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•Tight lending choking small firms –NASSI
By Merit Ibe, [email protected]
For obvious reasons, manufacturers and small and medium-sized enterprises (SMEs) in Nigeria have continued to grapple with rising production costs, weak consumer demand and mounting operational pressures with access to affordable credit standing as a major obstacle to survival and expansion.
Commercial lending rates averaging 32.1 per cent for very short-term loans, have plunged businesses into the difficult choice of borrowing at prohibitive costs, scaling down production or postponing investments needed to grow their operations. The cost of financing productive enterprises has become a growing concern, for an economy seeking to strengthen domestic production, create jobs and reduce dependence on imports.
Against this backdrop, the Central Bank of Nigeria’s (CBN) decision to retain the 45 per cent Cash Reserve Ratio (CRR) for Deposit Money Banks has reignited concerns among manufacturers and SMEs over the availability of credit to the real sector.
In simple terms, the CBN’s 45 per cent CRR rule means that for every N100 made by a bank, N45 out of it is to be deposited with the apex bank, leaving the rest as funds to operate with and lend to individuals and businesses.
As a result of this, industry stakeholders argue that the high reserve requirement, which limits the proportion of depositors’ funds available for lending, could further constrain the flow of credit to businesses that need financing for raw materials, machinery, working capital and expansion. Questioning the adjustment of the Standing Deposit Facility (SDF), they warned that the prevailing monetary policy framework could encourage banks to place funds with the apex bank rather than extend credit to productive enterprises.
For the Manufacturers Association of Nigeria (MAN) and other stakeholders, the implications extend beyond the immediate challenge of securing loans. Expensive and limited financing threatens industrial capacity utilisation, discourages new investments, weakens the competitiveness of locally manufactured goods and constrains the ability of businesses to generate employment.
The SDF is a monetary policy band set by a central bank to control and stabilise short-term interbank interest rates.
In recent years, the CBN has maintained tight reserve requirements as part of efforts to manage liquidity and contain inflationary and exchange rate pressures.
In his comments, Director General, MAN, Segun Ajayi-Kadir expressed concern that retaining the CRR at 45 per cent could limit the availability of funds for manufacturers, particularly SMEs that depend on bank financing to sustain production, acquire equipment and expand capacity.
Ajayi-Kadir pointed out that reductions in the MPR alone would not adequately address the structural constraints confronting businesses if banks remained constrained in their ability or willingness to lend to the real sector.
In his assessment, the CRR and the Standing Deposit Facility (SDF) arrangement could discourage banks from extending credit to manufacturing businesses.
“The CRR of unfriendly 45 per cent and adjustment of the SDF to pay commercial banks to park their idle funds at the apex bank effectively incentivises banks to avoid lending to the manufacturing sector.”
The prevailing cost of borrowing has continued to undermine industrial competitiveness and make business expansion financially burdensome.
“Commercial bank lending rates averaged 32.1 per cent for very short-term loans. This limits access to finance, increases borrowing and production costs, and makes operational expansion financially burdensome,” Ajayi-Kadir lamented. He said manufacturers need access to affordable, long-term financing to invest in production, modernise equipment and build sustainable industrial capacity.
“This is not manufacturing-friendly, as manufacturers expect improved access to long-term, patient capital at single-digit interest rates.”
The MAN boss also linked the financial difficulties confronting manufacturers to persistent inflation, which he said was increasing input costs while weakening consumer purchasing power and demand for locally manufactured products.
“The combined pressures have contributed to a growing accumulation of unsold finished goods, with inventory valued at N2.14 trillion reportedly sitting in manufacturers’ warehouses.”
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Ajayi-Kadir, therefore, called on the Federal Government to expand access to concessionary, single-digit financing for manufacturers, particularly SMEs and businesses operating in strategic sectors of the economy.
He also advocated a gradual review of the CRR for Deposit Money Banks, subject to prevailing macroeconomic conditions, to improve banks’ capacity to lend to productive sectors without compromising financial system stability.
Ajayi-Kadir noted that the expected benefits of monetary easing could be undermined if businesses continued to face restrictive access to credit.
“Improved liquidity conditions could increase credit availability and strengthen businesses’ ability to meet short-term financing needs, but the benefits of the MPR reduction may not be fully realised if credit expansion to the real sector remains constrained.”
To address the funding gap, he proposed development financing for manufacturing SMEs at an interest rate of five per cent, supported by appropriate loan tenors and repayment structures that reflect the production and investment cycles of manufacturing businesses.
He said affordable financing “would enable manufacturers to invest in productive assets, manage working capital requirements and expand output, while strengthening the sector’s contribution to employment and economic growth.”
He stressed that improving access to affordable, long-term credit would be essential to easing manufacturers’ operating pressures and unlocking the productive capacity of Nigerian industries.
For the Lagos Chairman, National Association of Small Scale Industrialists (NASSI), Gertrude Akhimien, the CRR and SDF regime has made liquidity tight and expensive. She decried that SMEs are not really accessing finance from banks, “they are surviving outside the banking system.
To her, “until we have a carve-out that rewards banks for lending to the productive sector, expansion will remain financially burdensome.”
“CBN needs to consider a lower CRR for banks that lend a certain proportion to manufacturing, agriculture and SMEs. We did it with LDR policy in 2019/2020, it worked.
“ SDF rate should not be so attractive. There must be a cap on how much a bank can park at SDF. Otherwise you are paying banks not to lend.”
The NASSI boss called for better transmission of intervention funds, noting that BOI and DBN should be better capitalized to wholesale to commercial banks at single digits with clear KPIs on lending to SMEs.
Reeling out her advice to small businesses, she noted that MSMEs must tidy up their books and formalise their records.
“The main reason for bank rejection after high rates is poor bookkeeping. Banks need a 12 month bank statement and audited cashflow.”
Akhimien also advised that MSMEs should belong to associations to access funds easier.
“Cluster lending through cooperatives and trade associations (MAN, NASSI) gives better negotiating power than individual walk-in”.
She suggested that MSMEs can use equity more than debt for expansion. “Bring in partners rather than taking a 32% loan for a 3-year machine.”
