Small players struggle in Nigeria’s financial markets

By Gillian Parker in Abuja
Posted on Thursday, 16 May 2013 16:12

Nigeria’s banking sector has turned a corner. Lenders are boasting about bumper profits, continuing a recovery since a 2009 crisis when a N400bn ($2.5bn) central bank bailout
saved nine lenders.

But banks remain cautious when it comes to lending, leading Nigeria’s small and medium-sized enterprises (SMEs) to have difficulties in mobilising funds.

Nigeria’s population, rapid economic growth and large banks should make it fertile ground for expansive financial services.

However, just 21 percent of its population has a bank account, according to the central bank, and some 93 percent of Nigerians cannot access a loan.

Rising risk aversion and sluggish credit growth typically follows banking crises.

Even after the banking sector consolidation, which multiplied the capital available to banks and brought about a boom in credit – annual growth rates at one stage were around 96 percent per year – there was still little sustained lending to SMEs.

Large companies able to benefit from economies of scale and with access to cheaper financing are more likely to be successful in a high-cost, oil-based economy such as Nigeria’s.


“It is very difficult to get access to bank loans now.

The process has become stricter than before,” says Sagir Bashir Nasambo, owner of a small carpentry firm in Kano State.

“And we lack the collateral they are looking for, for us to access the loans. We get the small amount of loans we can get from either friends, relations or some well-to-do customers.”

Lending rates can be more than 20 percent and requirements for collateral are rigorous.

According to the Central Bank of Nigeria (CBN), two-thirds of Nigerians only have access to informal moneylenders, while 71 percent of loans come from family networks.

Banks argue that the opaque nature of many SMEs does not help.

Patchy power supplies and a weak road network are just two of the infrastructure bottlenecks that add to SMEs’ woes, putting pressure on overheads.

“SMEs have to pay for everything, from electricity to other inputs, in a dollarised economy. This weakens their viability, and therefore their credit-worthiness.

“As a result banks are reluctant to lend,” says Razia Khan, head of research for Africa at Standard Chartered Bank.

Bismarck Rewane, the managing director of Financial Derivatives Company, believes that the central bank is holding back the banking sector with an overly cautious approach.

“In strategy, they always say that one of the things to look at is from which department the CEO comes.

“If the man running the bank is from the corporate finance department, then the bank will focus more on corporate finance. It becomes an extension of his own personality and values,” Rewane says.

“The central bank governor comes from a risk management background, so that is what the CBN is focused on.”

Corporate governance and regulatory oversight have brought about significant improvements.

“The best safeguard for effective financial intermediation in the long term is to have a sound financial system,” argues Khan.

Even when banking regulations were lax there was little evidence of lending to the real sector, but some progress in lending has been made and the CBN is trying to do its part to provide
funding for small businesses.

First Bank announced in July 2012 that it would offer loans with an interest rate of 9 percent to members of the Nigerian Association of Small Scale Industrialists, partnering with the CBN in this risk-sharing scheme.

In 2010, the CBN launched a N200bn SME Credit Guarantee Scheme and a N200bn SME/Manufacturing Sector Refinancing/Restructuring Fund.

Agriculture has emerged as a key priority for President Goodluck Jonathan’s ‘Transformation Agenda.’

In 2009, the CBN and agriculture ministry launched the N200bn Commercial Agricultural Credit Scheme, a facility where commercial banks and the central bank share the risk.

By May 2012, the CBN dispersed loans to 222 projects, while 16 banks participated in the scheme, most actively UBA, Skye Bank, Zenith and Union Bank●

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