Ebenezer Onyeagwu, the GMD of Zenith Bank Plc, in an interview with Arise TV, explained why small and medium scale enterprises struggle to get low interest loans in Nigeria. I have noted already that Nigerian banks cannot easily lend in single digits due to many factors. Those factors include that the central bank “lends” to them at about 11%, and they have to insure the funds, and by the time they add cost of operation & compliance, with small profit, anything less than 17% may not be possible.
See it this way: the Central Bank of Nigeria (CBN) lends at close to 11% to banks and NDIC, the deposit insurance regulator, asks banks to insure (put another 2%). If you add banking operations costs and need to make small money, no bank can lend below 17% annually in Nigeria.
But some nations lend to their banks at 0.25%: “In December 2020, the Federal Reserve maintained its target for the federal funds rate at a range of 0% to 0.25%.” This cheap money makes it possible for U.S. banks to give cheap loans to their SMEs. Yes, you can get a business loan at 6% or even lower.
But in Nigeria, starting at 11% made it impossible for banks to match that. Because they have to move above 17%, it creates a vicious circle which makes things harder. See it this way – at that 17%, most SMEs cannot return whatever banks have given them, setting the banks up for losses. Simply, there are few businesses in Nigeria where you can make profits when your cost of capital is 17% before taxes to repay your loans.
According to Mr. Onyeagwu, “if you look at the numbers, you will see that these regulatory costs account for a whopping 28 percent of our overhead.” Yet, it is not only Nigerian banks which are regulated; American banks are regulated and yet they can lend at sub-6%. The most fundamental thing here is the prime rate which in the US tends towards zero while in Nigeria hovers around 11%. Read the full interview here.
Arise TV: So, how can we get interest rates on loans down to single-digit?
Ebenezer Onyeagwu: First of all, if you are looking at interest rate, you have to look at it in terms of the theoretical framework and issues around money supply, demand for money, issues around government borrowing and the fiscal deficits. So, when you put all that together, you will see that you cannot have a situation where you decree interest rate by fiat. Interest rates would always be set by the dynamics and realities in the market. In this case, if you are looking at interest rate in Nigeria, you have to index it to the risk-free rate. One-year risk-free rate in Nigeria is like 10 per cent. So, it will be difficult to have single-digit rate in Nigeria. However, the Central Bank of Nigeria has come up with a number of laudable initiatives to support single-digit lending.
We have intervention funds such as the Creative Industry Financing Initiative, where banks in the country provide long-term single-digit funding for entrepreneurs who are in cinema, movie, ICT and fashion designing. We also have what is called the Agri-Business/Small and Medium Enterprise Investment Scheme. It is also a pool of fund available for businesses in that space. You can as well access these loans. Apart from these ones, the CBN also have different intervention schemes such as the Anchor Borrowers Scheme, the Commercial Agricultural Credit Scheme and others, and all these loans are single-digit and they provide long-term financing. The big problem we have is that when you see an SME approaching you for loan, the SME may not have a track record; he walks up to you and tells you that he needs a single-digit loan and needs N20 million.
But I can’t give you N20 million without looking where you are coming from. So, we cannot decree interest rate by fiat. But the regulators have done a good work by providing funding schemes and whoever is eligible would get such single-digit long term loans once they meet the criteria. So, the funding is there, but the SMEs when they approach the banks don’t often meet the eligibility criteria.
Yet, you cannot ask the Central Bank of Nigeria (CBN) to drop its rate to 1% without thinking of inflationary pressures in the economy. The apex bank at the end has to pick a lesser evil – and today, it is that SMEs cannot get cheap loans. If you want them to get loans at 6%, you may end up messing up the economy. This happens because of the structural nature of our economy. Yes, CBN cannot just wake up and tell banks, from today, you need to lend at 6% because it cannot!
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The solution? Because we just read why it’s not possible, so whose job is it to make across board single digit lending rate possible? Or are we condemned to remain this way forever?
Ordinary people don’t know what inflation means, so whether it’s going up or down isn’t within their capacity to fix, but they want good things happening elsewhere to happen here; the way forward?
Why is banking profitable here, if we are such a sorry economy? Could it be that we created lopsided and dysfunctional systems, only to turn around and claim that ‘nothing can be done about it’? The losses need to be all round, at least to set the alarm bells that we are in trouble here. It’s immoral to claim that a disproportionate amount of players in an economy cannot access affordable loans, while a small group is living extremely large.
Rather than discussing ‘Why single digit lending rate is not possible’, we should be discussing ‘How to make single digit lending rate possible’; that’s what will engender growth! We waste a lot of time on things that cannot help anyone. The problems are well-known, now we need to hear from those who can solve them, they should take centre stage.
We have been unfair to the small guys, and it’s quite depressing.