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Small business operators in Nigeria often wonder why deposit money banks that handle the Central Bank of Nigeria (CBN)’s N220 billion Micro, Small and Medium Enterprises (MSME) fund do not lend it at the official rate of nine percent.
A CBN statement released last Wednesday had quoted Godwin Emefiele, governor of the apex bank, as warning the banks to not lend intervention funds at more than nine percent.
Start-Up Digest’s findings show that banks charge between 15 and 25 percent rates on intervention funds from the CBN. This was even confirmed by Jon Kachikwu, chairman of SME Group at the Lagos Chamber of Commerce and Industry (LCCI).
“Most of our members only get the intervention funds at 22 percent interest rate,” Kachikwu had told Start-Up Digest.
This writer interacted with top officials of different banks at the weekend to find out why they were reluctant to obey the CBN directive to lend at a single-digit rate of nine percent.
“The risk profiles of many SMEs are very high. As a bank, you must plot your graph about an individual who comes to borrow and price the loan according to what you find out about him, particularly his capacity to pay back,” said one bank official who heads the SME desk in a Tier 1 bank.
This writer reminded the bank official that intervention funds did not belong to banks but the CBN.
“Even though we manage it for the CBN, any loss you incur goes to your books. If the SME business owner defaults, your bank bears the loss. This is why many banks do not even like to manage such funds,” said the top bank official.
Another bank official of a Tier 2 bank told Start-Up Digest that it would be almost impossible for a financial institution or deposit money bank to manage such funds without factoring in two or three costs, which deal with risks.
“If you are meant to bear the risk, you must also factor in the cost of the risks,” said the bank official.
This writer also asked why banks prefer to lend to rich businesspeople than start-ups or small business owners.
“It’s all about risks. The profiles of such people are not the same as those of small business operators. They have a higher capacity to pay back and they have identity. They can get loans at 17 percent after profiling, but others might get credit at 22 to 25 percent,” another bank worker said.
She explained that banks usually do not lend to small business owners because they had less risky investments where theywould be guaranteed higher returns.
“If you have the Treasury bills with 18.5 percent return on investment, why would you lend to small businesses at a much higher risk?” she asked.
“Do not forget that the Monetary Policy Rate is at 14 percent,” she added.
Business leaders do not agree, however Frank Udemba Jacobs, president of the Manufacturers Association of Nigeria (MAN), said SMEs in the productive sector deserve to get loans at not more than five percent.
Start-Up Digest observes that the Bank of Industry (BoI) still lends loans to industries and small businesses in the productive and creative sectors at single-digit rates, but stakeholders acknowledge that the bank is under-funded.
According to Jon Kachikwu, SMEs must be seen as economic drivers and should be provided with credit at single-digit rates across board as the BoI does, to steer growth and create jobs, citing China as one country where small businesses get loans at one to two percent.
