As DBN Begins Lending to Businesses…

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In this report, Wole Ajayi examines the unique features of Development Bank of Nigeria as it begins lending to businesses in September

The Development Bank of Nigeria (DBN) holds great promise for the growth and expansion of small businesses in the country and the economy. Set to start lending in September on the back of a $1.3billion startup fund from initial investors, its business model to facilitate new and longer tenured bank loans to entrepreneurs makes its intervention unique, historic and unprecedented.

For Nigerians, especially the youth, who have bankable business ideas and are looking for affordable and long term finance to get started, the DBN as designed provides a good basis for optimism. For entrepreneurs who have gone through the horrors of raising finance from banks at cut throat interest rates to be paid back within a year or two, it may just be time to heave a sigh of relief due to the long term funding from DBN.

Against the backdrop of several government backed development initiatives that have failed to deliver on their mandates, it is understandable to be cautiously optimistic about the impact that DBN is set to have. Yet, there is a lot of practical evidence to establish that the DBN story would not be like those before it. In its formation, design and implementation framework there are pointers providing assurance that it is indeed different and unique.
In specific terms, the DBN has four key features which set it apart from other development finance institutions in the country.

The first is its operational structure. Although the DBN was initiated, promoted and set up by government as co-owner, the institution was fundamentally designed to function and operate its business activities as a private sector led and independently run financial institution.

The wisdom in taking this course of action is obvious: to limit the chances of government intervention in its operations. It was drawn from bitter lessons learnt from earlier interventions which have performed sub optimally due to unrestrained interference by previous governments.

This goes beyond the general principle of non-interference. The DBN also has well-built institutional operational guidelines to prevent and check likely instances of such. In fact, the continued involvement of key international development financial institutions, such as the World Bank, African Development Bank (AfDB), European Investment Bank, and KfW of Germany and AFD of France as initial investors that have committed a substantial part of the initial $1.3billion for its take-off, depends on the strict adherence to this principle by the government.

The board of the DBN is also structured to ensure that the government has limited influence over its operations. The government has only one member who is chairman of the Board, from a nine member board that exercises oversight and supervisory role over its activities. The other board members are drawn from the private sector.

This may explain why the Minister of Finance, Mrs. Kemi Adeosun, in April after presenting the pioneer Managing Director of the DBN, Mr. Tony Okpanachi, a consummate banker with over 25 years’ experience and other management staff openly stated that there will not be any political interference and that the bank will be insulated from government control.

In her words: “I want to say something about what makes DBN different. It is going to be devoid of political interference. It is not going to be influenced by politics. It is going to be run by private sector best practice. We have learnt lessons from the past. What ruined the ones in the past was political interference- “lend to my local government; lend to my friend; lend to my family”. So, there is nothing like that. The multilaterals have done it elsewhere and they are bringing the model here. With the multilaterals and private sector players on the board, we have a board that we (government) can’t control.”

The second key differentiating feature of DBN is that it will operate as a self-sufficient, self-financing financial institution that is totally non-reliant on government subsidies or subventions. The bank has the power and latitude to source for funds to run its operations from local and international development agencies. It can also leverage existing structures of the financial sector without relying on the government.

The operational framework of the DBN is another major distinguishing factor that makes it unique. It is designed to function primarily as a wholesale development finance bank. It will therefore interface only with existing commercial banks, Micro Finance banks, development financial institutions and other financial institutions to fund development projects and businesses that will stimulate growth in the economy. It will not deal directly with individual businesses or private persons. The DBN is also the only development finance institution with a strong focus on MSMEs. Of the five existing DFIs in Nigeria, only the Bank of Industry and Agriculture focus on Agriculture and MSME sectors. But even these two have only struggled to address the shortfall in MSME lending largely due to inadequate governance structure and perennial reliance on capital injection from government to sustain their operations.

DBN’s focus on this segment of the economy is very telling. It is a sector that even in its non-optimal state basically functions as the backbone of the Nigerian economy. According to the National Bureau of Statistics (NBS) there are about 31 million of these businesses which contribute over 45% of our GDP and employ about 66% of our adult population.

The sad thing is that the growth of this key sector and its ability to create jobs, strengthen the national economy have been greatly hampered by lack of proper access to finance. Currently, the financing needs for this critical segment of our economy stands at $119 billion with only less than 3% met by the formal financial sector. This is because MSMEs typically have low capitalization, limited assets, poor credit/governance culture and inadequate financial management, resulting in financial institutions perceiving small businesses as high-risk customers and have therefore been consistently reluctant to advance credit to them.

One of the key benefits of the DBN in practical terms is that it will revolutionize lending by helping MSMEs have access to finance. DBN working with Participating Financial Institutions will lower the risk of the MSME segment and the resulting interest rates will greatly help small business owners to increase their profit margins, have more money set aside to expand their businesses and improve their standard of living.

Furthermore, the DBN as structured will offer unrivalled tenors for loans to small businesses. For the first time in the history of the country’s financial system, small business owners would be able to access loans with an expanded tenor of up to ten years. In addition, they will also enjoy moratorium of about 18 months. This is a historic development in the Nigerian financial landscape with massive benefits for the business environment.

The coming on stream of DBN powered by reputable finance institutions like the World Bank, the European Bank and the African Development Bank is therefore significant because the lack of access to finance has stunted the growth of small businesses and overall economic growth in Nigeria. With enhanced access to finance for small businesses they will be empowered to expand their operations and contribute significantly to the country’s GDP. Small and medium enterprises (SMEs) cannot grow without reliable long-term sources of finance and affordable interest rates.

In conclusion, DBN will be a good addition to the efforts of the government to diversify the economy by igniting a critical sector of the economy. As the small businesses grow, so will they continue to generate employment for the teeming Nigerian youths. The success of these businesses will encourage other Nigerians to start up their own ventures so that they can access the required financing to grow their businesses under convenient payment terms.
No doubt the success of DBN will contribute to significant reduction in unemployment and reduce reliance of the economy on oil exports.

The DBN is indeed a smart program whose time has come. By creating a private sector institution funded by international development finance institutions, the government has been able to creatively overcome the structural and systemic inadequacies of existing development banks and secured sustainable large financing inflows for energizing MSME growth in Nigeria.

– Wole P. Ajayi is a public analyst based in Lagos.