With growing interest rates and ambiguous requirements to access credit from banks for their daily business activities, many Micro, Small, and Medium Enterprises (MSMEs) now opt for non-bank lenders.
According to reports, Nigeria’s lending rate is one of the highest in the world. Although, lending rates in Nigerian banks officially remain at 18 per cent, four percentage points above the MRR, loans are available in the banks only at an interest rate of between 20 and 21 per cent.
This underscores the disconnection between the small businesses and the banking sector of the Nigerian economy.
In a statement late last year, the Central Bank of Nigeria (CBN) unveiled the applicable rates for deposit money banks (DMBs) showing the lowest and the highest rates from the 24 lenders. The statement showed that Skye Bank, Keystone Bank, Unity Bank, and Wema Bank had the highest lending rates of between 30 and 31 per cent while Citi Bank, Guarantee Trust Bank, Rand Merchant Bank had the lowest rates of between 20 and 22 per cent. UBA, Access Bank FCMB, Fidelity Bank and First Bank are said to have loan facilities with single interest rate for agriculture.
With the high interest rates, Enhancing Financial Innovation and Access (EFInA) said in its 2016 survey report that about 41.1 million, 41.6 per cent Nigerian bankable adults out of 96.4 million kept their money at home throughout 2016. The report attributed decreased interest to the challenging economic environment between 2015 and 2016 with the attendant effect of low employment rate, lower disposable income and increasing inflation rate.
Mrs Mosun Adeola, a newsprint supplier, has in the past five years relied on loans from non- bank lenders. According to her, she was pushed to seek refuge with non- bank lenders at Ogba in Lagos in 2014, when she found it difficult to access loan from her bank which she had been patronizing for over 15 years. She said a friend who had used them introduced one of the lenders to her.
At 10 per cent interest rate, Mrs Adeola said she collects loan of about N1.5 million from her lender on a monthly basis and that she is able to pay back within the same month. However, Mrs Adeola ran into trouble recently when the lorry load of her supplies to a client in Akwa Ibom State, was involved in an accident.
“For many days, I couldn’t sleep. At a point I developed high blood pressure. When I could not handle the situation, I confessed to my lender. That was the first time I defaulted in payment”, she said.
Financial experts who spoke to Daily Trust on Sunday, lamented the spate at which Nigerians now patronise the non-banking sector, saying the formal banking sector is fast losing its relevance.
Muda Yusuf is the Director General of LCCI. He said that access to credit by the Micro, Small, and Medium Enterprises (MSMEs) is one of the major problems being faced in the Nigerian economy today.
“This segment of the economy accounts for over 50 per cent of the Gross Domestic Product (GDP) in the country and enjoys less than 1 per cent of the banking system credit. This has made it difficult to unlock the huge potentials of small businesses for job creation, poverty reduction and economic inclusion,” he said.
He maintained that the consequence of the failure of financial inclusion is the resort by MSMEs to money lenders, finance companies, informal financial markets, and micro finance banks for credit.
“The lending rates in these windows are outrageous, ranging from 40 to 70 per cent. Some of these lenders, in some instances, charge as high as 7 per cent interest per month.
“The truth is that it is hard to boost domestic investment with interest rates that range between 18 to 30 per cent (for bank lending), especially in the real sector”, he said.
According to him, the impact of high interest rate on investors is still not being adequately appreciated by the monetary authorities.
“The truth is that interest rate matters, depending on gearing of the business. Many investors depend on bank loans for the acquisition of fixed assets, machineries and working capital. Times like these demand that we should worry more about growth, jobs, and output, than inflation. In any event, an increase in output would have a moderating effect on inflation,” he added.
Yusuf said high interest rate is also a contributory factor to the rising level of non-performing loans (NPL) in the banking system.
“The projection by the IMF for the industry ratio NPL was 12.1 per cent for December 2016, as against the prudential limit of 5 per cent. Many of the businesses that ended up with AMCON were victims of high interest rate. We need the investors to turn things around in the economy. This will not happen if we continue to perpetuate a regime of high interest rate.
“This situation is further complicated by the high yield on government debt instruments. Government borrows from the public and financial system through treasury bills at well over 18 per cent; and federal government bonds at over 16 per cent. Few private investments can match this yield. Because these instruments are government instruments [with zero risk], it imposes a risk premium on private sector. The crowding effect on the private sector is very profound. Funds are being moved from fixed deposits and savings account into the purchase of treasury bills. This does not augur well for the economy. We are thus saddled with a system that penalizes economic activities that create value and jobs.
“Meanwhile, the liquidity squeeze in the economy is not abating. This is driven by the contractionary monetary policy, aggressive drive for tax revenue by all levels of government, import duty regime, the Treasury Single Account (TSA), and the crowding out of investors in the financial markets through the high yields on government debt instruments, especially treasury bills and federal government bonds. The economy now needs injection of liquidity in order to rebound. The budget appropriations are not enough to make the desired impact. Boosting private investment through a low interest rate regime is therefore very vital,” he further stated.
Also, Bisi Oni of FunQuest, a financial service firm, said different models of lending are springing up daily, adding that the credibility of any financial institution to lend lies on its recognition by the CBN.
“Today, funding is looking for expression more so that government is waging war against fraud, corruption, some of the money must find their way to the market. Some people from day one know they can’t pay for the loans they are taking. When we started, we based our lending on integrity model. Unfortunately, we nearly ran into debt as many clients failed to fulfil their obligation of re-payment as scheduled. We found out that because we did not attach anything to the loan some of our borrowers saw these as free money”.
“So, many of them could not pay, though it may be due to business failure. But the average Nigerian hardly wants to pay back loan. These defaulters usually come up with different stories. We have become wiser now. For us to lend you as an individual money, we must ascertain the job you are doing and ask for guarantors, mostly people of credible character, integrity and who will not like to lose their jobs”, he said.
“For business lending, we lend for cash flow. Before we can lend you money for your business, we have to see your cash flow. If we see that your cash flow cannot pay for your loan, we back out. For us, we focus more on people that are working in certain industries. For instance, if we give a bank manager a loan, of course, with a post-dated cheque written in our name, we are sure of payment. The cheque must not bounce because the bank official knows the implication,” he added.
Oni advised loan seekers to always look for CBN recognized lenders so as not to fall victims of fraudsters.