Okpanachi: MSMEs Have Huge Financing Needs

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Tony Okpanachi

The Managing Director, Development Bank of Nigeria, Mr. Tony Okpanachi, in this interview says with a strong on-boarding exercise it carried out within the year, the Bank currently has a total of 29 participating financial institutions. He speaks about the determination of the institution to ensure that micro, small and medium scale enterprises continue to get the required financial support. Obinna Chima presents the excerpts:

Can you give us an overview of what the DBN does?

The Development Bank of Nigeria (DBN) is a wholesale development finance institution. We were set up to provide and elevate the funding need of micro small and medium enterprises (MSMEs). So, essentially we focus on providing long-term finance to micro small and medium enterprises. Our mandate is in three fold – we do lending activities and that is wholesale lending funds to financial institutions to on-lend to MSMEs. That is one of our investment angle and which is the core or our mandate. The second part of our mandate which we are also going to do is to provide partial guarantees for financial institutions to encourage them to be able to provide access or credit to MSMEs. We have already set up a subsidiary which will focus on that, with skill set for credit guarantee. The third part of our mandate is capacity building or what you call technical assistance to financial institutions. Again, because we are a wholesale finance institution, all we do, we work through other financial institutions. So, in these three mandate, at the end of it all, it is to be able to act as a catalyst to ensure that other financial institutions like commercial banks, micro finance institutions, and other financial institutions that interface or that provide finance MSMEs are able to do that. So that is what the  DBN does. But ultimately, we do all these to be able to achieve what we call our developmental objectives. And what are these developmental objectives? In the Nigerian economy for example, we want to see how do we create jobs and we know that the Nigerian population is growing and we also know that the MSME segment of the economy is the greatest employer of labour. So, the more we are able to empower them, the more we are able to achieve that. So we also want to see the diversification of the economy, we want youth empowerment, gender empowerment and all these developmental impact that in the long-run will positively impact the Gross Domestic Product of the country.

One of your core mandates is to provide financing to MSMEs. We also see some other Development Finance Institutions (DFIs) and lot of commercial banks and microfinance banks do same. But all we hear every day is that a whole lot of MSMEs still lack the required funding. What is responsible for that?

First and foremost, I will say the financing needs for that segment is quite huge. It is in trillions. The available finance is pretty much not truly adequate, so you need to actually get catalyst to get more institutions to be able to finance. So, I will categorise the issues starting from first, the availability itself. Secondly, the risk profile of that segment and thirdly, talking about the bankability of what they call their business. So, if you look at it from that perspective, I have talked about the available funds. If you know as at the last count, when the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), they did their survey in 2015, they came out with about 37 million MSMEs. It is quite huge. If you look at it in terms of the number of people that are employed in that segment in Nigeria, I can tell you that it is the greatest employer of labour, both full time and part time labour. And the importance of that segment of the economy cannot be over emphasised. So, in terms of the need for that area, it is quite huge. So most businesses will assume that the issue they have is finance. So they have ideas and all they require is finance. So, both effective needs for financing and perceived need for financing, when you put it together, it shows that there is a huge demand for that segment. So, there has to be a concerted effort to be able to meet that need. That is in terms of quantum and availability. The second part which I talked about is in terms of risk profile. Historically, lending to MSMEs is usually where most banks seems to have high number of non-performing loans. There are issues about people not being able to differentiate between the business and the owner and there are issues about going into business without proper feasibility studies and then when you get the finance, it is misapplied. So, because of these experiences, some financial institutions tend to shy away from lending to MSMEs. So, we have the issue of risk profile of that segment being very high, relative to, for example, the large corporates, which are more structured, more organised, have track records and have reputation to protect. So, over time you can dimension them in a way that their risk profile is better. That is the second reason why I will say mostly they complain about financing not being available. Another greater part, which is the third part of it, I will say, is the bankability of some of the projects. Every entrepreneur that gets up now has an idea and puts it’s together. Typically, you have to go through a process to know if it is bankable for you to be able to get financing from an institution. So, the bankability of this project is also a major issue.

What are those things that distinguishes the DBN from the Bank of Industry and also from the Central Bank of Nigeria’s development finance function, because you all appear to be doing the same thing?

Firstly, I started by saying the need of that that segment is very huge; so no single institution will be able to do all. So you have the Development Finance Department of the CBN coming with their own and making those impact, you have the Bank of Industry focusing on industry and in some cases also doing MSMEs, you have NEXIM Bank also providing funding for export for exporters. You also have the Bank of Agriculture focusing on strictly on agriculture, in terms of how do you provide funding or finance to farmers. For us at the DBN, the difference is that most of these other finance institutions focus on specific sectors or areas, but at the DBN, our focus is the whole gamut of MSMEs. So if you are in agriculture, industry, or any sector of the economy, DBN focuses on that. So, we cut across all sectors. The second distinguishing factor for us is that we are a wholesale DFI. So our funding model is to do all our financing through other financial institutions that already have relationships with these MSMEs.  So the philosophy of the DBN is to ensure that we collaborate as much as possible with all these other financial institutions that are able to provide access to credit MSMEs.

How much have you disbursed so far?

In 2017 we started our pilot lending with two micro finance institutions; but I will say 2018 was our first full year of operation.  And at the end of 2018, which was our first full year of operation we had done N31 billion in terms of loans provided for on- lending to MSMEs. In terms of number of loans, we did over 35,000 in 2018, which was our full year operation. But I can assure you that the first quarter of this year we have done more than that, but usually we give our report annually. The figures are also still looking up because by the end of the first quarter, we had gone beyond that, 35, 000 number of loans and then 31 billion till date.

You projected that you are going to do 70 billion loans and you have also told us what you did in Q1 in terms of number of loans. Does it look like you are going to meet the 70 billion disbursement target this year?

Definitely, we are going to meet the 70 billion disbursements this year. With what we have done in the first quarter and this second quarter, the trend is going towards meeting the target.

You are a wholesale lender that goes through other financial institutions. How do you mitigate bad loans from the kind of lending you do?

Clearly, being a wholesale DFI, the credit risk on the lending is on the financial institutions. So they do the credit appraisal, they do the discussion, the pricing, they take whatever, if there is need for collateral or not. They do all that.  And so they have the relationship with these end borrowers. So in the event that the loans go bad, they also have a machinery to be able to collect it back. So we provide the funds to them on wholesale for on-lending, we don’t have direct interface with the end borrowers. So, collection of loans and all that is their own. We will be talking about NPL when the financial institutions that we give wholesale funds have issues. That is where our won NPL comes from. So, if for example, a financial institution that was given wholesale funds, something happens to it and it is not able to meet its obligation to us, then it becomes a non-performing loan. But, be that as it may, because we also have interface with them, part of our capacity building and technical assistance is to see where there are technical issues. If we need to come in there to provide some technical assistance to help the financial institutions, that is one of the things our mandate also covers. We work with them to see the reason(s) why we are having rising growing non-performing loans in that segment and to find out if there is anything we need to do in terms of helping them with capacity, technical assistance, then we do that. Now if we also notice that for example, the institution is not growing its loan book, we will ask what are the issues, we sit with them and see areas we can come in to provide technical assistance. Let me again reiterate the fact that being a wholesale institution and the fact that our own catchment segment is MSMEs, it is not jack of all trade, it is within the segment. So, for example, if a large corporate comes and wants a loan, DBN will not lend to such because we have maximum loan amount you can get from us.

How many financial institutions are you working with presently?

We have about 29 financial institutions now and that cut across commercial and microfinance banks. And our plan and objective is to ensure that we get as many that meets our eligibility criteria to be     on-boarded, so that we give alternatives and options to end-borrowers.  As we speak, we have about 10 commercial banks on-board already and some of them are already at different phases of our on-boarding exercise to bring them up, so that their customers can go there and apply for DBN loan and get it. For microfinance institutions, we have both the national and states microfinance banks. A lot of these MFBs have already been on-boarded and we are talking about between 85 to 90 per cent of our borrowers. The average loan size of the microfinance banks that we sell is about N170,000; And the average for commercial banks is about N70 million. Now the drive is to ensure that customers are able to go to those banks, ask them for DBN loan and be able to access the loan.

What are your eligibility criteria?

Essentially they are the same. First and foremost, we have to look at if you have been profitable in the last two years, we have to look at issues which include non-performing loans and several other things. And then how strong are they in MSME lending? But it is quite simple, it is on our website and we are transparent about it. And then the process is that we send you a questionnaire, you fill the questionnaire, we asses it, if you meet our criteria, we do due diligence on you, if you meet our due diligence then we on-board you. 

Do you collaborate with the chamber of commerce and industries like the Lagos Chamber of Commerce and Industry, the Abuja Chamber of Commerce and others, since their members are mostly SME operators?

We have strategic alliances with all these chambers of commerce, even the Nigeria Association of SMEs. We are even a corporate member of that association.  We have common objective and we have common goal. How do we empower the micro small and medium enterprises? How do we ensure that they have access to credit? So we all have the same objective. So we have strategic alliance with them, we interface with them, we go make presentations at their seminars when necessary and create awareness with them. We have been on panels where they have invited us in their conferences. So it is ongoing, because we need to also create that awareness. Yes, the DBN funds is available through banks, let the customers go to the banks and ask. And they can access it either directly or they go through the associations, the chambers of commerce and so on. So we collaborate with them, we have a very strong unit that handles our strategic alliance with them and that has to keep going.

You were part of the 140 members that joined the Global Finance, how is that going to impact on your operation?

You see what we are doing, that forum ensures that global best practises is shared and it is made up of both financial institutions and even professional bodies, Fintech companies, and so on and so forth. So that forum enables you to have a feel of how the businesses are doing, what are their requirement, what are their foreign requirement and how is it done in other areas. So, you use the experiences of other areas to improve on what is being done in Nigeria. If you remember in Nigeria, I think we are the only financial institution that is there and the only other one that was there was Diamond Bank before their acquisition. We are the only financial institution that is a member of that global SME finance forum. And we took that deliberate step to say look, if we say we are a bank for SMEs then wherever SMEs are, we should go with them all over the world.  And the learning from that so far has been very interesting because we share experiences. Whatever we are going through in Nigeria and whatever the issues of this financing constraint and all that, other countries have gone through it. So how did they do it? Learning from what they have done and what are the new things they are doing to ensure that at the end of it, all the MSMEs are able to access those funds.

In the next five years, where do you expect the DBN to be and what level of impact do you expect to have made in the economy?

First, we want to have achieved maybe about 10 per cent of the funding available to that segment, in terms of direct lending. But most importantly, with our credit guarantee and technical assistance, we want to act as catalyst to ensure that overall, the news is no longer that financial institutions are running away from funding that segment. And in collaboration with other several initiatives, other DFIs who are providing different funding, that segment itself should in the next five years should become an attractive segment and a most sort after segment of the economy. And access to credit should now become an issue that will not be there, though it will always be there but it will not be as critical as it is. They will now begin to look at other issues beyond just access to credit.

What are those challenges you encounter in the course of your job and how did you manage to scale through?

 

First being a new institution some of the challenges are first awareness. But, we are addressing that through advertisement and other means. But being a wholesale DFI we needed to work and partner with other financial institutions to reach out. So you needed the buy-in of those financial institutions. It is a challenge, in the sense that you want to work to get their buy-in on that. But ultimately when you now get their buy-in it becomes an advantage. Because they now become your apostle and reach to others. At the initial time, they were reluctant to partner with the DBN. So it was a challenge for us. The other one is that there is this market perception about pricing. That DBN is a government bank, so they come and they price loans at single-digit. So we said DBN was set up to provide sustainable financing and when you are going to be sustainable, the institution itself has to be sustainable. And being sustainable means that the institution itself has to ensure that, the cost of raising funds, the cost of lending, your pricing must reflect adequately to be able to ensure that you are there in the long- run. Not that you come out and then what has happened in the past to other financial institution or other DFIs that are struggling for funding becomes an issue.

How do you feel about the special recognition that was given to you by the Chartered Institute of Bankers of Nigeria?

I feel quite great. I think it is monumental, given the fact that a profession that I have been in for almost 30 years recognises me and it the highest recognition you can get from a professional body. So, I think it is quite great and I am excited about it. I am quite grateful to CIBN for deeming it fit to be conferred a fellow. And on my part I think it is a commitment, and I going to live the ideals expected of a fellow of the Chartered Institute of Bankers of Nigeria.