Nigeria’s Big Risk And Why The Banks Underperform on SMEs & Startups Lending

Nigeria’s Big Risk And Why The Banks Underperform on SMEs & Startups Lending

Here are comments on this LinkedIn feed and I will explain my point below.

Comment: Just one simple question for me. Why is there no value for these banks in the NSE? Even with announcements such as these. Do Nigerian banks create value or they hide the value they create. Truly baffling.

My Response: I do not think the problem is with the banks. The issue is that Nigeria is a relatively poor country. Banks cannot create value where there is no value. Your national budget is about $35 billion for 200 million; South Africa spends more than $123 billion for 60 million people. That delta on budget makes its markets better because that is money pumped into the economy.

Another member’s comment: Prof Ndubuisi Ekekwe, for the first time I disagree with your view, which numerous of goods and services we import from developed countries, Nigeria Banks can be a string board that can triple Nigeria GDP if only they are innovative and willing to support more SMEs, to reduce the country poverty index. We have seen a lot of deficits in Nigeria trades with many countries: how can banks partners with private companies to turn things around. We can multiple this to housing/mortgage, transport, industry target towards exportable goods.

Now my main response:

Comment:Nigeria Banks can be a string board that can triple Nigeria GDP if only they are innovative and willing to support more SMEs,”

See it this way: the Central Bank of Nigeria (CBN) lends at close to 11% to banks and NDIC, the deposit insurance regulator, asks banks to insure (put another 2%). If you add banking operations costs and need to make small money, no bank can lend below 17% annually in Nigeria. 

But some nations lend to their banks at 0.25%: “In December 2020, the Federal Reserve maintained its target for the federal funds rate at a range of 0% to 0.25%.” This cheap money makes it possible for U.S. banks to give cheap loans to their SMEs. Yes, you can get a business loan at 6% or even lower.

But in Nigeria, starting at 11% made it impossible for banks to match that.  Because they have to move above 17%, it creates a vicious circle which makes things harder. See it this way – at that 17%, most SMEs cannot return whatever banks have given them, setting the banks up for losses. Simply, there are few businesses in Nigeria where you can make profits when your cost of capital is 17% before taxes to repay your loans.

Without scaring people, most banks have paid hard penalties for being generous on lending. Yes, many collapsed due to failed loans. So, what do  banks do in Nigeria? They trim lending because the rates are tough for most SMEs to handle, and the fault is not necessarily coming from the banks.

Sure, banks can do more. But the big issue is not addressed and that is where I bring Nigeria’s relative poverty. Give the banks money at 1%, and you will see they will lend at 6%, and most SMEs can handle that percentage.

Of course, CBN has hit them hard to lend from their deposits. Yes, that makes sense until you realize that deposits are not “free” money. In other words, they still have to protect that deposit so that when the owner comes, he/she gets the money back. For most, they prefer the CBN to fine them say N100 million instead of taking risk on that N2 billion because losing N100 million is a better outcome than N2 billion. That is why even as CBN keeps debiting them for not meeting the lending deposit ratio, most do not care since statistically, the fine from CBN is well below what they will lose if they follow the ordinance as stipulated by the apex bank.

See the CBN fine as cost of business! If they hit you N5 per say N1 million, you can find another cost on your non-loan customers or increase the cost on the few you are lending to! Simply, all the debits would be recovered from the customers, indirectly.

Yet, before we begin to criticize CBN, it has to manage inflation and because of that, it cannot lend to banks at 1% which you can get in the U.S. as Nigeria’s economy is not structurally similar to the U.S. That paradox is the risk element in Nigeria. The rates we need to unlock entrepreneurial capitalism cannot easily happen without taking inflation to a level that would destroy the economy.

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3 thoughts on “Nigeria’s Big Risk And Why The Banks Underperform on SMEs & Startups Lending

  1. The solution? Produce and scale quality humans, so that they won’t be regurgitating and churning out primitive and mundane excuses as we have here.

    The truth is that we are not as good as we think we are, so we easily get stuck once anything gets a bit complex, because we have lots of shallow thinkers in the land; making almost everything appear impossible.

    We fear risk of loans not repaid, we fear inflation, we fear the small guys because in our blurred thinking – they are not reliable. But we don’t fear the politicians, we do not fear the big but empty business executives; only the ambitious and serious small guys are seen as risks!

    And in all our fears, we are never fearful of extorting and charging commissions on the very people that cannot be trusted in the things of money, so it’s honourable to make billions in ridiculous ways, with no real or practical productivity in the system. To say that we are morally and ethically debased would be an understatement, it’s embarrassing.

    Produce quality humans, the purest breeds, and all the things we list as drawbacks and obstacles will become a springboard to greatness. The earlier we realise that we are not good enough, the better. Dumb people don’t make smart decisions anyway.

    Reply
  2. RE: Nigeria’s Big Risk And Why The Banks Underperform on SMEs & Startups Lending.
    Francis, I think we are all as frustrated and perhaps some of us more frustrated than you are. However, this idea of “producing quality humans” and the “purest breed” could easily lead the audience to think that your commentary includes a debate on race or racism.
    Nigerians are good enough. We don’t need genuises to run government or businesses for them to be successful. Just average intelligent men and women with a very high dose of honesty; a strong Will; and boldness to implement solutions that have not been tried before are some of the elements at the core of what is required.
    That said, banks, besides being developmental institutions, are also businesses and every business gravitates towards pursuits where they can make reasonable amounts of profits without undue risk. And they have a lot of institutional experience to guide them in making their decisions on capital allocation. So, if their experience has shown that they get burnt more often than not lending or allocating capital to SMEs in terms of their loans and non performing loan book, then they would naturally keep their distance from SMEs. And if they must lend to SMEs, then they want to be duly compensated for that “extra risk”. The level of risk undertaken is always reflected in the pricing of all financial assets and a bank loan is not an exception. Looking at it from this perspective, I would agree with the gentleman who proposed that the fault is not totally that of the banks.
    The Nigerian Government has a large share of this fault: If Government addressed the issue of infrastructure, with stable electric power supply at the heart of it; including a proper ID infrastructure and an efficient judicial system for easy and quick loan recovery through the judicial process; then a significant part of the risks and cost input for most businesses, not just the banks, will go down.
    Given that high loan rates is one of the factors responsible for high default rates of SMEs then even more important in addressing the issue is the question of what is responsible for the high loan rates?
    It is true that this cannot be addressed without implicating the Central Bank of Nigeria’s Monetary Policy Rate (MPR) which presently stands at 11.50%. Compare this with the American Federal Reserve Bank’s funds rate that presently stands at a range of 0% – 0.25%.
    So, ordinarily, you would imagine that Nigerian banks will at a base level always consider their own lending rate at MPR + xyz in pricing loans to SMEs and therefore cannot lend below MPR.
    I would argue however that perhaps what is more important in an economy like Nigeria, with a high level of distortion and deviation from the norm is not the MPR but the rate at which the CBN and the Government itself is willing to borrow from the banks, you and I, members of the public.
    Now let us see if I have any basis for my proposition: that what is perhaps more important is the CBN/Government borrowing rate via 1year Treasury bill rate and FGN bonds rate versus the MPR. I begin by taking a look at the American situation once again: Federal Reserve Bank fund rate is at a range of 0% to 0.25%; one year Treasury Bill rate is at 0.09%; and the average lending rate of American banks to small businesses is at approximately 4% to 6%. You can observe the closeness between the Reserve Bank Rate and it’s Treasury bill rate.
    In Nigeria as we have observed, although MPR is at 11.50% coming down from 12.50%; 1year Treasury bills rate has come down from as high as 11.18% to between 0.3% and 0.5% presently. [You can also see the high margin between the CBN’s MPR and the CBN Treasury bills rate]. So even though the MPR has not changed much, the Treasury bill rate has reduced tremendously, with the result that some banks as well as some non bank financial institutions are willing to lend, and lending for as low as to 8% -13.5% per annum for 1year to SMEs and investors alike – compared to lending rates that were above 20% previously.
    In the American situation, with little or no distortions, the traditional model is respected and banks follow the dictates of their MPR. In Nigeria however, the bank’s in reality do not seem to be following the MPR and the reason is not far fetched. Nigerian banks are rationale investors and being rationale investors are asking questions any rationale investor will ask: ‘am I better off investing in Treasury bills at 0.3% to 0.5% or am I better off, comparatively, looking for SME’s on my book that I can invest in (lend to) and earn a better return at 8%, 9% 10% etc.
    So even though inflation is going up and power is still not stable but because the bread and butter of financial institutions and their non bank financial institutions in terms of CBN high treasury and Government bond rates are no longer available, they are willing to look at and increase their lending to retail customers, SMEs/retail investors. This is of course coupled with the fact that the CBN has given banks an option to earn zero percent on a large chunk of their deposits if they do not meet the CBN set target of lending volume via Loan to Deposit Ratio.
    So from my perspective, regardless of what the MPR is, if the CBN and the Government themselves do not borrow from the banks at ridiculously high rates, via Treasury bills and goverment bonds (and the CBN sets certain developmental targets for the banks via CBN policies) then the banks themselves don’t have an option but to lend at reasonable rates to SMEs and deserving members of the banking public. This also speaks to the boldness of the CBN no matter how much some may vilify Emefiele, the present CBN boss. It further speaks to the fact that we as a nation don’t always have to follow what works in the West because there are numerous things that are different in our own system and we can better identify those differences and provide tailored responses.

    Reply
    1. Thank your Abel for this scholarship. This is more than a comment – this deepens this and makes the point in a very clear way. Nigerians like to punt (as they do in American football). Yes, we like to blame banks when these banks are just doing their things. CBN has been debiting them for not lending enough above the ratio. Yet, the same CBN will withdraw their licenses if they mess up on lending. Sure, banks have to support the economy but it cannot be done blindly.

      Reply

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