Real sector burdened by high cost of borrowing

The campaign to force a reduction in the cost of borrowing to the real sector and also interrogate the performance of the various single digit interest rate funding windows available for the sector, particularly manufacturing, will surely top manufacturers’ policy advocacy this year.

Indication that these will galvanize the advocacy machinery of the Manufacturers Association of Nigeria (MAN) and indeed, other members of the Organised Private Sector (OPS) emerged after manufacturers raised eyebrow that the double-digit rate at which commercial banks lend to the sector was discouraging productivity and investments.

The Nation learnt that when the policy advocacy eventually kicks off, manufacturers will specifically be pushing that the Central Bank of Nigeria (CBN) improve and sustain the current policies aimed at increasing loans to the productive sector of the economy to stimulate national output.

They will also be advocating the need for the CBN to review the guidelines of the various development funds put in place for the real sector to ensure that the terms and conditions are liberal enough to attract borrowing from the industrial sector.

The stage for what promises to be a robust engagement between manufacturers and the Federal Government through its monetary authority, the CBN, was set after 82 per cent of Chief Executive Officers (CEOs) of manufacturing companies indicated that the double-digit rate at which commercial banks lend to the sector was discouraging productivity and hurting investment.

This was contained in the Manufacturers CEOs Confidence Index (MCCI) for third quarter 2019, following which MAN said “It was imperative that it sustains the advocacy for policy measures that will lower the cost of borrowing to increase the sector’s productivity and competitiveness.”

The association added that it will also be partnering the Federal Government to interrogate the performance of the various single digit interest rate funding windows available for the real sector.

The MCCI gauges the pulse of the economy on quarterly basis. It deploys a set of diffusion factors, including business operating environment issues such as over-regulation, multiple taxes/levies, access to sea ports, local and raw-material sourcing, among others, to measure a quarterly perception and confidence of manufacturers in the economy.

In addition to the set of diffusion factors for which information is generated on, the general macroeconomic ambience in terms of foreign exchange, lending rate, credit to the manufacturing sector etc. are also measured.

A questionnaire structured with the diffusion factors, macroeconomic and business environment variables, and administered on the CEOs of MAN member-companies across the six geo-political zones of the country and the 10 sectoral groups of the association returned a disturbing verdict.

It indicated that majority of respondents (82 per cent) disagreed that the rate at which commercial banks lend to the manufacturing sector encourages productivity in the sector. “This is evident in the double-digit cost of borrowing from the commercial banks even amidst measures by the monetary authority to reduce cost of borrowing in the country,” the report said.

The index, which also added that the situation, discouraged investment particularly in the manufacturing sector, set the tone for manufacturers to push for a better deal from the commercial banks and from the various single digit interest rate funding windows put in place for the real sector.

Indeed, at moment, commercial banks are said to charge as high as between 22 and 25 per cent interest on loans. Micro-finance Banks (MFBs) charge higher, insisting on between 30 and 40 per cent interest rates.

The exorbitant interest rates charged by the commercial banks are said to be partly responsible for the shutting of many industries, while others simply relocate to neighbouring countries where they are sure of interest-friendly credit facilities.

Worst hit by the prevailing unfriendly interested rate regime are Micro, Small and Medium Enterprises (MSMEs). The commercial banks are yet to change their perception about MSMEs; they are still wary of the risk of loan default by MSMEs so, they are reluctant to advance credit to the operators.

There are 41 million MSMEs in the country, according to a national MSMEs survey carried out in 2017, by the sector’s regulatory agency, the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) in collaboration with the Nigerian Bureau of Statistics (NBS).

However, the MSMEs, despite being acknowledged globally as the engine of economic growth because of their potential to create jobs, boost production, generate income and reduce poverty, are still plagued by a plethora of challenges among which is lack of access to credit.

About 80 per cent of MSMEs are said to lack access to the financial market, according to a survey by the International Finance Corporation (IFC) and Mckinsey & Company, a United States (US)-based multinational management consulting firm.

To close the financing gap in the MSME segment of the industrial sector and hopefully, boost the profitability and competitiveness of MSMEs in Nigeria, the Federal Government, through the CBN, launched the N220 billion Micro, Small and Medium Enterprises (MSMEs) Development Fund in August 2013, as well as other intervention funds.

However, difficulties in accessing the N220 billion MSMEs Development Fund and other intervention funds meant for the sector have continued to stand in the way. The operators lament that it is easier for the camel to pass through the needle’s eye than to access the fund because of the stringent conditions and guidelines for accessing it.

Under CBN’s guidelines, the fund, which attracts nine per cent interest rate, would be administered through private or state owned Micro-Finance Institutions (MFIs), Finance Houses, and Cooperative Finance Agencies.

Such MFIs or micro-finance banks must pass CBN’s competency and proficiency tests in order to certify them capable of distributing these funds to MSMEs. State governments will be able to access up to N2 billion each for lending to eligible beneficiaries through Participating Financial Institutions (PFIs) in their states.

In other words, the CBN will not be lending directly to farmers or businesses. What the fund does is a wholesale fund. It provides funding to the PFIs. MFIs or micro-finance banks can also come to the fund.

The CBN will assess them, give them the money at low interest rate. The PFIs would undertake that they will lend at low rate of interest to micro-entrepreneurs, the low-income earners, farmers, artisans and the active poor who operate in the informal sector.

Also, PFIs can only finance agricultural value chain activities, trade and commerce; cottage industries, artisans, among others.

The apex bank in a bid to ensure that productive sectors of the economy attract more finance necessary for employment creation and diversification of the country’s economic base, also said a maximum of 10 per cent of the commercial component of the fund should be channeled to trading and commerce.

Although, CBN requests that 60 per cent of the fund, representing N132 billion, be voted for providing financial services to women-owned businesses, PFIs would be required to submit periodic returns on disbursements as well as an analysis of the social impacts of the fund.

The finance sector regulator will also undertake regular on and off site checks to ascertain the veracity of the reports received.

That is not all. The CBN also demanded that borrowers provide 100 per cent near-cash cover in treasury bills or fixed deposit, a situation said to have made it difficult for most finance house operators to draw from the fund.

Most of the finance house operators are therefore, reluctant to draw from the loan. In their own thinking, the CBN cannot force people to invest in treasury bills or keep fixed deposits because they want to borrow.

Because of this, only commercial banks are said to be meeting the drawn-down policy and are accessing the loans. The snag however, is that this arrangement defeats the objective of setting up the fund.

But an MSME operator said that the commercial banks are still being reluctant to grant the CBN intervention funds meant for the real sector because of risk of default.

The operator, who declined to be mentioned, said the commercial banks prefer paying penalties to the CBN for deliberately withholding the funds or channeling them to other areas at the detriment of giving the MSMEs to use to run their businesses.

However, as the President, Lagos Chamber of Commerce and Industry (LCCI), Mrs. Toki Mabogunje, explained, the intervention funds are available, but there are issues both on the side of the borrowers and the lender.

“The lender complains that the borrowers are not bankable; that they are not meeting the criteria that the banks are asking them to meet in order to access the funds,” she told The Nation, adding that there are also issues around financial literacy.

While also pointing out that some businesses themselves may not understand what is required for them to access these funds, Mabogunje said it was in an attempt to address issues around ease of access to the funds that the CBN came up with the idea of Moveable Collateral Registry, where a small business can use a moveable item as collateral to access the funds.

“With Moveable Collateral Registry, you don’t have to have land and property; you can use your movable car, your freezer; women can use their jewelry; any kind of moveable asset you have can be used as collateral. So, the CBN is trying to encourage more people to register their assets in that registry so that they can use it as collateral for funds,” the lCCI boss explained.

The National Collateral Registry of Nigeria is an initiative of the CBN, with support from the International Finance Cooperation (IFC), to improve access to finance particularly for MSMEs.

It is a web-based system that allows lenders to determine any prior security interests, as well as to register their security interests over movable assets provided as collateral.

The Collateral Registry facilitates the use of movable/personal assets as collateral that remain in possession or control of the borrowers and thereby improves access to secured finance.

The web-based nature of the system offers remote access from the comfort of the borrower’s location even beyond normal business hours without visiting the registry office. It reduces and frees officials of the registry operations from paper burdens, manual reviews, searches and storage costs.

Beyond the Registry, Mabogunje also said that at a certain level, at the micro level, that is the smallest of the small, up to a certain amount don’t even have to provide collateral.

“What they need is a guarantor; they can provide two guarantors; you know how they use guarantor under federal policy, either they use civil servants, a military officer, a lawyer, a banker; there are certain people that will be accepted as guarantors,” she explained.

According to the LCCI president, the matter is still being discussed and debated. “The funds are there, and we at the LCCI are also advocating for more simplification of that process so that there will be more access to the funds,” she added.