Energising Nigeria’s MSMEs growth with supply chain financing

Energising Nigeria’s MSMEs growth with supply chain financing It is an understatement that micro, small and medium enterprises (MSMEs) play a significant role in Nigeria’s drive for real Gross Domestic Product (GDP) growth. As the lifeblood of socio-economic growth, MSMEs create jobs, reduce poverty, generate wealth, drive innovation and serve as incubators for large corporations. The International Labour Organisation (ILO) says MSMEs account for 96% of global businesses and 84% of employment. In Nigeria they make up 97% of businesses, generate six million jobs and contribute 50% of GDP. But access to financing and importantly, affordability and flexibility remain crucial pain points for them. The problem is exacerbated by lack of collaterals or credit history necessary to meet the requirements set by financial institutions. Sometimes, interest rates are prohibitive. According to the Central Bank of Nigeria (CBN) 2018 statistical bulletin, only about 0.3% of total commercial banking credit was available to small businesses, leaving an annual ₦617.3bn financing gap.

Unmet funding gap hampers MSMEs’ capacity and potential to scale up among numerous challenges they face. With technology disrupting all aspects of life, however, fintechs are now increasingly taking interest in providing operating loans in the form of supply chain financing (SCF) to reduce financing gaps for MSMEs. The idea behind supply chain financing is to lower financing costs and improve business efficiency for buyers and sellers linked in a sales transaction. Supply chain financing methodologies work by automating transactions and tracking invoice approval and settlement processes, from initiation to completion.The first of such technology-based platforms, Fiducia, launched in Nigeria recently.

And as the first of its kind in Nigeria, Fiducia, aims to catalyse the growth of Nigeria’s MSMEs by upscaling the SCF market to NGN 12 trillion, from the current N3trn.Fiducia is an innovative supply chain financing platform that connects corporate buyers, suppliers, and financiers in a digital marketplace where invoices can be financed and traded. By leveraging the credit profiles of their corporate buyers, Fiducia provides suppliers access to lowest-cost financing while preserving the liquidity of corporate buyers. For corporate buyers and suppliers alike, Fiducia strengthens cashflow without materially impacting client on-balance sheet loan profiles. It also provides access to a greatly expanded pool of previously overlooked corporates and newly de-risked suppliers seeking financing. Supply chain financing otherwise referred to as reverse factoring is a form of financial transaction wherein a third-party facilitates an exchange by financing the supplier on the customer’s behalf. It is a collaborative process where the buyer, supplier and lender have an arrangement together.

It is called reverse factoring because a third-party creates a unified marketplace for all players. Fiducia’s launch underscored how digitalised supply chain ecosystem can cater to the need of MSMEs and open up new lending opportunities for banks to partner as capital providers.Speaking at the brand reveal in Lagos, Chief Executive Officer of Fiducia, Imohimi Aig-Imoukhuede, said SCF is emerging as an effective instrument to reduce financing gaps in developing markets. With current SCF supply meeting only about 24% of the potential market, MSMEs are estimated to generate more than half of the SCF opportunity, according to the International Finance Corporation (IFC). Aig-Imoukhuede revealed that Nigeria’s current SCF is around N3trn but if the excluded SME supply chains could be brought into play, an additional N9trn could be unlocked for Nigeria’s economy. 

He said: “Fiducia is founded with the express purpose of levelling the playing field for business owners in Africa by unlocking the value of their supply chains. Today, Fiducia is successfully driving inclusive GDP growth by broadening financial inclusion – as a wider pool of small and mid-sized businesses enter Africa’s financial markets on the same terms and rates previously only available to large corporates. Fiducia’s financial services and funding partner ecosystem includes many of Africa’s top developmental finance institutions, equally committed to solving Africa’s supply-chain finance challenges.”Although reverse factoring is still at the infancy stage in Africa, experts say factoring as an important form of SCF holds huge potential to unlocking opportunities for Nigeria’s MSMEs. In 2021, factoring accounted for around €32.3bn in Africa representing a 28% growth in the sector.Sears in a report entitled, ‘Assessing MSMEs and Business Funding in Nigeria’, co-presented by the duo of Michael Famoroti, Co-founder & Head of Intelligence and Adaobi Oni-Egboma, Senior Associate, Digital Regulations at Sears notes that SCF provides alternative for MSMEs to close financing gaps.

“Global trends driving SCF include evolution of global supply chains with increase in suppliers and transactions, while scarcity of capital and improvement in technology are allowing for fintech disruptions.“For instance, the local SCF market in Pakistan is about $18-$20 billion, around 60% of this value is derived from reverse factoring. In Africa, factoring grew by 28.1% between 2020 and 2021. Supply chain financing provides an opportunity to eliminate the risk of bad debt and unlock new financing sources for MSMEs.”Bunmi Lawson, Fiducia’s Chairperson, said considering the size of Nigeria’s MSMEs, and the severe effect of big corporates’ payment cycles, SCF marketplace is a game-changer for smaller businesses and mid-sized corporates as it offers faster, cost-efficient funding alternative.“By leveraging cutting-edge technology, building a community of financiers and suppliers, we offer businesses an opportunity to unlock the true potential of their supply chain. With our services, companies can access immediate funds, improve liquidity, and fuel their growth ambitions; all while mitigating risks and minimising administrative burdens,” she said.