedback to the central bank and the Bankers’ Committee. According to him, based on the feedback, the CBN would release the operational guidelines for the AGSME fund.

“By our estimation take-off is January 1, but those projects would not be available until around March or April next year, after the banks’ audited accounts have been presented to the public. Our initial experience is that you don’t need more than N30 billion to start with,” Emefiele said.

He said the Bankers’ Committee recognises the potential impact of agriculture, manufacturing and SMEs as catalysts for rapid growth, job creation and poverty reduction, to drive inclusive growth and development of the economy. He said the Committee fully supports President Muhammadu Buhari’s economic goals.

Looking Back

Despite the new initiative by the Bankers’ Committee, there have been concerns about the likelihood of the scheme making the desired impact when the then Small and Medium Enterprises Equity Investment Scheme (SMEEIS), a voluntary initiative of same Bankers’ Committee approved at its meeting in 1999, was largely adjudged as unsuccessful then.

The SMEEIS then was also established in response to the federal government’s concerns and policy measures for the promotion of SMEs as vehicles for rapid industrialisation, sustainable economic development, poverty alleviation and employment generation. The scheme then required all banks in Nigeria to set aside 10 percent of their PAT for equity investment and promotion of small and medium enterprises. It was agreed then that the 10 per cent PAT to be set aside annually should be invested in small and medium enterprises as the banking industry’s contribution to the federal government’s efforts towards stimulating economic growth, developing local technology and generating employment. The funding to be provided under the scheme was to be in the form of equity investment in eligible enterprises, to reduce the burden of interest and other financial charges expected under normal bank lending, as well as provide financial, advisory, technical and managerial support from the banking industry which covers very legal business.

But Anochie U. and and Ude D. (2015) pointed out that SMEEIS did not realise its full objectives because among other challenges, the “conditions attached to the loans itself made it impossible for their objectives to be attainable. For instance, according to bankers’ committee Revised (2005), the enterprise must be a registered limited liability company with Corporate Affairs Commission (CAC) as well as comply with all the relevant regulations of the company and allied matters act, the owners of these SMEs find it difficult as a result of the huge funds attached to registering under CAC.

“Most of these SMEs operate from the rural areas which also put them off the current trend, as a result of communication facilities, access road, and cost of transportation, also demands from the association to which they (SMEs) must register with in order to be recognised.”

Nonetheless, Emefiele assured that proposed initiative ensure that previous challenges do not resurface.
“We thought that this time that there is need to really stimulate growth and because we also know that having equity funds by investors, particularly local investors, has always been a thing in achieving the objective of agriculture and SMEs, we decided that the banks and the CBN would commit certain percentage of their funds to support this endeavor.

“The SMEEIS fund was left in banks’ provision accounts. But this time, once the profit of the banks, like in this case, their 2016 results which would be out latest April 2017, they would provide the percentage we would agree from their PAT and the fund would be warehoused at the CBN. Hopefully, before or about that time, some of the projects that we contemplate would go under this fund would have been identified,” the CBN governor assured business owners.

Furthermore, Emefiele clarified that previous intervention funds by the central bank had been effectively deployed to critical sectors of the economy, just as he dismissed the insinuation that the level of assessing the funds were low.

“I will not say the level of a assessment is low. It is important for us to understand that in the process of granting a loan, there has to be various forms of assessments to determine the viability of the project and to determine whether that project can pay up. So, we have the Commercial Agriculture Credit Scheme (CACS), the Power and Aviation Intervention Fund (PAIF) and others and they have been fully disbursed.

” The one that you may be talking about is the micro, small and medium scale enterprises development fund (MSMEDF), where we have about N220 billion under that scheme, but so far close to N90 billion of the monies have been disbursed. But if you recall that these are loans to MSMEs, I can assure that so many small businesses and farmers have accessed these funds. But we are ramping up and we would continue as usual to provide enlightenment for people to know they can access this scheme.

“That would also be the basis for which the AGSME Fund would be launched. In the next couple of days, we would release the guidelines for people to know how they can access this facility. But it is important for us to know that we are going to build strong governance framework around the fund. The CBN would continue to provide intervention funds at single digit interest rates as usual,” Emefiele said.

Therefore, it is expected that the initiative, if properly structured and fully implemented, would enhance access to credit by SMEs in Nigeria, set the pace for industrialisation of the economy, increase output, generate employment, diversify the revenue base, and above all, increase foreign exchange earnings.