Promoting Access to Credit for MSMEs through Effective Government - PowerPoint PPT Presentation

Promoting Access to Credit for MSMEs through Effective Government Interventions Richard Ketley March 2012

Contents 1. Introduction 2. The financing gap in the MSME market in Nigeria 3. A history of interventions that affect MSMEs in Nigeria 4. Evaluation of interventions 5. Recommendations 2

EFInA commissioned Genesis Analytics to conduct an evaluation of public interventions in Nigeria that promote MSME development • The study focused on constraints in the supply of • MSMEs play a pivotal role in services from financial emerging economies, driving institutions and effectiveness equitable development and of public interventions to employment. address these constraints. • They often face a number of • Research was gathered challenges one of which is through interviews with an access to credit. array of the key stakeholders* and an analysis of • The Nigerian government has international best practice. launched a number of interventions to support • The findings are presented MSME’s access to credit. here and the full report will be available on EFInA’s website. * Diamond Bank, First Bank of Nigeria, Lateral Links, DFID, GIZ, World Bank Micro, Small and Medium Enterprise (MSME) Project, Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), Rural Finance Institutions Building Programme (RUFIN), Central Bank of Nigeria (CBN), Bank of Industry (BOI) 3

Contents 1. Introduction 2. The financing gap in the MSME market in Nigeria 3. A history of interventions that affect MSMEs in Nigeria 4. Evaluation of interventions 5. Recommendations 4

In Nigeria, 98% of the MSME sector is made up of micro businesses… Split of MSMEs in Nigeria 98% Micro The number of MSMEs in Nigeria is 1% Small estimated between 10-50million* 1% Medium Official definitions currently used in Nigeria: Employees Turnover Turnover Asset Value Asset Value (annual N) (annual USD**) (N) (USD) Micro 0-10 0 – 10 million 0 – 65 000 5 million 32 000 Small 10-49 10 - 100 65 000 – 5-50 million 32 000 – million 650 000 320 000 Medium 50-199 100 - 500 650 000 – 50 – 500 320 000 – million 3.2 million million 3.2 million * The nature of the MSME sector makes an exact number hard to quantity ** An average exchange rate of 155N to 1USD has been used. 5 Source: IFC, 2010, The SME Banking Knowledge Guide Federal Republic of Nigeria, (undated) National Policy on Micro, Small and Medium Enterprises

… and although the lending portfolios of financial institutions are sizeable, MSMEs have access to very little Total lending portfolios to MSME 2010, Naira billion, Nigeria 500 468 400 Naira, billion Only 5% of lending from 300 DMBs reaches MSMEs 200 100 53 0 Deposit Money Banks (DMBs) Microfinance Banks (MFBs) DMB SME statistics • Average SME loan size: N6 million (USD40 thousand) • Average interest rate charged for the lowest risk SME customers: 20% • Average loan maturity for SME loans: 12 months • Average non-performing loan (NPL) ratio for SME:16 % (with large variations across the industry) Source: World Bank, Nigeria SME Finance 2011 – 2012 Survey Results & Conclusion 6 Central Bank of Nigeria, 2011 speech by the governor, Banks in Nigeria and national economic development: a critical review

An effective intervention needs to understand the constraints of both banks and SMEs to bridge the gap* Common reasons for banks’ rejecting SME loan SMEs most common reasons for not applying for applications loans** Interest rates not Collateral or consigners 28% 42% favourable unavailable Collateral requirements Incompleteness of loan 27% 13% too high application Application procedures Problems with credit 25% 10% for loan/lines too onerous history/report Did not think it 10% 6% Insufficient profitability would be approved Size of loan and maturity 2% Other objections 29% not sufficient 8% Other An effective intervention needs to bridge the gap between the constraints of banks and MSMEs Source: World Bank, Nigeria SME Finance 2011 – 2012 Survey Results & Conclusion * The World Bank survey refers to SMEs not MSMEs, Banks refer herein to DMBs 7 ** Sample of 47 SMEs interviewed

Contents 1. Introduction 2. The financing gap in the MSME market in Nigeria 3. A history of interventions that affect MSMEs in Nigeria 4. Evaluation of interventions 5. Recommendations 8

Creating a thriving environment for MSMEs requires sound policies on four levels + + Level 4 : Public Sector Schemes Implementation and Monitoring Capacity Government Activism Level 3: Institutional/Infrastructure Strengthening Level 2: Enabling Regulatory Environment Level 1: Prudent Macroeconomic Policies - - 9 Source: Genesis Analytics Team Analysis 2012

Our focus is on interventions that address the supply side a General Regulatory Level 1 Environment b Enabling Environment Level 2 Supply-side 1 interventions Partial Credit Guarantee c Level 4 Schemes State banks and development d Level 3 finance institutions What interventions can the Government design that e successfully encourage Level 4 Apexes and wholesale funding banks to lend more to MSMEs? f Supply Side Capacity Building Level 4 Encouraging Innovation g Level 4 Enabling environment – to a promote MSMEs Demand-side 2 interventions Capacity building for MSMEs b Capacity building for MSMEs 10 c

The regulatory /policy environment defines the terrain for intervention Intervention Key components Recommendations/Implications Regulatory 1a 1 National Policy on MSMEs: • Current proposed revisions environment • Launched in 2007 to segment definitions (by • Maps the MSME regulation landscape SMEDAN) should be done • Defines the MSME segments (due to be revised) with caution – to avoid adversely shifting the banks’ targets . 2 Revised Microfinance Policy: • Important given the • Launched 2005, revised in 2011 structure of the market • Categorizes MFBs in Nigeria according to whether • Important for the policy to operating at a Unit, State of National level. achieve the right trade off • The CBN stipulates 80% of MFB lending portfolio between focus and scale must go to Micro and risk 3 • SMEEIS failed to achieve SMEEIS: its developmental aims • Launched in 2001, terminated in 2008 as it did not match banks • Mandated all bank set aside 10% after tax profit to Discontinued capabilities . invest as equity in SMEs (defined more broadly than • There is no indication the national definition above) SMEEIS will be reinstated. Source: Genesis Analytics Team Analysis 2012; Federal Republic of Nigeria and CBN brochures 11 Definition: SMEEIS: Small and Medium Enterprises Equity Investment Scheme

Some of the biggest constraints to MSME lending are environmental Intervention Current Nigerian Initiatives Recommendations/Implications 1 1b Enabling Credit bureaus: • Credit bureaus will help to environment • There are currently 3 (Credit Reference Company, ease information uncertainty Credit Registry, XDS Credit Bureau) • Need to monitor effectiveness • Current regulatory requirement is that institutions • Encouraging and register with at least 2 credit bureaus regulating use of the bureaus will be important. 2 Collateral Registries: • This is an important area • Registration and realisation of collateral is a for reform and major challenge/ obstacle for financial modernisation institutions 3 Customer identification (ID): • This is a important national • The lack of an uniquely identifying national ID project that will bring system in Nigeria has limited banks’ ability to know enormous benefits to the and identify their customers and extend credit financial sector 4 • Whilst simplifying tax laws is Taxation laws: complex, it would be • Nigeria’s complex State and Federal taxation laws beneficial to partner with can be a burden on MSMEs requiring time to expert organisations to understand and pay the various taxes; multiple remove redundant processes, taxation can occur. ensure unique taxpayer IDs. Source: Genesis Analytics Team Analysis 2012; Federal Republic of Nigeria and 12 CBN brochures