Of What Use is Another DFI?

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INDUSTRY ANALYSIS

Crusoe Osagie examines the mandates of the Banks of Industry and Agriculture, along with that of the recently licensed Development Bank of Nigeria, asking if there is truly any need for another development finance institution

Nigeria is in desperate need for economic growth and development. An analysis of the country’s demographics further buttresses this fact.
As a matter of fact, when one considers the structure of Nigeria’s population, with youths constituting up over 70 per cent, vis-a-vis the nation’s contracting economy, it can throw the discerning into some sort of panic.

For example, the age structure in Nigeria shows that people aged between 0 and14 years make up 42.79 per cent of the population; 15-24 years: 19.48 per cent; 25-54 years: 30.65 per cent; 55-64 years: 3.96 per cent and 65 years and over: 3.12 per cent.

The above figures show that the population of Nigerians 54 years and younger is over 90 per cent, indicating that nearly the entire population in Nigeria is in the active production bracket. The puzzle is how to keep these young people numbering over 140 million, gainfully employed.

It is therefore difficult to fault the decision of the government to set up a new development finance institution (DFI) even though a couple of them are already in place, set up by the same government for virtually the same purpose.
So, it was mostly cheers when recently the federal government announced that it had approved the commencement the Development Bank of Nigeria (DBN).

The Federal Executive Council (FEC) approved a $1.3 billion loan credit facility for the institution.
The approval came on the heels of a memo submitted by the Finance Minister, Kemi Adeosun seeking council’s ratification on the loan’s request.

Adeosun said $500 million of the amount would come from the World Bank, $450 million dollars expected from the African Development Bank, and $200 million from German development finance institution, KFW.
According to the finance minister, another $130 million would come from the French Development Agency to make up the $1.3billion earmarked for the commencement of the bank.

“As you know, the Development Bank of Nigeria recently received its licence and is being funded by some long term loans from some of our development partners.
“So the World Bank had given us 500 million dollars repayable over 21 years and all of this is at a concessional rate.
“The African Development Bank is giving us 450 million dollars and KFW are giving us 200 million dollars and the French Development Agency are giving us 130 million dollars.

“To access this money, we are ready to disburse but there are two requirements that we need to make and one of them is the legal opinion by the Attorney-General of the Federation and the other is the National Assembly approval.

“Before it goes to the National Assembly, it needs to be approved by FEC and the FEC simply approved today that these loan requests should go to the National Assembly for approval.
“So we can access this money and the Development Bank of Nigeria can take off fully as it is expected to transform Financing of our Micro Small and Medium Enterprises (MSMEs) sector.

“The council enthusiastically approved these facilities which are on long term, meaning that the DBN will be able to lend to our MSMEs over much longer periods and at much lower rates.
“So the impact on the SMEs will be quite considerable.”
According to her, the loans are also concessionary with interest rates of less than two per cent and have very long repayment period of up to 21 years.

The loans are aimed at allowing the bank to lend to Small and Medium Enterprises (SMEs) for a longer period with interest rate lower than in commercial banks.
With the finance minister having spoken with so much enthusiasm, it is still necessary to debate the appropriateness of the decision to introduce another development finance institution when the Bank of Industry (BOI) and the Bank of Agriculture (BOA) seem to have similar mandates as the DBN.

Bank of Industry
The BOI is Nigeria’s oldest, largest development financing institution. It was reconstructed in 2001 out of the Nigerian Industrial Development Bank (NIDB) Limited, which was incorporated in 1964. The bank took off in 1964 with an authorised share capital of 2 million (GBP).

The International Finance Corporation (IFC), which produced its pioneer Chief Executive held 75 per cent of its equity along with a number of domestic and foreign private investors. Although the bank’s authorised share capital was initially set at N50 billion in the wake of NIDB’s reconstruction into BOI in 2001, it has been increased to 250 billion in order to put the bank in a better position to address the nation’s rising economic profile in line with its mandate.

The institution’s vision is to be Africa’s leading DFI operating under global best practices, to transform Nigeria’s industrial sector by providing financial and business support services to enterprises.
The institution is mandated to provide financial assistance for the establishment of large, medium and small projects as well as the expansion, diversification and modernisation of existing enterprises; and

Bank of Agriculture
As for BOA, it is the nation’s foremost agricultural and rural development finance institution. It was incorporated in 1972 as Nigerian Agricultural Bank (NAB), in 1978, the name was changed to Nigerian Agricultural and Co-operative Bank Limited (NACB) to reflect the inclusion of co-operative financing into its broader mandate. In October, 2001, following the federal government’s effort to streamline the operations of its agencies, that were believed to be performing overlapping functions, three institutions Nigerian Agricultural and Co-operative Bank Limited (NACB), People’s Bank of Nigeria (PBN) and the risk assets of the Family Economic Advancement Programme (FEAP) were merged to form Nigerian Agricultural, Co-operative & Rural Development Bank Limited.

In October 2010, following the rebranding of the Bank to reflect its institutional transformation programme, the Bank adopted the new name Bank of Agriculture Limited (BOA)
The Bank is wholly owned by the Federal Government of Nigeria with its shares held by Central Bank of Nigeria (CBN) (40 per cent) and Federal Ministry of Finance Incorporated (MOFI) (60 per cent). It is supervised by Federal Ministry of Agriculture and has an authorised share capital of N50 Billion

The Banks key mandates include: Provision of credit to support all activities in the agricultural value chain; provision of non-agricultural micro credit to the poor segment of the society comprising rural artisans, petty traders etc; capacity development for the promotion of co-operatives and agricultural information systems; provision of technical support and extension services; boosting of opportunities for self-employment in the rural areas to stem rural-urban migration and inculcation of banking habits at the grass-roots of Nigerian society.

The BOA prides itself as Nigeria’s largest DFI and one of Africa’s leading agricultural finance institution.
It is also said to be the Nigerian DFI with the highest rural operational outlets comprising 136 outlets, six zonal offices and the head office, spread across the 36 states of Nigeria and the Federal Capital Territory.

The Bank has deep institutional knowledge of rural micro and agricultural financing with over 40 years of experience. It maintains strategic partnerships with international and multilateral institutions like USAID, IFAD, World Bank, African Development Bank (AfDB) and ECOWAS Bank for Investment and Development (EBID).

Clear Overlap of functions
A critical look at the mandates and missions of the two preexisting development finance institutions: BOI and BOA, show vast similarities and points of convergence with that of the DBN.
All three institutions can provide financing for MSMEs, all of them target single digit interest rates, all of them have the superintending goal of socio-economic development. Why therefore must we have all three with clear duplicity of functions?

The setting up of this new institution throws up a lot of new liabilities: human capital, fixed assets, among many others.
Could the new initiative that resulted in the establishment of DBN not have been channeled through the BOI and BOA? If not, then why not put the two older institutions down and fuse their functions into the DBN.