Cost vs Access: SMEs Worry Over Structure of Bank Funding
Esther Menua needed N15 million to expand her small grocery store in Lagos. She went to a tier-two commercial bank but was asked to provide a plot of land valued at N25 million. The bank worker who attended to her also informed her that the cost of the loan was 23 percent per annum, and she must pay back in 12 months.
Menua chose to borrow the money to meet the expansion plans, but she was unable to pay back the money, which now amounted to N18.45 million plus interest. Her landed property was eventually sold by the bank after several threats.
“For me, access to funds is tough, but cost of funds is tougher,” Menua said, downcast.
Like Menua, many micro, small and medium businesses (MSMEs) are going through funding challenges at different levels.
BusinessDay sampled the opinions of entrepreneurs to determine between cost and access, what was the bigger problem for MSMEs attempting to get funding for business expansion. The opinions were divided, with the majority thinking that both access and cost of funds have equal weight.
“Interest rate is very high,” said Adepeju Jaiyeoba, lawyer and chief executive of Mothers Delivery Kit, which reduces maternal mortality in rural communities.
“I have experience in issues around debt recovery due to my capacity as a lawyer and I know that the problem is the seen and unseen costs borne by entrepreneurs like us,” she said, adding that access is also a big issue.
Ibrahim Maigari Ahmadu, chief executive of Liverstock247.com, Nigeria’s first livestock online marketing and listing platform, said interest rate is high just as there are many gridlocks to access to funds.
“Nigerian commercial banks are risk-averse. They put so many bottlenecks on the way when you want to access funds,” Ahmadu said.
“Interest rates are very high, which is a major inhibiting factor. Collaterisation is structured to knock you out,” he said.
He explained that the risk-averse nature of banks prevents them from funding the agriculture sector.
Nigeria’s benchmark interest rate is among the highest in Africa at 13.5 percent. Ethiopia’s is 7 percent; Kenya’s 9 percent; South Africa 6.75 percent; Zambia 10.25 percent, and Cameroon 4.25 percent.
Similarly, Rwanda is 5 percent; Mauritius 3.5 percent; Algeria is 8 percent, and Senegal is 4.5 percent.
Interestingly, the National Bureau of Statistics’ recent MSME report shows that 85 percent of businesses could not have access to external financing between 2013 and 2017.
In fact, only 5.3 percent of SMEs had access to bank credit, even with 40 percent of them having relationships with banks.
“Both access to funds and costs are big issues for me,” said Attah Anzaku, CEO of AgroEknor, exporter to Europe, Asia and the Americas.
“Even if you have the access, cost is crippling,” he added.
Oladapo Abiodun, chairman, Small and Medium Enterprises Group (SMEG) of the Lagos Chamber of Commerce and Industry (LCCI), said cost and access to funds are intertwined, adding that tenor of funds is an often ignored but important issue.
“The funds we have are not suitable for the kind of economic environment we have. The economy requires long-term funds, which are unfortunately not available,” Abiodun, who is also the CEO of an export-oriented firm, Comtrade Foods Limited, said.
He explained that most SMEs can hardly afford to provide collateral required by commercials banks.
“In many climes, government intervenes to guarantee such funds and even provide the needed mentorship,” he said.
Attempting to bridge the gaps are Financial Technology firms or Fintechs, which are growing in Nigeria but also have lending rates that are in double-digits per annum just like deposit money banks scattered across the country.
But the Bank of Industry (BoI) intervenes by providing funds at 9 percent per annum. Businesses told BusinessDay that banks like the BoI and the Bank of Agriculture (BoA) need recapitalisation to enable them to fund more businesses.
Muda Yusuf, director-general of LCCI, said access to funding is much more difficult for MSMEs but cost of funding is a much bigger challenge for medium and large enterprises.
“For micro and small businesses, because they are perceived as high risk, collateral is tougher and many of them cannot provide such,” Yusuf said.
“For them, the big issue is not just the cost but access. If you ask them to pay 30 percent per annum, they will pay, after all some micro and small businesses borrow from microfinance banks at 5 percent per month or more, which amounts to 60 percent per year or more,” he added.
He explained that bigger firms can provide collateral due to their size but worry about high funding costs.