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Poor access to finance and credit risks are some of the factors hampering the growth of the nation’s Micro, Small and Medium Enterprises (MSMEs). It is against this backdrop that the Central Bank of Nigeria (CBN) has banned Credit Guarantee Companies (CGCs) from accepting deposits and other core banking functions. The ban, according to the CBN, will stimulate lending to MSMEs. In line with the Act establishing them, the CGCs are primarily expected to provide third-party credit risk mitigation to lenders through the absorption of a portion of the lender’s losses in the loans made to MSMEs in case of default.
In the new guidelines, CBN clearly stipulates what it calls ‘permissible and non-permissible activities’ and the role of credit guarantee companies in them. Under non-permissible activities, CGCs are barred from providing guarantees to entities outside the shores of Nigeria, while on the permissible activities, they are allowed to provide guarantee for risk assets of participating financial institutions, advisory services for financial and business development, as well as invest surplus funds in government securities and offer technical assistance to lenders and borrowers.
The objectives of Credit Guarantee scheme, the CBN says, include improving access to credit for MSMEs, reducing credit risk in lending by providing safeguards for participating financial institutions and stimulating lower interest rates on loans and promoting flexible collateral requirements by participating financial institutions. Acceptance of deposits is strictly excluded. In addition, the CGCs are to encourage new business formation, development and expansion, accelerate economic growth and decrease unemployment, foster sustainable and inclusive growth as well as improve risk management in the financial system.
These are laudable objectives that will help overcome most of the deficiencies in our financial system and procedures that spawn poor loans. Since every bank bears a degree of risk when it lends to private borrowers such as businesses and consumers, it is important that CGCs develop a credit culture supported by well-conceived management strategies for controlling credit risk, especially for loans advanced to MSMEs in case of failing to meet obligation.
Some of the sanctions stipulated by the CBN guidelines on erring CGCs include monetary penalties on the Directors, officers or employees, suspension of operations, capital expenditure, and even revocation of licence, where necessary. However, government should provide a conducive environment for MSMEs to thrive and equally improve the ease of doing business. Currently, the general insecurity has adversely affected business operations.
Recently, the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Agency (SMEDAN) revealed that about 39.65 million Micro, Small Enterprises (MSMEs) in the country were in a distress situation due to lack of access to finance and the current high price of Automotive Gas Oil (AGO), popularly known as diesel. Currently, a litre of diesel is sold above N700 in some parts of the country. Figures from SMEDAN, which is the regulator of MSMEs, show that there are 41.5 million registered MSMEs in the country, comprising 41.5 million micro enterprises and 73,081 SMEs. Together, they are responsible for 59.6 million jobs, which represent 86.3 per cent of national workforce and contribute about 3.5 per cent to the nation’s Gross Domestic Product (GDP). In spite of this, the peculiar environment that many MSMEs operate in poses serious challenges to their survival and contribution to economic growth and development.
According to recent statistics, 61.95 million persons were engaged in MSMEs in 2020, while 16.04 million micro enterprises employment were generated across the informal sector, with agriculture generating 61.1 per cent of the jobs, while 7.49 million jobs were generated in the formal sector, with manufacturing accounting for 21.6 per cent. This represents the highest employment among MSMEs, according to official government data.
Also, a survey by the Ministry of Industry, Trade and Investment has also shown that MSMEs account for about 76 per cent of the nation’s labour force and contributes about 50 per cent to the GDP. MSMEs account for over 90 per cent of all firms globally and on the average, account for about 70 per cent of the total employment and 50 per cent of GDP worldwide. In view of the pivotal role of MSMEs in stimulating economic growth and providing employment to vulnerable groups, such as the youth, women and the poor in the country, government must sustain its interest in the sector for efficiency and growth.
There is need for more government and private interventions to cushion the effects of current economic downturn on MSMEs. This will enable them recover from the present high cost of production. Perhaps, this is the time to revisit the MSMEs Survival Fund and Off-take Scheme. No nation can develop its economy without the MSMEs. Besides the efforts by the CBN, last year, the Nigeria Export-Import Bank (NEXIM) supported the MSMEs with N36billion, to which each state got N1billion.
Between 2015 and 2020, the Bank of Industry (BoI) disbursed loans to over three million MSMEs and 653 large enterprises through which about seven million direct and indirect jobs were created. Besides, MSMEs operators are still grappling with high electricity tariffs and high interest rates from the banks. If these constraints are removed, the MSMEs will contribute meaningfully to the growth of the economy.
