Banks’ Zero Lending: What Implications for the Economy?

Small scale entrepreneurs allege that the banks are stifling their businesses by denying them necessary credit with dire consequences on the economy. They call for a trial of the Muhammad Yunus’ model of micro-financing, but the banks aver that infrastructure and cultural tendencies deter their ambitions to venture into funding small scale enterprises. Kenneth O. Eze writes.

Banks pride themselves with their financial intermediation role. But the economic meltdown has seen several customers’ request for facilities being met with unfavourable responses from several banks in Nigeria. The illiquidity is highlighted by the effort of the Central Bank of Nigeria (CBN) to control the banks’ desperate chase for deposits by pegging the interest payable at 15 percent.
The Bankers Committee at its meeting of Saturday, 21st March, 2009, observed that “interest rates have recently risen to levels considered to be intolerable and not supportive of the desired economic recovery,” according to the then CBN Governor, Prof Chukwuma C Soludo. Consequently, the bankers committee resolved that banks should no longer “source deposits at rates above 15 percent.”
As a result, the apex bank presently considers the act offering higher interest rates unprofessional, unethical and a de-marketing tactic, which attracts penalties depending on the severity of the offence.
Nigerian businessmen and entrepreneurs are crying out that banks’ inability to aid individual businesses with loans is crippling small scale businesses/industries, and is consequently taking its toll on the economy.
Femi Moshaku-Johnson, the Chief Executive Officer of Hero Consulting, and Executive Director of Nigeria Entrepreneurship Institute, lending his voice to the dearth of finance for the lower end of industry in Nigeria, says: “The major challenge of enterprises in Nigeria is finance. In every economy of the world, there is a mapped out fund for enterprises, provided you can bring a convincing business plan or feasibility report.” He lays the blame at the doorposts of the banks and the government.
Malachy Agbo of the corporate communications department of Diamond Bank affirms that the banks are not lending. A situation he traces to the recent change of guards at the CBN and the economic meltdown. “Banks are repositioning to make full provision for the loans given out that could not be recovered. The CBN is also hot on the heels of everybody with more severe risk assessment measures.” His opinion is that it is only natural that the banks will take their immediate stakeholders – shareholders, depositors, staff and regulators – into account in reaching loan decisions.
It seems that small scale businesses that look up to the banks would have none of that. A lady entrepreneur, Siku Adewuyi, the CEO of Cake ‘n’ Candy Confectionery, could not hide her disappointment with the banks for failing to support small businesses. Her words: “I find out that there are issues that small businesses have to contend with financially, sometimes when I have cash flow problems and approach the banks, they are not willing to help out. The worse or rather ridiculous part is that the Microfinance Banks that are supposed to be there for small businesses still demand cut throat rates; they actually demand for six percent per month!”
Her verdict is that “microfinance banks are not meeting the needs for which they were established.” This opinion is shared by Chris Ukaegbu, the Accounts Director of Dreamland Drycleaners Ltd. In Ukaegbu’s words, “the major challenge of the company is accessing fund for expansion. Internally generated revenue is definitely not enough to expand the business, so the company runs at subsistence level.” The banks are not living up to their responsibility in terms of funding small scale businesses, he opines.
In the face of this, an executive member of the Association of Corporate Affairs Managers of Banks (ACAMB) who discussed the challenge of small scale businesses getting requisite financial backing from the banks said: “the banks are being cautious. Aside the economic meltdown, there is a major change at the CBN and full disclosure is being demanded from the banks. It is only natural that each bank should look before leaping,” he says.
Against the backdrop of the misadventure of several Nigerian banks into the capital market and oil sector, small scale businesses are claiming that they are bearing the brunt. Their claim is that the banks’ tough stance on funding small scale businesses that form the backbone of each nation’s economy is traceable to lack of cash in the banks’ vaults.
Moshaku-Johnson minced no words on this when he said, “we have serious handicaps. We have serious handicaps in the area of finance. Nobody wants to set up a structure that will bail out financial operations. They have set up microfinance banks all over the place, but we know what they are looking for. They are looking for people to bring their money so that they can use the money to trade. It is not that they are giving entrepreneurs money as required. I did a study on them and I discovered that they are not going to support entrepreneurs.” This view is shared by Adewusi.
Agbo told M2 that Diamond has a US$20 million onward lending facility from the IFC, aimed at small scale businesses that any body who qualifies could tap into. But he added that this is on the premise that whoever comes to equity must come with clean hands. Banking is no philanthropy. Credit understands one language, and that is “pay back”, he says.
ACAMB sources and Agbo are of the view that small scale businesses should explore ways of overcoming infrastructural challenges like power and roads instead of pointing at the banks. “The economy is shrinking. Purchasing power is reducing. People are losing their jobs and purchasing power.” These are some of the factors that make it difficult for banks to have enough trust to put money into small scale businesses in Nigeria.
They point out the relocation of major manufacturing concerns like Dunlop and Michelin, which has nothing to do with the banks’ willingness to lend, but squarely rest on infrastructural challenges. ACAMB sources expressed concern that manufacturers expend as much as 30 to 35 percent of their overheads on power alone.
Moshaku-Johnson would scarcely disagree with them. His words: “One can hardly blame them.. Even when you start a small scale business here, you are going to have the problem of power generation. That could kill the business. That is why everybody is turning to importation, developing other economies at the expense of our own.”
ACAMB sources also fingered the issues of personal integrity and inconsistency in government policies. Instances abound where entrepreneurs obtain facilities for one thing and apply the fund to something else only to run on murky waters when it comes to repayment. The banks factor this into loan appraisal, according them.
Presently, houses are being demolished along the Badagry Expressway. The sources drew M2’s attention to this and asked: “How would a bank that disbursed a loan secured with one of those beautiful houses recover the fund?” With the Lagos State government positing that only well documented properties are entitled to compensation, the issue looks grievous. Agbo maintains that even when the loan is properly secured, it is not easy to realise it from the collateral. Valuations, for instance fluctuate and buyers are not always handy, according to him.
All the people that spoke to M2 on behalf of small scale enterprises unanimously aver that “for small scale enterprises, you do not need collaterals, all you need is a guarantor and you can access the fund for enterprise.” They posit that the Muhammad Yunus initiative on micro-financing that made much impact on the economy of Bangladesh and her people would succeed in Nigeria.
It would be recalled that Yunus awes his audiences with stories of how loans of just a few dollars can be life-transforming for the recipients, allowing debt-ridden villagers to free themselves from the clutches of ruthless moneylenders, or enabling small-scale entrepreneurs to get on their feet. This model, the entrepreneurs contend, would add impetus to their businesses and consequently the national economy.
But the bankers contend that Yunus’ model of funding is predicated more on the dicey issue of borrower’s behavioural changes and less on the amount of money lent or the lender’s liquidity. They claim that the model has met with less and less success outside its birth place of Bangladesh. They pointed to the idea of the defunct Peoples Bank, which former military President Ibrahim Badamosi Babangida tried unsuccessfully to propagate, to back their position.
Though our discreet findings at Afribank show that there is a desk dedicated to small scale enterprises that insider sources say are doing well, there is no indication that Afribank is aiming for the “mass market.” It is the bank’s policy to study business proposals and, on conviction, partner with the promoters on equity basis, normally on a medium term basis. The bank funds the business on equity basis and pulls out as the business finds its feet. This strategy conforms to the CBN’s directive on SMEs and safeguards the bank and the fund it doles out.
On a last note, it is a clear case that most banks are not lending to small scale businesses and the impacts on the economy are ominous. Though both the protagonists and antagonists, in this case – the banks and the entrepreneurs, seem to have cogent reasons for their stance in all this, it is obvious that it is the economy that will bear the brunt. Moshaku-Johnson aptly captures this reality in these words: “Enterprise is what oils the wheel of economic progress of most countries. The difference between advanced countries and the ones that are not advanced is enterprise – the spirit of enterprise! In the United States, Germany, Republic of South Africa, Spain, etc, the largest employers of labour are the SMEs. It is even so in Ghana. I did a study on that. That is why in some countries you notice that they have totally taken care of employment related issues, because they are nurturing small enterprises.”