Seventy percent of the total number of employed people in the country – about 59 million people – are employed by MSMEs. These MSMEs account for N1.5 trillion of revenue generated in Nigeria and contribute 48 percent to GDP annually. Ikeja’s Computer Village is a perfect example of this entrepreneurial spirit and economic potential – according to Ojikutu Adeniyi, president of Computer and Allied Products Dealers Association of Nigeria, the market makes up to N 1.5 billion daily.
When one takes into consideration the fact that this is only a single market hub in the state, one can only imagine the enormous value that sits across the entire nation’s MSME industry. The work that I do at the Lift Above Poverty Organisation (LAPO) is centred on deepening the pivotal role that these micro and small enterprises are already playing in Nigeria’s economy.
In a recent article, Godwin Nwabunka (founder, Grooming Centre) buttresses this point by highlighting that Nigeria’s informal economy is largely driven mainly by microbusinesses, many of which are run by women. Salamatu is one of these women. A petty trader in Maiduguri, Salamatu runs a successful “kose” stand by the side of the road. Expanding her business from a roadside stand to a larger stall is a business decision that would increase her earning potential as well as increase the likelihood of her becoming financially independent and a job creator. However, alongside many other challenges that Salamatu’s business will face, access to credit will be fundamental. Female entrepreneurs and employers face significantly larger barriers than their male counterparts in gaining access to financial services.
In order to ensure the continued success of these enterprises, growth is imperative. One of the most critical catalysts for growth is a business’s ability to access credit. The paradox, however, is that in Nigeria, a country which, according to the World Poverty Clock, has become “the poverty capital of the world”, those most in need of credit are largely ignored. The global development monitor put Nigeria at the top of the list of countries with high rates of entrepreneurial activity – almost 40 percent of people aged 18-60 owning businesses. Many of these businesses will never realise their full potential because of a lack of access to capital.
Yet, the impact is proven. According to the great economist, John Keynes, in an early study, results showed that if the grant of bank credit to an entrepreneur is combined with their existing credits; this allows the entrepreneur to make an addition to current investment which would not have occurred otherwise; and ultimately, income will be increased at a rate which will normally exceed the rate of increased investment. A study conducted in Ghana revealed that all microfinance products positively affect small business growth, and the greatest influence is microloans.
Acknowledging the impact that solving this challenge could have on the economy and the quality of life of many Nigerians, the Central Bank of Nigeria (CBN) introduced a policy mandating commercial banks to improve access to mainstream consumer credit. This new policy directing banks to lend at least 65 percent of their deposits is a critical step in the right direction, as it has birthed a variety of new loan schemes, including Access Bank’s Payday Loan, GTBank’s Quick Credit and Sterling Bank’s Specta platform.
As banks seek to create more credit options for MSMEs and individual borrowers, it is important to examine whether or not this new reality will address the challenges faced by MSMEs at the bottom of the pyramid.
Recent reports indicate that the adoption of credit amongst the working class and the private sector has shown signs of improvement, and is predicted to grow consistently through the year, which could be positive for economic growth. In many ways, the take-off of Nigeria’s consumer credit is not as far reaching as it should be. For one, the general discourse surrounding the topic of consumer credit cannot exist independently from the wider conversation around financial inclusion. There are still millions of Nigerians, many of whom own MSMEs that are not a part of the formal financial system and are victims of the limited reach of the formal financial sector which provide a first layer of exclusion that is then exacerbated by the rigidity of one-size-fits-all lending policies.
A randomised field experiment among 1,148 poor women in 40 villages across rural Mongolia was conducted; results showed that group loans had a positive impact on female entrepreneurship in particular. Among women who participated in a joint-liability group loan, there was an overall increase of 9 percent in the incidence of women operating a business. This study and the clarity of approach that can now be taken by financial service providers as a result, indicates the likely success and potential impact. This, as a result of human-centred qualitative data, and as a result of tailored solutions.
This is reinforced by research which suggests that financial products that come with additional services – technical training, awareness-building, warehousing services for farmers, market information, etc – create better outcomes for customers than financial products alone. Evidently, what these two findings reiterate is the need for a significantly holistic understanding of people, in order to appropriately cater to their needs, and actually see results.
Creating a thriving environment and driving finclusivity for MSMEs requires sound interventions that will successfully encourage banks to lend more to MSMEs. However, how appropriate these interventions are, given the consideration of local conditions, will determine their effectiveness. Favourable credit options for MSMEs are not readily available, and when they are, they are inflexible and very traditional. Today, when an MSME owner walks into a bank or even microfinance banks for a loan, there is still an over pronounced focus on business plans and other documentation that many of these businesses simply do not possess. Even with an increasing variety of credit options by commercial banks, the elephant in the room is always the issue of collateral.
In Nigeria, 98 percent of the MSME sector is made up of micro businesses, many with low asset values. According to research, 47 percent of banks reject MSME loan applications due to unavailable collateral or consigners whilst 27 percent of MSMEs do not apply for loans because collateral requirements are too high.
One key thing to note is that while the identity and collateral challenges and the resulting restrictions in accessing credit affect all MSMEs, it affects women more because the data challenge perpetuates gender gaps in financial inclusion. Financial Service Providers have consistently struggled to provide sufficient financial services to women because they often do not have the data needed to develop an accurate picture of the women’s market and cannot build a business case for targeting women or monitoring their own performance with the women’s market. Tailored data-driven policies could help address the gender gap we have witnessed in financial inclusion.
Understanding the complex nature of Nigeria’s economy particularly in relation to MSMEs is a practice that is lacking in the ways credit, where available, is provided.
I have participated in and borne witness to the inception and evolution of the country’s microfinance ecosystem. From the 1980s, when it merged as an answer to a slowdown in the Nigerian economy and the pressing need for microfinance support and credit as a result. LAPO was created to address the limitations to access to credit and to enable improved economic outcomes. Remarkable improvement in the condition of living is the ultimate goal of LAPO’s work in offering credit to low-income people.
Many of our users profusely express positive changes in their micro-businesses and their over-all socio-economic status. A few years ago, I came across one of such no-hold-back expressions by a middle-aged lady. It was towards the end of a wedding reception; she came to me and said, “you took me out a pit” with all seriousness. I looked at her, wondering if she was a distant relative that I might have assisted. As if she read my thoughts, she added: “I am not your sister, I am a LAPO woman!” I became quite emotional and shed tears of joy!
Over time, we have seen some progress, but there is still a long way to go. LAPO is trying to do its bit to address some of the gaps we have seen in the ecosystem. We are incorporating data-driven policy designs, including financial product designs, selection of delivery channels, risk management products and price structure to match the financial needs and preferences of the women we are catering to. We are also creating access to basic micro-business management training; combined with maternal and child health tips to help close this gender gap.
In all, the end goal in creating access to credit is increasing opportunities for businesses to thrive. As such, it is laudable that the CBN is taking steps to boost Nigeria’s credit culture. Nonetheless, in order for this to be favourable to MSMEs, banks must fully be invested in easing the process of acquiring credit, while taking into account the nuanced and unique parameters within which MSMEs operate. One size does not fit all; a tailor-made approach to MSMEs will be key to establishing positive economic outcomes within Nigeria.
Godwin Ehigiamusoe
Ehigiamusoe is founder, Lift Above Poverty Organisation Ltd.
