The country’s huge infrastructure deficit underscores the need for capital mobilisation required to finance activities and ensure sustainable growth, writes Obinna Chima
Globally, the relationship between the financial system and development remains very critical for any economy to realise its potential.
Financial system development depends largely on the flow of funds from the banking system. Economic development on the other hand, experts stressed, is about enhancing the productive capacity of an economy by using available resources to reduce risks, remove impediments which otherwise could lower costs and hinder investment. The banking system plays the important role of promoting economic growth and development through the process of financial intermediation.
Many economists have acknowledged that the financial system, with banks as its major component, provide linkages for the different sectors of the economy and encourage high level of specialisation, expertise, economies of scale and a conducive environment for the implementation of various economic policies of government intended to achieve non-inflationary growth, exchange rate stability, balance of payments equilibrium and high levels of employment.
Well functioning financial systems can mobilise household savings, allocate resources efficiently, diversify risk, and enhance the flow of liquidity, reduce information asymmetry and transaction cost and provides an alternative to raising funds through individual savings and retained earnings.
Joseph Schumpeter, in his “The Theory of Economic Development,”acknowledged the role of finance in economic development, stressing that financial intermediation is critical for economic development. He further stated that financial intermediation through the banking system plays an essential role in economic development by affecting the allocation of savings, thereby improving productivity, technical change and the rate of economic growth.
Also, McKinsey & Co, a global management consulting firm, had in a report, noted that Nigeria has the potential to be one of the world’s top 20 economies by 2030 with a consumer base that will exceed the current population of France and Germany.
It also noted that sales of consumer goods in the country may more than triple to almost $1 trillion by 2030, noting that Nigeria is developing a large consuming class.
The report also predicted that by 2030, about 160 million Nigerians (out of a projected population of 273 million), could live in households with sufficient incomes for discretionary spending.
This, therefore underlines the need to promote consumer lending in the country.
Case for Consumer Credit
To the Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, consumer credit is a topic that has dominated a lot of space recently.
But Emefiele, who spoke at a recent forum organised by The Guardian, pointed out that in other climes where consumer credit had gained ground, the development of a good credit bureau system has always been the issue.
“If you have a credit scoring system that is efficient, if you have a well-developed credit bureau system or market, where those who can catalyse financing like the banks can have confidence in the scoring system, then it is easy for you to stimulate consumer credit. “Before we had the global crisis of 2008/2009, we were beginning to see growth in the consumer credit market.
“But unfortunately, because of that crisis, we found out that there were a lot of credit losses by the banks. That made the bank to lose interest in consumer credit,” the CBN Governor added.
Therefore, he stressed the need to go back to consumer credit.
“But I must say it is also a responsibility from the side of those of us who are regulators, about what needs to be done to really stimulate consumer credit.
“That was why the CBN championed the development of the Bank Verification Number (BVN), where when you take a loan there is information about you that is circulated around the financial system, such that you must repay the loan.
“And if you do not pay, you are blacklisted to the point whereby it will be like life is taken off you. Once we begin to see that once people take loan and they repay and if they don’t pay they are sanctioned, then you will begin to see more encouragement on the part of the banks,” he said.
Also, the chief executive, Cowry Assets Management Limited, Mr. Johnson Chukwu, when consumer credit is high, and consumers can purchase goods and services, it goes a long way to show that the economy is doing well.
And when the economy is doing well, it means businesses can be able to grow as consumers’ purchasing power is high.
“We need to look at how we can stimulate consumer credit. The reality is that if we must grow this country, we must tap into our huge population,” he said.
Chukwu, however, said there was need to encourage private equity firms in the country as well, so as to stimulate investments.
“We need to make our economy attractive to foreign investors, beyond the portfolio investors. There have been a lot of improvement since the introduction of the Investors’ and Exporters’ window, but we need to drive that.
“Nigerians are very entrepreneurial, but a lot of the initiatives created by Nigerians don’t get capital,” he said.
To the founder, Centre for Values in Leadership, Prof. Pat Utomi, said there was need to develop a strategy for financing the Nigerian economy.
He noted that Nigeria needs to tap into the potential in its population.
Utomi explained: “For me, it is important that whatever you want to do and do well, you need to have a strategy. You can’t just be talking about financing the economy without looking at the strategy itself. There must be an alignment between the strategy of economic growth and the strategy of financing that growth.
“It is also important that we bear in mind that we need a mix of approaches. Capital is made at home and we need to build it. A great deal of the growth in many countries came from domestic savings. What has happened in recent years is that we have a situation whereby capital is built around the world in certain pockets.
“The issue is how we can make the economy attractive enough to that capital that is out there. What it means is that when you have a clear sense of what you want to do, you can attract a lot more capita. But it does not take away the main point that capital is made at home.”
Utomi, who stressed the need for the development of strong institutions in the country, noted that financing the economy should not be left to the banks alone.
“In other climes, other sectors, such as the insurance industry, contribute massively to growing the economy.”
On his part, the Managing Director of Financial Derivatives CompanyLimited, Mr. Bismarck Rewane, said to move the economy forward, Nigeria must stop doing “stupid things.”
Rewane added: “So the first thing you ask yourself is what are the stupid things we are doing? The economy is already financed, but it is how to move the financing to the most productive sectors.
“So, what are those stupid we are doing? We need to look at them and stop doing them, then we start doing smart things,” he added.
To the Managing Director of Niger Delta Power Holding Company (NDPHC), Chiedu Ugbo, said power sector is critical to the economy.
Ugbo explained that the power sector was funded by the government, but there was a thought recently that the sector was better financed by the private sector, which was later considered.
Also, the former Chairman, National Electricity Regulatory Commission (NERC), Dr. Sam Amadi, said to attract funding to the power sector to achieve market viability, financing the private sector is critical.
He identified the private sector involvement, the regulatory risk framework, and government funding as models that will finance the power sector effectively.
He also canvassed crowd-sourcing method of financing the sector, where he recalled the method as being used to generate funding from the people of Imo State for the Imo State’s airport.
However, the Director General, Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, however pointed out that a lot of operators in the economy are not able to access to the intervention funds that had been set up by the CBN.
“The CBN means well, as part of its developmental role it is playing. But until these funds gets to the end-users, we don’t think it would have achieved the desired results.
“Each time we talk to the banks, they make us to know that they are to bear the credit risk of this lending. And if they must bear the credit risk, it makes conditions and access tighter and it obstructs the realisation of the objectives of these funds,” he added.