SMEs, Pandemic, non-interest funding and financial inclusion

Small and Medium Enterprises, SMEs, a front line and key segment of Nigeria’s Gross Domestic Product, GDP, has been grappling with its fair share of the  damaging curve of Covid-19.

 Nigeria had slippedinto recession in 2016.

But government’s improved management of key segments entrenched a ray of hope even as the GDP remained below population expansion.

While the excitement of fresh economic dawn was yet to rescind, Covid-19, which begun in China, arrived Nigeria in February. Since then the pandemic, which originated from China, has spread worldwide.

Due to the escalating global impact of the pandemic, many economies, including Nigeria’s, have witnessed reduced activities.

Nigeria’s case is peculiar in view of its dependent on oil. This dependence has compounded the effects of the Covid-19 lockdown through oil price instability.

However, despite weak purchasing power of the people, Covid-19 forced many industrial facilities to shut down worldwide and global supply chain, as well, got disrupted.

For instance, Brent crude prices fell below $22 per barrel at some point, the lowest since 2003.

This was however, exacerbated by the price war between Saudi Arabia and Russia.

Nigeria, the most populous country in Africa, is awakening to the new economic and social realities of the COVID-19 crises. The country of over 200 million people, recorded its first case on February 28.

Since then, it has recorded about 48,445 cases and 973 COVID-19 related deaths.

CBN’s MONETARY POLICIES INTERVENTIONS

The Central Bank of Nigeria, CBN, in line with its responsibility, is keeping the economy going through monetary policy interventions.

This, expectedly, should include a-one year extension of moratorium on principal repayment of intervention facilities.

The interventions also involve reduction of interest rate on loans from 9  to 5 per cent and other stimulus packages.

Achieving this requires creating credit facilities for small and medium enterprises, SMEs, particularly for manufacturing pharmaceuticals.

Funding outlay of N1.1trillion for critical sectors of the economy to boost manufacturing and support import substitution activities should also be considered.

To boost critical sectors like Agriculture, MSMEs, and Information Communication Technology, ICT, non-interest guidelines were recently introduced by CBN.

The CBN said the initiative is for Non-Interest Financial Institutions under its Agri-Business, Small and Medium Enterprise Investment Scheme (AGSMEIS), Micro, Small and Medium Enterprises Development Fund (MSMEDF), and Accelerated Agricultural Development Scheme (AADS).
According to the guidelines by the apex bank, the framework will integrate non-interest windows in all its intervention programmes.

In the light of this, CBN has proposed Agri-Business, Small and Medium Enterprises Investment Scheme, AGSMEIS, for Non-Interest Financial Institutions, NIFIs,

The bank further stressed that  the Fund would be domiciled in a dedicated account with the CBN.

The guidelines stipulated that each Non-Interest Deposit Bank full-fledged or window is to set aside five per cent of its profit, after tax annually, as contribution to the Fund.

The bank added that each Non-Interest Deposit Bank is also to transfer its contribution to the CBN not later than 10 working days after the Annual General Meeting (AGM) of the participating bank.

Economists have however described the initiative as a critical inducement that will boost SMEs’ growth and development.

The experts also view it as capable of accelerating economic growth because SMEs are core in the real sector.

They opined that  the initiative would stretch far to aid expansion, expedite industrialisation, catalyse SMEs growth and enhance financial inclusion.

They noted that with an unemployment rate at about 27 per cent, the initiative would create more jobs and mitigate Covid-19 socio-economic impact on SMEs and the economy.

However, they argued that enabling government policies through appropriate incentives would go a long way to promote ease of doing business.

A Professor of Economics, Olabisi Onabanjo University, Ago- Iwoye, Ogun State, Sheriffdeen Tella, sees the business model as laudable. He urged the CBN to include training and monitoring as part of the intervention package.

“There is a need for training these businesses on how to keep records of production and financial transactions.

“Such training should be part of the package, just as monitoring of the loans for executing the projects by the CBN or an agent and timely repayment of the credit are important.”

Also speaking, the Chief Research Officer, Investdata Consulting, Ambrose Omodion, said the policy would boost SMEs and revitalise many businesses.

However, Omordion expressed concern over the high level of insecurity, infrastructure decay, and other impediments to business growth.

He noted that, “finance is not the only challenge facing these SMEs. But the challenge centres on lack of coordinated government policies, insecurity and multiple taxation.

He stressed further that  “high cost of transportation and infrastructural problems will definitely constitute a threat to these SMEs’ growth. “

According to him, inconsistency in policy making has become a threat to the expected impact of the intervention in critical sectors.

Further, he added that the focus on agriculture in the guidelines is very encouraging, as it is capable of saving Nigeria from the predicted food shortages as a result of global value chain disruptions.

The eligible activities under the Scheme are businesses across the agricultural value chain, covering production, inputs supply, storage, processing, logistics and marketing as well as MSMEs.

Others are the real sectors including manufacturing, mining and petrochemicals. Also, in the MSMEs services sector are  ICT and the creative industry as well as other activities as the CBN may determine.

According to the guidelines, financing under the Scheme will be for start-ups, business expansion and reviving ailing companies.

It shall be in compliance with provisions of BOFIA (1991) as amended.

THE PRINCIPLES UNDERPINNING OPERATIONS OF NIFIS

The underpinning principle for Non Interest Financial Institutions, NIFIs is to enhance MSMEs’ access to financial services by engaging a minimum of 370,000 youths in agricultural production.

 
PROHIBITIVE LENDING RATE

The importance of SMEs to the growth of per capital income and the economy cannot be over emphasized. The key challenge however is the seemingly prohibitive lending rate from conventional banks.

Interestingly, these funding challenges have been on the front burner of discourse among economists and analysts alike.

There are persuasions towards alternative and friendly funding for SMEs and indeed, its access to finance.

Across all stages of the life cycle, SMEs require access to appropriate sources of financing for their creation, survival and growth even as market failures and structural challenges remain.

This includes information asymmetries, high transaction costs in servicing SMEs and lack of financial skills among small business owners.

There is a need to broaden the range of financing instruments available to SMEs and entrepreneurs, to address diverse financing needs in varying circumstances.

This requires increasing  SMEs’ resilience to changing conditions in credit markets and improve their contribution to economic growth.

ALTERNATIVE FINANCING INSTRUMENTS

Alternative financing instruments offer opportunities to meet SMEs’ financing needs.

However, their potential remains underdeveloped in most countries due to demand and supply-side barriers.

Capital market instruments for SMEs often operate in thin, illiquid financial markets. This comes with a low number of participants and limited exit options for investors.

The digital transformation holds the potential to improve access to finance SMEs’.

 It offers unprecedented solutions to address barriers related to asymmetric information and collateral shortage.

At the same time, it requires regulatory frameworks to support novel developments. That would organically ensure financial stability, consumer and investor protections.

Meanwhile, governments have been stepping up efforts to foster a diversified financial offer for SMEs. And to achieve greater results, G20-OECD’s advocacy have provoked the two-pronged policy approach. They are high-level principles on SME financing and strengthening SME access to credit.

Supporting the diversification of their financing sources, will no doubt, make the sector more competitive.