New Era of Innovative Lending to MSMEs

Paul Adegboyega
Less than a year since it commenced lending operations in November 2017, the Development Bank of Nigeria (DBN) is in many significant ways helping to redefine the shape, size and depth of small business financing in the country.

This is refreshing given the urgent need to re-orient the national economy away from dependence on the oil and gas sector by building other critical growth sectors of the economy such as agriculture, services, mining and light manufacturing.

Over the years, several initiatives by government, alone or in collaboration with the private sector, either by design or implementation, have failed to close the funding gap required for this important subsector to grow in spite of the fact that it accounts for about 60 per cent of national income.

Statistics indicate that this sub-sector gets less than six per cent of commercial banks’ loan; and loans are largely short-term at high interest rates that live little room for growth.

Indeed, the bank’s operational roll-out strategy that puts eligible financial institutions at the centre, innovative ideas designed to plug systemic gaps and mitigate lending risk to the sub-sector along with the unmatched longer loan repayment durations is inspiring new levels of confidence and spurring increased enthusiasm within lending circles.

DBN’s lending products excite bank CEOs largely due to innovative attractions designed to address longstanding negative perception of the sector.
The proposed setting up of a credit guarantee subsidiary will facilitate the sharing of risks with commercial banks by providing up to 50 percent guarantee on the loans that the banks give to small businesses.

This is a huge relief. Over the years, banks have grown extremely cautious about lending to small businesses. Some of the reasons for this include a long history of non-performing loans recorded and outright losses which affected balance sheets of banks.
Preference has been for high yielding oil and gas contracts. DBN’s risk sharing feature will provide the comfort that banks require to lend to small businesses without much fear.

The implication is that more commercial banks are opening up their vaults and lending more to the sector than before.
When the bank commenced lending in November 2017, it had three micro finance banks as participating financial institutions. Today it has grown the number to nine. Recently, at an event at its head office, DBN strengthened its partnership with LAPO Microfinance Bank Limited, one of the three micro finance banks that it commenced pilot lending with in November 2017, to provide lending to about 10,000 Micro, Small and Medium Scale Enterprises (MSMEs) to alleviate the financial constraints they face. LAPO Microfinance Bank is a pro-poor financial institution committed to the social and economic empowerment of low-income households through provision of access to responsive financial services on a sustainable basis.

The second reason is that DBN’s access to longer term funding which supports provision of long tenors of up to 10 years with about 18 months moratorium, give the banks a brand-new product to sell to a category of customers they had hitherto shut out of the lending window.
Before the entry of DBN, commercial banks, because of the short-term nature of their funds could only finance loans that are re-payable within short time frames ranging from one to 2 years.

Small business owners looking for longer term loans of up to four, five to ten years to buy equipment, expand operations to enjoy economies of scale were unlikely to be attended to simply because the banks did not have the liquidity to handle them.
DBN’s ability to raise and make available for on-lending by its participating financial institutions longer term loans from international development finance institutions has now closed this funding gap and made it possible for banks to accommodate this category of businesses.
The significance of the unique DBN’s small business financing strategy is two-fold: The first part is that it provides a business incentive for commercial banks to draw more from their balance sheet to lend to the small businesses requiring short term credit.

This is a big deal! Over time, as the model matures with business owners paying up on time, it will help reverse the focus of commercial bank lending to the subsector.
The second implication is that the strategy provides commercial banks with another reliable and sustainable source of liquidity that they can draw on to satisfy a category of customers who require longer term loans of up to 10-year tenors to finance equipment purchase and expand their businesses.

It is also noteworthy that the longer-term financing window that DBN brings comes with its immense benefits for small business owners too. One of such benefits is helping them to conserve operational cash flow. Longer term loans help small businesses to make capital improvements, acquire equipment or purchase supplies without using operational cash flow. This helps them to leverage their earnings to grow the company and provides leverage for owner’s equity. Again, longer term loans also help small business owners to stave off investor interference by reducing the need to pursue equity investment from potential business partners. In addition, it allows small businesses to have more security when budgeting for costs and expenses, allows more flexibility and the maintenance cost are also generally low once they are secured.

At the heart of DBN’s appeal and promise is the quantum of resources at its disposal, the strong governance structure surrounding its operations, speed of disbursement that speaks to its willingness to impact the sector. Take DBN’s large financial war chest of about $1.3billion. In a recent media interview, the MD/CEO, Mr. Anthony Okpanachi stated that the bank had lined up a whopping N60billion that its participating financial institutions including commercial and micro finance banks can draw from to on-lend to small businesses. A large sum of this is targeted for lending via micro finance banks because of their reach and history of dealing with small businesses. This amount of capital injection by a single entity into the sector is unarguably unrivalled. And it’s only a slice of the sum that it has at its disposal.
The bank has already surpassed its 2018 target of lending to 20,000 micro, small and medium scale enterprises in its first full year of operations. The impact in terms of contribution to the GDP, job creation and wealth creation is bound to be huge.

The bank also understands the need for speed. DBN partner banks attest that in most cases, once they conclude internal vetting processes and requisite documentation for loan applications, DBN disburses the loans to the beneficiaries within 72hours.

The bank also has a monitoring and evaluation system that tracks to ensure that loans are used for the purpose it was given, monitors to know the impact on the business and economy in terms of job creation, business expansion and wealth creation. This holistic and proactive approach to business financing is both novel and revolutionary and if sustained will go a long way in spurring sustained growth of the small business subsector.

Another innovative aspect of the DBN Small Business Financing Strategy is the plan to finance complete start-ups. This is a promising industry that commercial banks for a lot of reasons, some owing to inadequate funding and risk do not lend to or even when they do, lend at breakneck interest rates.
In today’s age of innovation where novel ideas of graduates transited to start-ups that now dominate and define today’s world, DBN’s plan to provide the necessary financial backbone to catalyse their growth in the country is timely, relevant and portends a lot of good for the advancement of the national economy, productivity and wealth creation.

In a recent media interview, its Managing Director, Mr. Tony Okpanachi, spoke enthusiastically about this plan of the bank’s lending strategy:
“Part of what we are doing differently is that we are ready to help start-ups. As part of our capacity building initiatives, we are telling the financial institution that once a project comes and they assess it to be bankable to should reach out to us.
“This will be facilitated through the proposed credit guarantee subsidiary. It will take up the risk with them to give funding to start-ups. Our plan is to come up with products that we are going to sell through these financial institutions to fund star-ups.

“For now, we are collaborating with financial institutions themselves for their buy-in. Once that is done and we are able to earn their confidence, we will approach them with customised products that they will assist us in offering to star-ups.
“This will be in phases, but we are committed to assisting start-ups actualise their aspirations. The overall objective is to make access to funding easy for them,” he added.

Start-ups and thriving small businesses form the foundation of vibrant economies. As Nigeria exits the recession and tries to build a possible post oil economy, institutions such as DBN are going to increasingly play vital roles as catalysts that will ignite sustained growth in critical sectors of the economy such as agriculture, light manufacturing, hospitality and mining. The spirited moves by the management of DBN to create impact and support small business growth through targeted financing initiatives is therefore, relevant and should be encouraged. The participating financial Institutions (PFIs) particularly banks should embrace this noble initiative and work with DBN as good corporate citizens to ensure that this sector is provided with the resources it requires to flourish.

Adegboyega, is a public policy analyst