CHAPTER ONE
UNIVERISTY OF LAGOS
SCHOOL OF POSTGRADUATE STUDIES
FACULTY OF LAW
MICRO FINANCING, SME AND SECURITY OPTIONS
REVISED EDITION
PPL 807 – SECURED CREDIT TRANSACTION 11 – 2010/2011
BEING A SEMINAR PRESENTATION IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF LL.M DEGREE PROGRAMME
DATE OF PRESENTATION: 23RD JULY 2011
BY
ARMSTRONG IHUA - 109061149
CHINYERE UHEGBU - 980601123
LECTURER
DR. DAYO AMOKAYE & DR. TUNED OTUBU
TABLE OF CONTENTS
Pages
Chapter One
General Introduction 1
Chapter Two
Problems and Constraints facing SMEs 3
Chapter Three
SMEs Funding Mechanism 9
Chapter Four
SMEs, Alternative Financing Options 20
Chapter Five
Criticizing of Microfinancing 25
Chapter Six
Conclusion 28
Chapter Seven
Annex 31
CHAPTER ONE
GENERAL INTRODUCTION
Although MSMEs are vital to the economy, the sector is constrained by multifaceted problems that threaten its survival. Foremost among these constraints is the problem of limited access to deposit and credit facilities and other financial services provided by formal lending institutions. Institutional lenders[1] often perceived lending to MSMEs as to risky, because the entrepreneurs lack sufficient capital base and adequate collateral to guarantee loan. Second,[2] lenders are of the view that small and medium entrepreneurs have no performance antecedents on which to evaluate their credit worthiness. They see small entrepreneurs as unstable, especially because most often enter and exit the market and often lack the incentives to remain for a tangible period of time, and are, as a result, risky borrowers.[3] Third, MSMEs business performance is usually poor as a result of low education, managerial and entrepreneurial skills. Even in ceases where government intervenes to stimulate investment in MSMEs, institutional investors are reluctant to embrace such development, primarily because MSMEs are under-capitalized and have no asset base sufficient enough to guarantee loans. Fourth, access to cheap funds from capital market through the insurance of debenture and equity instruments are constrained by high transaction cost. For this and other reasons, MSSMEs financing is usually restricted to private equity and retained earnings, such that meaningful growth and expansion equity and retained earnings, such that meaningful growth and expansion are usually inhibited by lack of external financing. The end results include a credit gap for MSMEs and micro businesses (especially long-term credit whenever it exists), higher real interest rates and enormous differentialism financial costs for small, medium and micro investors.[4] Against the backdrop of a deregulated economic policy of the present Obasanjo’s administration, a major public choice[5] challenges for the government is to determine the nature of intervention in terms of incentives that can stimulate investments by inducing a higher rate of private sector financing of MSMEs. Should the government decide to intervene by regulations, she would have to decide the issues to regulate. Additionally, it is important for the government to determine the extent to which she would intervene in her quest to stimulate growth in this sector. Large industrial and commercial investments are no longer large in terms of accommodating all the growing demands and needs in any economy. They are larger only to the extent that they can improve quality services, quality production and quality products. They can no longer take care of more people as it used to be since science is being optimized for them to realize their goal and profitability. More people can no longer be accommodated; goods that do not have large consumption base are phased out and the semi and unskilled 'quantities' in the economies are no more considered. SMEs however are nit mediocre institutions but provide good space for the larger percentage of the demands of people in any growing economy like Nigeria.[6]
In an economy with defective infrastructural capacities, SMEs can easily function to provide composite products and services which investments with huge structural base cannot go into. Because of the dearth of the huge funds, consolidated firms that can take Ten to Twenty production lines cannot be common. What happens in this case is that SMEs can now disintegrate the various product lines and take them in turns to the extent that their small funds and processes can carry. The long run effect of this is that they have ended up providing the same goods and services. For instance, five SMEs plants can differently be set up to produce five different electrical materials that could be produced by one integrated plant at less cost and increased benefit to the economy.
Why did our textile collapse? If there are numerous small industrial operators that produce the various components that are required to make a fabric, the sector would conveniently survive the onslaught of the smugglers. Because all the products are integrated in one plant the cost becomes enormous both in human capital and infrastructure. In Taiwan, about the ten small scale industries produce and supply textile materials to the final manufacturer before fabrics can be made, even as that country is highly industrialized. They have continued to toe that line because they have the experience of the benefits of SME and the much talked about collaborative advantages.[7]
CHAPTER TWO
PROBLEMS AND CONSTRAINTS FACING SMEs
Group systems for micro-financial services evolved in particular from Bangaladesh (the Grameen Bank method) and was pioneered by Professor Yunsu and in Latin America (Solidarity groups and village banking), as well as in Indian (self-help groups or SHG). While there are thus many variants, there are broadly two very different ways of using groups for financial intermediation. These two systems are Grameen system and the SHG system.[8]
In the Grameen System MFO (Micro Finance Organization) organize themselves into 'groups' of five members which are in turn organized into centers of around five to seven such groups. The members make regular savings with the MFO, according to a fixed compulsory schedule, and they also take regular loans. They each have individual savings and loan accounts with the MFO, and the main function of the groups and centers are to facilitate the financial intermediation process, on behalf of the members.
While in the SHG system, the members form a group of up to 20 members. The group formation process may be facilitated by a non-governmental Organizations (NGO) or by the MFOs or Conventional banks itself, or it may evolve from a traditional rotating savings and credits group (ROSCA) or other locally initiated grouping.
Financing Constraints
Aside from the low saving habits of micro, small and medium entrepreneurs, several economic and ethical arguments have been adduced to explain the inability of MSMEs to access funds from institutional lenders in Nigeria. Factors affects the growth of MSMEs include unfavourable macroeconomic environment and attitudinal problems of many small and medium entrepreneurs to loan and to ownership dilution. These issues are discussed in the section following.
a) Economic
Three broad economic arguments have been adduced to justify the inability of MSMEs lenders to access money from both the money and capital markets, namely: efficiency, information asymmetry and monitoring arguments. In addition to this, the low capital base of many financial institutional has been advanced.[9]
(i) Efficiency Consideration
Efficiency-based theories provide the most important economic insights into the preferential status accorded many bug enterprises to access funds to finance their businesses with relative ease.[10] Simply, efficiency is the measure of satisfaction in the light of the costs of obtaining what is wanted and in view of the costs incurable to obtain the next best satisfaction. Efficiency analysis of MSMEs lending will arise where the benefits derivable from a given transaction offsets the transactions costs. Since lenders are rational and utility maximisers, whose primary motive is to maaximise profits, minimize risk of loss of investment, they may be unwilling to invest in a riskier business unless they can justify the risk. Investing in MSMEs generally entails higher risk than investing in established companies.[11] Such investments will be economically justified if higher a premium returns on the use of their capital.[12]
Again, the demand for security interest in the assets of the borrower before granting loan to a borrower is further justified by the efficiency theorists that security enables the secured creditors to obtain additional comfort from the debtor that the loan will be rapid.[13] However, desirable as the demand for tangible collaterals may be for the lenders, most small-scale borrowers may find its related costs[14] too burdensome. Other major subsets of efficiency analysis that have impact on small, medium and micro financing and worthy of consideration are monitoring and information consideration.
ii) Informational Asymmetry
Information is crucial to reliable risk assessment. Unless lenders have information on the nature of businesses MSMEs engage in, they may be unable to adequately assess not only the businesses profitability, but also their risk, which they must do to be able to determine chargeable interests or decide whether they should participate in the first place. Thus, lack of adequate information may be said to account for the low level patronage of MSMEs by institutional lenders.[15] Many small-business owners have no business pedigree or an experience that is of interest to bankers for risk assessment. Additionally, most entrepreneurs lack the financial expertise needed to keep accurate business records which lenders rely upon to assess their credit worthiness. In cases where such expertise is present, the entrepreneurs may not be able to evaluate the costs and benefits of alternative secured and unsecured lending transactions.
iii) Monitoring Consideration
Monitoring not costless the difficulty a lender may encounter in monitoring the activities of a borrower often highlights not only the risk involved in lending, but also suggest to the lenders the desirability of alternative measures that could fulfill the role monitoring would have performed. Where it is not easy to monitor a borrower, it is often the case that lenders insists on a collateral (or security), which will excuse them from bearing further monitoring costs.[16] A secured party, according to this theory, obtains a security interest over the property of a debtor (or the security provided) for the purpose of minimizing the risks of debtors’ misbehaviours. Debtor’s misbehaviour could arise where the debtor acts in a manner inconsistent with the terms of the loans, such as misuse or diversion off loan to purposes unconnected with the original agreement. It could also where the debtor deliberately mismanaged the business, thereby exposing the investment of a lender to further risk. In Nigeria, most beneficiaries of public loans are unwilling to repay loans based on the mind-set that the loans are their own share of the “National Cake”.[17] Many pseudo investors prefer to divert loans to other profitable businesses, such real estate and stock broking, as opposed to industrial or manufacturing business on the basis of which they applied for the loan. Additionally, they also apply the loans they obtain to other personal non-business related uses. Of course, in the absence of effective monitoring, a borrower can easily externalize risk by transferring it to a lender, who would lose except he took other steps to mitigate or address risk externalization implicit in a credit arrangement in which monitoring by the lender is either impossible or too expensive.
iv) Low Capital Base
Until fairly recently, many banks in Nigeria are undercapitalized. As a result, they do not have enough capital to cushion the risk of lending to MSMEs without collateral. Prior to the recapitalization of banks, about 89 banks (with about more than 50%) have capital base that is less than US$10 million and about 3, 300 branches. This compared to 8 banks in South Korea with about 4, 500 branches or with one bank in South Africa with larger assets than all the 89 banks in Nigeria.[18] Empirical figures from the Central Bank of Nigeria revealed only 75 out of over 600 community banks, whose financial statements of accounts were approved by the CBN in 2005, had up to N20 million shareholders funds unimpaired by losses. Similarly, the Nigerian Agricultural Cooperative and Rural Development Bank (NACRDB), with a proposed authorized share capital of N50.0billion has N10.0 billion paid up capital and only N1.3billion shareholders’ fund unimpaired by losses, as at December, 2004.[19] Recent research on SME[20] further reveals that small businesses tend to rely heavily on internal fund both for operating and investment purposes, with just over a third having no borrowing due in part to their inability to raise funds from bank and the preference of many banks to finance short-term projects that yield higher returns such as oil and gas projects,[21] telecommunications,[22] LPOs and imports.[23]
b) Ethical Reasons
A major ethical reason adduced to explain the low access to public and private funs by the MSMEs is the high level of corruption among banks. MSM entrepreneurs complained of various under the-counter deals by many lenders before loans could be granted to them. First, access to government-financed loan to MSMEs is not direct. For instance, access to National Economic Reconstruction Fund (NERFUND) can only be originated by participating banks,[24] who act as financial intermediaries to many of MSM entrepreneurs.[25] Many micro, small and medium entrepreneurs complained of high level corruption among the officials of many banks before their loan applications were processed for approval. Despite the mandatory provision in the NERFUND Act requiring participating bank to disburse loans within three working days of the release of the fund to the bank,[26] banks sometimes delay the disbursement of loans to entrepreneurs to produce goods or products for local and international markets. In some cases, delay occurred in transferring money to many overseas suppliers of goods and technology. This attitude has a snow-ball effect on compliance by local entrepreneurs. A delay in payment of overseas suppliers of raw materials and technology or for the supply of finished products often expose many local entrepreneurs to damages airing from contractual breaches, thus unduly increasing the transaction costs of utilizing the NERFUND loans.
Next is the pattern of appointment and categories of persons appointed to manage public financial institutions. Appointments of chairmen and executive directors of some of these institutions are, sometimes, influenced by political affiliations, so that only persons with political connections benefit from the disbursement of loans.[27] The result is that many loans are politically induced and are granted to undeserving entrepreneurs.
c) Political and Economic Environment
A further constraint to MSMEs financing is the unstable macroeconomic environment in Nigeria. Government macroeconomic policies are unstable, and their fluctuations have been unhelpful to stable planning and implementation of strategies by small-scale entrepreneurs. The most notable shocks are that of high interest rates,[28] exchange rate disparity,[29] inflation and budgetary distortion.
Beyond this, there is also the absence of legal and economic incentives to induce investment in other micro-finance institutions that may provide alternative sources of finance to many MSMEs. Some of these micro finance institutions are formal and informal in nature. Formal institutions include the credit card companies,[30] equipment leasing companies and mutual guarantee companies.[31] Informal institutions include the non-governmental organization (NGOs) and community-based cooperatives organizations.
Generally, most local NGOs and community-based cooperative organization obtain their funds from contributions from members, fees, and interest on loans. Also, most local NGOs obtain additional funding from international donors.[32] Funding of MSMEs by international donors are achieved through two main channels: (i) direct funding of microfinance projects, and (ii) direct disbursement of funding to microfinance institutions and NGOs that function more or less like leasing companies (receiving wholesale external resources and lending to client). Community-based co-operatives, many of which operate outside the formal banking sector source their funds from contributions from members. Because of the relative access, security, liquidity and return advantages that local saving and cooperatives offer to the local people, the cooperatives became popular among the poor, especially in the rural areas. As noted by Basu, Blavy and Yulck, local micro finance institutions become a vehicle for increased domestic financial savings mobilization and investment by tapping the resources of poor who are otherwise isolated form the formal financial system.[33]
CHAPTER THREE
MSMES FUNDS AND SECURITIZATION
Public-Sector Initiative
Given the reluctance of institutional lender to extend credit facilitates to MSMES and the inability of the money market to regulate itself (market failure syndrome), it seems the only realistic way to promote MSMEs in Nigeria is for the government to intervene by the implement of measures that would help induce private sector participation in promoting small scale entrepreneurs. Government directly intervened through the establishment of financial institutions and agencies which in turn provide grants or loans and other support services to MSMEs.
In other cases, the government chooses to guarantees part of eligible loans provided to MSMEs through market intermediaries such as banks. It is crucial to observe that under the Constitution, the Government has the duty to promote the economic objectives of the State as enshrined in the Constitution.[34] This will involve the enactment of various laws and measures to promote not only the national economy, but also the economic well-being of the people. This section will discuss some of the steps the Government has taken to engender growth of medium-scale enterprise.
a) NERFUND
The National Economic Reconstruction Fund (NERFUND) was established by the Federal Government through the National Economic Reconstruction Fund Act[35] to catalyse development in manufacturing industries, mining, quarrying and agro-allied businesses. The Fund was primarily established to correct the observed inadequacies in the provision of medium to long-term financing to small and medium enterprises (SMEs), especially manufacturing and agro-called enterprises (SMEs), especially manufacturing and agro-allied enterprises and ancillary services by facilitating access to low cost long-term finance for SMEs.[36] Its key role was to provide MSM entrepreneurs access to funds from the World Bank, African Development Bank (ADB) and other international lending agencies. To be eligible for the loan, an entrepreneur must establish that he engages in a SME business, an agro-allied related project, mining, quarrying, industrial support service and equipment leasing, and that the enterprise or project is wholly owned by Nigerian.[37] Between 1990 and June 1996, NEFRUND disbursed US$114 Million (Foreign Exchange Component) and N3468million (Local Currency Component) to support 218 projects. Regrettably, the Fund could not accelerate the growth of MSMEs in Nigeria due to several reasons earlier in discussed.[38]
b) Specialized Financial Institutions
In addition to NERFUND, there are other funding windows available to MSMEs from specialized financial institutions set up primarily by the government, such as, the National Bank for Commerce and Industry Development Bank (NIDB), Nigerian Agricultural and Cooperative Bank (NACB), and Peoples Bank of Nigeria (PBN). Nonetheless, the impact of these institutions MSMEs was never felt. The inability of these institutions to adequately support MSMEs is due to many factors. First, the funding institutions are government-owned entities and their capitalization is rather too low to meet the loan demands of MSMEs. Second, the administrative bureaucracies in the processing of loans and strict demand for security for the loans and documentation formalities discouraged many MSMEs from accessing funds from these institutions.
c) Monetary Policies
Government has also, through its monetary policies, encouraged sectoral lending by commercial banks in accordance with the CBN Credit Guidelines to MSMEs. Genuine MSMEs have thus benefited from such lending. Effective from January 2002, the Central Bank of Nigeria (CBN) introduced the Refinancing Facility at concessionary interest rates to support medium to long term bank lending to the productive sectors of the economy. This facility was instituted to provide liquidity to banks to enable them finance real sector activities.
d) Current Initiatives at MSMEs Funding
In order to reposition financial institutions in stimulating investment in MSMEs, government has undertaken various reforms, which include the recapitalization of banks.44 reinforcement and merger of public-sector financial institutions and implementation of new Micro-Finance policy. The government also floated the Small and Medium Industries Credit Guarantee Scheme (SMICGS) to guarantee to loans disbursed to MSMEs and established a separate agency to coordinate public and private initiatives on MSMEs activities. The salient features of these reforms are considered below.
i) Financial Institution
The Bank of Industry (BOI) was created in 2000 after the merging of the Former Nigerian Industries Development Bank, Nigerian Bank of Commerce and Industry and NERFUND to create BOI. The Bank has a paid-up capital of N35billion. It has the mandate to assist MSMEs in accessing public funds at affordable interest rates. Moreover, the Nigerian Agricultural Cooperative Bank, Family Economic Advancement Programme (FEAP) an the Peoples’ Bank were merged in the same year to create Nigerian Agricultural Cooperative and Rural Development Bank (NACRB) with a mandate to channel long-term funds to agricultural and industrial development in the rural areas of Nigeria
ii) Small and Medium Enterprises Development Agency of Nigeria (SMEDAN)
The SMEDAN was established in 2003 to overcome information gap and low capacity of many MSMEs.[39] The Agency has the overall responsibility to initiate, articulate and coordinate public sector’s initiatives on MSMEs and to collaborate with the private sector in achieving the government’s goals and objectives regarding MSME. The main focus of the Agency’s activities is on capacity building, provision of technical assistance and institutional supports for MSMEs in the acquisition of business knowledge, skills, raw materials, machineries and equipment. It was intended that the body would assist small-scale entrepreneurs to market their products both locally and internationally. The Agency is expected to help small-scale businessmen develop skills in bookkeeping and reporting, understand the essence of internal controls and credit decision mechanisms and improve technology and human resources. To function effectively, SMEDAN has the responsibility to gather information on MSMEs activities or operations and establish a database of information through data compilation at institutional or sectoral level.[40]
(iii) Credit Guarantee Scheme
• Structure of the Scheme
The Small and Medium Industries Credit Guarantee Scheme (SMICGS) was established through the 2004/2005 Monetary and Credit Guidelines.[41] It is a public-sector driven initiative by the Federal Government to provide guarantee in respect of loans granted by any bank for industrial purposes. The scheme is also to help mobilize resources from the banking sector, by encouraging banks to lend to small businesses, which have viable projects and good prospects of successes.[42] The categories of loans guaranteed under this scheme include advances, overdrafts and any credit facility granted to Small and Medium-size Industries (SMI) either for the establishment of new projects, and for the expansion, modernization or restructuring of on-going projects, and for the expansion, modernization or restructuring of on-going projects. The beneficiaries of the Scheme are individuals or corporate bodies engaged enterprises relate to manufacturing or SMEs’ related services as defined by the National Council of Industrial.
e) Micro Finance Policy, Regulatory and Supervisory Framework (Micro Finance Policy)
The Micro Finance Policy was launched in December 15, 2005. its aim was to make “financial services accessible to a large segment of the potentially productive Nigerians which otherwise had little or no access to financial services, by increasing the share of micro credit as percentage of total credit to the economy from 0.9 per cent in 2005 to at least 20 per cent in 2020”.[43] Beyond this, the policy seeks to “integrate the informal funding institutions into the national financial system and enhance service delivery by microfinance institutions to MSMEs”.[44] This it seeks to achieve by increasing the number of linkages among universal banks, development banks, specialized finance institutions and microfinance banks by 10% annually. In order to achieve these goals, a number of strategies were adopted to deal with the issues relating to licensing and regulation of Microfinance Banks (MFBs), regulation and supervision of MFBs, capital base of the existing microfinance, and establishment of NGO-based microfinance institution.
Private Sector Initiatives
Private sector’s participation in MSMEs financing is achieved through the instrumentalities of small and Medium Equity Investment Scheme and Direct Finance.
(a) Small and Medium Industries Equity Investment Scheme (SMIEILS)
SIMEIS is a product of collaborative effort between the Central Bank and the Bankers Committee launched in July 2001 to accelerate the development and growth of MSMEs in Nigeria. Under this scheme, banks operating in Nigeria are required to set aside 10 per cent of their profit before tax (PBT) annually and invest same as equity in small and medium industries. Such equity investment may be in the form of ordinary or preference shares. Each participating bank will also be expected to monitor, guide and nurture enterprises financed under the scheme. To ensure easy administration of the scheme, each participating bank is required to have Small-Scale Industries (SSIs) Unit which will have responsibility for apprising and making recommendations on the relevant SSI proposal. To monitor compliance, banks are required to render quarterly returns and give full particulars of acquisitions of shareholding in any SSI to the CBN within 21 days of the acquisition.
(b) Direct Bank Finance
Debt finance is important source of capital for MSMEs because the owner-managers are often unwilling to dilute their ownership by involving equity participation. The most important popular form of debt finance utilized by MSMEs is the overdraft. This is because overdrafts are simple and flexible, and may be used alongside current bank accounts. In addition to this, banks often grant term loan, on selective basis, to many MSMEs. A bank may grant a term loan for a short or medium term, up to 5 years. However, available statistics reveal that short and medium terms loan advanced to MSMEs are meagre, compared to the loans granted to other established organizations.[45]
From the appraisal of existing microfinance-oriented institutions in Nigeria, the following facts have been evident:
a. Weak Institutional Capacity: the prolonged sub-optimal
performance of many community banks, microfinance and development finance institutions is due to in competent management, weak internal controls and lack of deposit insurance schemes. Other factors are poor corporate governance, lack of well defined operations and restrictive/supervisory requirements.[46]
b. Weak Capital Base: The weak capital base of existing
institutions, particularly the community banks, could not adequately provide a cushion for the risk of lending to micro entrepreneurs without collateral. this is supported by the fact that only 75 out of over 600 community banks whose financial statements of account were approved by CBN in 2005 had up to N20 million shareholders' funds unimpaired by losses. Similarly, the NACRDB, with a proposed authorized share capital of N50.0 billion. Has 10.0 billion paid up losses, as at December 2004.[47]
c. The Existing of Huge Un-served market: the size of the un- served market by existing financial institutions is large. The average banking density in Nigeria is one financial institution outlet to 32,700 inhabitants. In the rural areas, it is 1:57,000. That is less than 2% of rural households have access to financial services. furthermore, the 8 (eight) leading Micro Finance Institutions (MFIs) In Nigeria were reported to have mobilized a total savings of N222.6 million in 2004 and advance N2.624 billion credit, with an average loan size of N8,206.90.
This translates to about 320,000 membership based
customers that enjoyed one form of credit or the other from the eight NGO-MFls. Their aggregate loans and deposits, when compared with those of community banks, represented percentages of 23.02 and 1.04, respectively. This reveals the existence of a huge gap in the provision of financial services to a large number of active but poor and low income groups. The existing formal MFls serve less than one million out of the over 40 million people that need the services. Also, the aggregate micro credit facilities in Nigeria account for about 0.2 percent of GDP and less than one percent of total credit to the economy.[48]
The effect of not appropriately addressing this situation
would further accentuate poverty and slow down growth and development.[49]
d. Economic Empowerment of the poor, Employment Generation and Poverty Reduction: The baseline economic survey of small and medium industrials (SMls) in Nigeria conducted in 2004 indicated that the 6,498 industries covered currently employ a little over one million workers. Considering the fact that about 18.5 million (280/0 of the available work force) Nigerians are unemployed, the employment objective/role of the SMls is far from being reached. Once of the hallmarks of the National Economic Empowerment and Development Strategy (NEEDS) is the empowerment of the poor and the private sector, through the provision of needed financial services, to enable them engage or expand their present scope of economic activities and generate employment. Delivering needed services as contained in the Strategy would be remarkably enhanced through additional channels which the microfinance bank framework would provide. It would also assist the SMls in raising their productive capacity and level of employment generation.[50]
The need for increased Savings Opportunity: the total assets of 615 community banks which rendered their reports, out of 753 operating community banks as December 2004, stood at N34.2 billion. Similarly, their total loans and advances amounted to N11.4 billion while their aggregate deposit liabilities stood at N21.4 billion for the same period. Also, as at end-December 2004, the total currency in circulation stood at N545.8 billion, out of which N458.6 billion or 84.12 percent was outside the banking system. Poor people can and do save, contrary to general misconceptions. However, owing to the inadequacy of appropriate savings opportunities and products, saving have continued to grow at a very low rate, particularly in the rural areas of Nigeria. Most poor people keep their resources in kind or simply under their pillows. Such methods of keeping savings are risky, low in terms of returns, and undermine the aggregate volume of resources that could be mobilized and channeled to deficit areas of the economy. The micro finance policy would provide the needed window of opportunity and promote the development of appropriate (safe, less costly, convenient and easily accessible) savings that would be attractive to rural clients and improve the savings in the economy.[51]
e. The Interest of Local and International Communities in Micro financing: Many international investors have expressed interest in investing in the microfinance sector. Thus, the establishment of a microfinance framework for Nigeria would provide an opportunity for them to finance the economic activities of low income groups and the poor.[52]
f. Utilization of SMEEIS Fund: As at December, 2004, only N8.5 billion (295) of N28.8 billion Small and Medium Enterprise Equity Investment Scheme (SMEEIS) fund had been utilized. Moreover, 100/0 of the fund meant for micro credit had not been utilized due to lack of an appropriate framework and confidence in the existing institutions that would have served the purpose.[53]
MICROFINANCE IN NIGERIA
Robust economic growth cannot be achieved without putting in place well focused programmes to reduce poverty through
empowering the people by increasing their access to factors of production, especially credit. The latent capacity of the poor for entrepreneurship would be insignificantly enhanced through the provision of micro finance services to enable them engage in economic activities and be more self -reliant; increase employment opportunities, enhance household income, and create wealth.
Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions. Three features distinguish microfinance, from other formal financial products. These are: (i) the someless of loans advanced and or savings collected, (ii) the absence of asset-based collateral, and (iii) simplicity of operations.
In Nigeria, the formal financial system provides services to about 35% of the economically active population while the remaining 65% are excluded from access to financial services. This 65% are often served by the informal financial sector, through Non- Government Organization (NGO)-microfinance institutions, moneylenders, friends, relatives, and credit unions. The non- regulation of these informal financial sectors by the Central Bank of Nigeria's (CBN) hinder its ability to exercise one aspect of its mandate of promoting monetary stability and a sound financial system.
The government recognized the fact that a microfinance policy which recognize the existing informal institutions and brings them within the supervisory purview of the CBN would not only enhance monetary stability, but also expand the financial infrastructure of the country to meet the financial requirements of the Micro, Small
and Medium Enterprises (MSMEs). Such a policy would create a vibrant microfinance sub-sector that would be adequately integrated into the mainstream of the national financial system and provide the stimulus for growth and development, it would also harmonize operating standards and provide a strategic platform for the evolution of microfinance institutions, promote appropriate regulation, supervision and adoption of best practices. In these circumstances, an appropriate policy was necessary to develop a long-term, sustainable microfinance sub-sector.
This policy was prepared in exercise of the powers conferred on the Central Bank of Nigeria by the provisions of Section 28, sub- section (1) (b) of the CBN Act 24 of 1991(as amended] and in pursuance of the provisions of Sections 56-60(a) of the Banks and Other Financial Institutions Act (BOFIA) 25 OF 1991 (as amended).
POLICY MEASURES AND INSTRUMENTS IN THE ESTABLISHMENT OF THE FRAMEWORK FOR MICROFINANCE BANKS
Private sector-driven micro finance banks shall be established. The banks shall be required to be well-capitalized, technically sound, and oriented towards lending, based on the cash flow and character of clients. There shall be two categories of Micro Finance Banks (MFBs) namely:
i) Micro Finance Banks community licensed to operate as a unit bank, and
ii) Micro Finance Banks (MFBs) licensed to operate in a state
The recognition of these two categories of banks does not preclude them from aspiring to having a national coverage, subject to their meeting the prudential requirements. This is to ensure an orderly spread and coverage of the market and to avoid, in particular, concentration in areas already having large numbers of financial institutions.
An existing NGO which intends to operate an MFB can either incorporate a subsidiary MFB, while still carrying out its NGO operations, or fully convert in to a MFB.
(i) MFBs Licensed to Operate as a unit bank (a.k.a. Community Banks)
MFBs licensed to operate as unit banks shall be community-based banks. Such banks can operate branches and/or cash centre subject to meeting the prescribed prudential requirement and availability of free funds for opening branches/cash centre. The minimum paid-up capital for this category of banks shall be N20 million for each branch.
(ii) MFBs Licensed to operate in a State.
MFBs licensed to operate in a State shall be authorized to operate in all parts of the State (or the Federal Capital Territory) in which they are registered, subject to meeting the prescribed prudential requirements and availability of funds for opening branches. The minimum paid-up capital for this category of banks shall be N1 billion.
THE ROLES AND RESPONSIBILITES OF STAKEHOLDERS
The roles and responsibilities of stakeholders shall include the following:
1. Government
a. Ensuring a stable macro-economic environment, providing basic infrastructures (electricity, water, roads, telecommunications, etc), political and social stability;
b. Fostering adequate land titling and other property rights sufficient to serve the collateral needs of borrowers and financial institutions;
c. Instituting and enforcing donor and foreign aid guidelines on micro-finance to streamline their activities in line with this policy; and
d. Setting aside an amount of not less than 1% of the annual budgets of state governments for on-lending activities of microfinance banks in favour of their residents.
2. Central Bank of Nigeria (CBN)
The roles of the CBN shall include the following:
a. Establish a National Microfinance Consultative Committee
b. Evolving a clear micro-finance policy that spells out eligibility and licensing criteria, provides operational/prudential standards and guidelines to all stakeholders;
c. Evolving a micro-finance sub-sector and institutional policies aimed at providing regulatory harmony, promoting healthy competition and mainstream micro financing with formal intermediation;
d. Adopting an appropriate regulatory and supervisory
framework;
e. Minimizing regulatory arbitrage through periodic reviews of the policy and guidelines;
f. promoting linkage programmes between universal development banks, specialized institutions and microfinance banks;
g. Continuously advocating market-determined interest rates for government-owned institutions and promote the channeling of government micro finance funds through MFBs; and
h. Implementing appropriate training programmes for
regulators, promoters and practitioners in the sub-sector, in collaboration with stakeholders.
3. Microfinance Institutions (MFIs)
Microfinance services providers shall:
a. Provide efficient and effective financial services, such as credit, deposits, commodity /inventory collateralization, leasing, and innovative transfer/payment services;
b. Undertake appropriate recruitment and retention of qualified professionals through transparent and competitive processes;
c. Adopt continuous training and capacity building programmes to improve the skills of staff; and
d. Strictly observe their fiduciary responsibility; remain
transparent and accountable in protecting saver's deposits.
4. Public Sector Poverty Alleviation Agencies
The MFB policy recognizes the roles of public sector MFIs and poverty alleviation agencies such as the National Poverty Eradication Programme (NAPEP)) in the development of the sub- sector. They shall be encouraged to perform the following functions:
a. Provision of resources targeted at difficult-to-reach clients and the poorest of the poor;
b. Capacity building;
c. Development of MFIs' activities nation-wide;
d. Nurturing of new MFIs to a sustaining level; and Collaborating/ partnering with other relevant stakeholders.
5. Donor Agencies
Donor agencies offer free or subsidized funds, donations or technical assistance for the development of the microfinance industry in Nigeria. They include bilateral and multilateral institutions, NGOs and missionaries with a pro-poor orientation. The services provided by donor agencies include grants, donations, technical assistance, etc.
The donor agencies, in conducting their microfinance activities, shall comply with the relevant provisions of this policy. The target clients for donors support may include: MFIs, NGOs, regulators and other relevant agencies. However, for the purposes of leveraging the evolving micro financing initiative, donors are expected to direct most of their assistance to licenced MFBs to ensure an orderly resource injection, transparency and synergy.
CHAPTER FOUR
SMES, ALTERNATIVE FINANCING OPTIONS
The foregoing analysis reveals some imperfections in the government paternalistic approach to MSMEs financing. In this section, various private financing options such as asset securitization, equipment leasing, mutual guarantee schemes and venture capitals are put forward as better alternatives to government funding. One or combination of these arrangements may be utilized by MSMEs to finance its business if properly packaged and made accessible to many of these enterprises who may take advantages of these products to improve on the quality of their products, access international market and ultimately maximize profits. These options may also be designed to attract many MSMEs, particularly those with track records and meaningful contribution to the national economy. These financing options are discussed below:
Assest Securitisation
Structured financing or Asset Securitisation (Securitisation) is a process by which illiquid assets such as receivables are converted into tradeable instruments or asset-backed securities (ABS). It can be used when a company or financial institution has a diversified pool of assets, which can be financed more efficiently by the sale of its receivable on the balance sheet with a view to (i) enhancing its capital adequacy. (ii) diversifying its source of funds or (iii) lowering its funding cost. Asset Securitization could be secured or unsecured. Mortgaged Backed Securitisation (MBS) could be said to be the most secured form of structured financing; although asset- backed securitisation (ABS) is also very useful for unsecured receivable. Mortgaged-hacked securitization is a scheme whereby a pool of secured 'receivables is assigned to a special purpose vehicle (SPY), which in turn raises funds in the capital market but arc secured by a charge on the real property of the company as security for the loan. The proceeds of the public issue are used to pay the pool of secured receivables. The public bond or debt issues is usually through a trustee in whose favour all the assets and undertakings of the Spy arc charged on behalf of note or bond holders. Asset Backed Securitisation (ABS), on the other hand, is a scheme whereby unsecured debts like consumer receivables, trade debts, equipment lease and the like, which provide good and steady cash flows are securitized. The securities issued by the SPV are not secured by a charge on some assets but backed by cash flows from the receivables financed.
Under an asset securitisation transaction, selected receivables (assets) are packaged together into a pool and sold by the originator to a special purpose vehicle (SPV). The SPY refinances the pool by issuing debt securities (including bonds, notes and commercial chapters secured by the assets) to investors in the. capital markets or in some other cases by private placements. The proceeds from the issue of securities are used principally to purchase the assets being securitised from the sponsor of the transaction. ABS could be unsecured or secured. The SPY's obligation in respect of the debt securities are supported by a first- ranking security interest over the securitised assets. This security interest is usually granted in favour of security trustees, which hold it on trust for the benefit of the investors and certain of the SPV’s other creditors.[54] Securitisation offers a great variety of benefits to both MSMEs fund investors. To MSMEs, it leads to improved asset-liability management and access to longer term funding. It also enables issues with sufficiently high level of balance sheet assets to transfer future cash flows generated from their operations to an (SPV): which the acquisition of assets by means of issuing debt securities to capital market investors. Furthermore, it gives the company the opportunity to have a better knowledge of the assets which may facilitate effective credit management. Finally, securitization has been actively used to collect the non-performing loans of the banking systems and to restructure the balance sheets of the debt-ridden conglomerates. Securitisation also offers benefits to the investors in many ways. First, it widens the investor's base for SME credit risk by providing him the opportunity to diversify some of his portfolio from large corporate exposure to quasi-retail risk. Second, because securitized loans arc staundardised and liquid, they are easily marketable to a variety of investors.
(2) Security over Chattels
Pledge and mortgage of chattels such as jewclleries, furniture, crops, cars and other valuables (which is very much available to many MSME entrepreneurs) is one of the oldest means of security financing by which a micro, small and medium entrepreneur could raise fund to finance his business raise fund to finance his business. A pledge, simpliciter, is the deposit of goods or documents of title of goods, or negotiable instruments with a lender as security on condition that it will be delivered to the depositor if the debt is rapid. Once the possessor right of “special property” right in the goods is transferred to the pledge or to any other person over which he has control, then a pledge transaction is consummated even though the legal ownership or title in the goods remains in the pledgor.[55] Chattel mortgage is legally permissible under the Bills of Sale Act 1878. However, the protection and enforcement of security in personal chattels in Nigeria is fraught with a number of problems, some of which include, but not limited to, the lack of control over the goods by the lender: the inability to take proper care of the goods: the difficulty in monitoring the goods and the possibility of a third party having priority over the creditor. The problem is further exacerbated by lack of credible registration system that may assist an innocent third party to deal with the asset without notice of the existing encumbrance. In theory, the record of transactions under the Bill of Sale Law is expected to be maintained by the Registrar of the High Court but in practice it is virtually non-existent or moribund. As noted by Smith, the whole operation of the Bills of Sale Law remains barely on chapter and the transactions under it remain rather dangerous and harmful to the interest of the creditor.[56]
It is, therefore, essential that the government should develop and maintain a coherent and predictable regulatory framework for the registration and enforcement of security interest on chattels which will allow the lenders to provide cheap and affordable loan to MSMEs on the strength of this species of security. Thus will require the establishment of public registry to keep records of securities over personal assets used as security the registry will also serve as repository of information to prospective lenders wiling to provide loan to the MSMEs on the strength of the same assets as security. It will enable lenders to conduct appropriate searches on the property which will reveal the existence of any encumbrances or pledges on the asset before further advances can be extended to the MSM entrepreneurs.
(3) Mutual Guarantees
Mutual guarantee companies are independent companies established primarily to guarantee investments in firms, particularly small businesses. Due to the preference of most institutional lenders for a third party guarantee, particularly mutual guarantee companies or insurance companies, the establishments of mutual guarantee companies in Nigeria will enhance the status of many MSMEs, who, due to low credit status, could not previously access credit and broaden their financial channels. The preference of a third party guarantee arose from several reasons. First, foreclosure or realization of collateral is very time consuming and costly in case of a default. Second, many lenders do not like to foreclose assets of the debtors because of the bad publicity it generates, but prefer to go after the guarantor when the primary debtor defaults. Thus, guarantee benefits the lenders by increasing the chances of obtaining repayment if the loan and minimizing the risk of default. Thus, guarantee benefits the lenders by increasing the chances of obtaining repayment of the loan and minimizing the risk of default. Third, guarantee allows banks to concentrate more on loan generation for the MSMEs and leaves the business of debt collection for the guarantors.
In Asia, mutual guarantee companies have played pivotal role in the development of MSMEs. One of such companies is the CapMac. In 1996, CapMac, one of the major US mono-line insurers, established ASIA Limited with capital support from Asian Development Bank and GSIC Singapore government’s investment arm. ASIAL Limited is the first mono-line insurer to provide financial guarantees to Asian companies, and build up an insurance portfolio totaling USD2.5 billion between 1996 and 1998. Japan also has Credit Guarantee Associations that provide public guarantee for MSMEs. In the United States of America, where the financial guarantee business is most active, major mono-line insurers such as MBIA, AMBAC, FSA and FGIC provide guarantees only to large enterprises (LE) or low risk entities such as government.
Venture Capital
Venture Capital are funds invested in a new enterprise that has high risk and the potential for a high return, particularly one in which the investor has no managerial control. Financing of MSMEs through venture capital by banks could be undertaken by indirectly investing in businesses of many MSMEs that are considered viable.[57] The legal basis for such investments is contained in section 21 of BOFID as amended. The section provides, “A bank may acquire or hold part of the share capital of any agricultural, industrial or venture capital company subject to the following conditions, that is, -
a) the venture capital company is set up for the purpose of promoting the development of indigenous technology or a new venture in Nigeria;
b) the shareholding by the bank is in small or medium-scale industries and agricultural enterprises as defined by the Bank;
c) the shareholding by the bank in any medium scale industry, agricultural enterprise or venture capital or any other business approved by the Bank shall not be more than ten per cent of the bank’s shareholders fund unimpaired by losses and shall not exceed fort per cent of the paid-up share capital of the company, the shares of which are acquired or held.
d) the aggregate value of the equity participation of the bank in all enterprise pursuant to this section does not, at any time, exceed in the case of commercial bank, twenty per cent of its shareholders fund unimpaired by losses or in the case of a merchant bank, not more than fifty per cent of its shareholders funds unimpaired by losses”….
(4) Equipment Leasing
Equipment leasing is an arrangement whereby the lessor (usually the lending bank) provides the funds, acquire title to the equipment and allows the lessee to use it for all (or most) of its expected useful life. During this period, the usual risks and rewards of ownership are substantially transferred to the lessee who bears the risks of loss, destruction and deprecation (fair wear and tear) only exempted, and of its obsolescence or malfunctioning[58] also bear the costs of maintenance, repairs and insurance. The regular rental payments during the primary period of the lease are calculated to enable the lessor to amortise its capital outlay and to make a profit from its finance charge.[59] Finance lease offers various tax advantages. In finance leasing, tax writing down allowances are claimed by the lessor, and the rentals payable by the lessee are reduced accordingly, the rentals are usually an expense allowed against the lessee’s liability to companies’ tax.[60]
In Nigeria, equipment leasing is presently undertaken by banks, finance houses and insurance companies in addition to their traditional banking and insurance functions. There is need for specialized equipment leasing companies to emerge to stimulate further investment in small and medium enterprises. For this to arise, it is essential that the government should develop and maintain a coherent and predictable regulatory framework for equipment leasing which will allow the industry to place innovative procedure in the events of default by the lessees. Presently, the state of law on equipment leasing is in state of lux. Recourse is generally made to the incoherent common law rules which are not best suited for contemporary equipment leasing arrangement in contradistinction to the traditional hiring arrangement. In addition, there is also the need to strengthen consumer protection law in order to give consumers the necessary confidence in the quality of equipment produced and sort of information that allows them to make free and educated choice about the products they purchase.
(5) Subcontracting
One of the private external sources of support for MSMEs is through subcontracting. Subcontracting arises where the large companies subcontract some of their production processes to MSMEs. MSMEs may be contracted to supply raw materials, technology, and product designs. They may also provide technical and marketing services for the large companies. In Japan for example, according to a survey by the SME Agency, in 1987, 55, 9 peer cent of MSMEs were engaged in subcontracting. Most large firms depend on MSMEs for the supply of parts and components. MSMEs also have an important position in a number of regional production networks, or clusters that constitute a part of regional economic activities in many parts of Japan. Subcontracting is attractive for many reasons. Although subcontracting may be hampered by several deficiencies such as delay in delivery of goods, supply of low quality, and inadequate supply of goods and services, yet it is believed to be transactional cost-efficient, in that at each level, the principal needs to contract with only a few contractors, each of whom, in turn, can contract with a small number of other subcontractors, etc. down the various tiers in the overall contractual structure.
CHAPTER FIVE
CRITICISMS OF MICROFINANCING
Raghuram Raj an , economic counselor and director of the International Monetary Fund's (IMF) research department has said that global effort should be geared towards making financial services available to all instead of focusing on micro-credit for the poor alone. Microfinance is about providing financial services to the poor who are traditionally not served by the conventional financial institutions. It is increasingly being touted as a miracle cure for poverty in the global market.[61]
Rajan said if it is true that micro-credit represents the cure for poverty, the question that should agitate the minds of people is, why is it not evenly widespread and how could it be extended? Lack of access to credit is one of the problems of micro-credit promoters. Common explabations are that the poor are not credit- worthy because they are untrustworthy, lack business opportunities or steady jobs, have little collateral and high cost of transaction as a result of the small size of the businesses they are doing. Rajan said that on closer examination; some of these explanations are questionable, adding that "there is no reason why the poor should be intrinsically more untrustworthy than their richer brethren”.
To help the poor, Rajan proposed the following:
1. Government should encourage the creation of infrastructure that can allow technology to bring down Transaction costs.
2. Giving every individual a national identification number and creating credit registries where lenders share information about their client's repayment records can be enormously valuable.
3. Government should reduce the costs of registering or repossessing collateral, as well as eliminate usury laws.
4. Government should encourage competition in the financial sector. As private sector banks find their traditional businesses coming under fierce competition, they will seek out nontraditional businesses, including providing services to the every poor.[62]
5. Another criticism is to the fact that the philosophy of Micro-Financing is tilting towards gender discrimination as favoritism i.e. apart from being for the "poor" it terms to be mostly for the women.
Micro - Finance & SME in the ongoing reforms in the nation's financial System.
In the on-going reform of the nation's financial system, the Central Bank of Nigeria has chosen to transform the existing Community Banks into Microfinance Institutions; and the relationship of microfinance institutions which the overall financial system, of which they should constitute an integral sub-set.
Microfinance institutions (MIs) are financial institutions with a special mandate, i.e. dedication to assisting small enterprises and poor households that generally have no access to the more formal elements of the financial system in mobilizing savings and using other financial services.[63]
In Nigeria and elsewhere, MIs take a wide variety of forms and exhibit various degrees of formality and informality. Whatever forms MIs may take they exist primarily to meet the unsatisfied demand created by the inability or unwillingness (or both) of the more formal financial institutions to offer to small enterprises and poor households adequate access to their deposit and credit facilities as well as other financial products and services. This unsatisfied demand arises from at least three layers of interacting constraints.
1. The first layer relates to the features of small enterprises and poor households.
* They may lack adequate knowledge of the various financial transactions available and how to access them.
* They may not be considered credit-worthy: the NINJA syndrome- no income, no job or asset; hence no suitable collateral.
2. The second layer of constraints is erected against small enterprises and poor households by the more formal financial institutions for perfectly good and understandable reasons:
* High opening and minimum account balances (to minimize operational costs);
* High travel time and transport costs involved in making deposits and withdrawals by small enterprises and poor households at bank branches (which are typically located in richer neighbourhoods where there is more business).
3. The third layer of constraints consists of problems faced by the more formal financial institutions in dealing with small enterprises and poor households:
* Asymmetry of information.
* Very high costs of small-sized transaction;
* Difficulty in enforcing legal rights.[64]
The MIs have developed innovative ways for dealing with these constraints:
➢ The barrier of physical distance is overcome as the MI goes to the clients.
➢ The barrier of social distance is addressed as MI loan officers have similar social status as the customers:
➢ Collateral problem is addressed through the creation of social networks, with social collateral requirement being met through group lending;
➢ Linking of savings and credit programmer overcomes the problems caused by asymmetry of information between lenders and borrowers;
➢ Group lending and its associated peer pressure also saves on transactions costs and increases loan repayment rates. Other Constraints
* Systemic: Inadequate information and database on borrowers, their credit history, and repayment records;
* Within MIs: inadequate book-keeping and reporting standards, internal controls, and efficient credit decision mechanisms;
* Within the supervisory authority: shortage of appropriate, skilled and trained staff, with integrity.[65]
CHAPTER SIX
CONCLUSION
This chapter discusses the growth and financial constraints of MSMEs in Nigeria and the fresh initiatives from the public and private sectors in MSMEs financing. It is obvious from this discourse that the existing public and private sectors financing mechanisms are insufficient to meet the needs of MSMEs. Therefore, there is the need for increased private funding through equipment leasing, credit guarantee scheme and venture capital to enhance the ability of MSMEs to access short and long term capital for their businesses.
Although the ABS, as a supplementary financing mechanism is relatively novel in Nigeria, the role market operators and investment bankers in this regard is to stimulate and accelerate the growth of MSMEs and make MSMEs financing attractive to investors. For capital market to be ready for MSMEs, the institutional and legal framework for ABS securitization may be put in place. Access to finance could be broadened by giving legal backing to existing Micro Finance Policy and SMICGS, through the enactment of SME Securitization Law that will regulate the licensing and operation of Micro Finance Institutions (MFIs). The proposed Securitization Law should address the issue of minimum capital limit, minimum retained earnings, or capital adequacy ratios, risk concentration limits (on single borrowers), liquidity limits and well-defined provisioning requirements as well as effective supervision of the Micro Finance Institution (MFIs). These regulatory requirements and prudential norms must be adapted and flexibly designed to reflect the specific characteristics and stages of evolution. Where a separate law is enacted, it will provide the necessary legal platform beyond ethical standard to implement MSMES development policies and to secure legal compliance. It can also be enhanced through increase partnership between the government and private financial institutions. Finally, specialized public institution such as Bank of Industry (BOI) and SMEDAN must partner in identifying viable MSMEs and help them to survive.
However, as the range of financing options for MSMEs become broader, banks and financial institution would need to adapt to meet the specialized needs of MSMEs, while balancing the risks and costs to compete effectively in the markets. Lending to MMSMEs must not be constrained by rigid credit assessment mechanisms and excessive collaterals but directed to viable enterprises with good prospects of success. As such, banks will need to exercise greater discretion when making credit evaluations of MSMEs. Loan documentation and origination processes must be simplified and cost-effective. There must also be in place appropriate risk management strategy to identify promptly unviable loans before they become bad and irrecoverable ones. In this regard, the development of private credit bureau for MSMEs that will provide banks and other financial institutions with easier access to MSMEs payment records and credit information is also desirable. This will also encourage MSMEs to manage their finances better and adopt greater financial transparency. Additionally, banks should also assist in developing capacity for MSMEs growth through the identification of specialists and research and development institutes that can complement MSMEs projects.
1. From what economic theory teaches us about the implication of segmented markets, we know that the ultimate goal of policy reform is to establish an integrated financial system of which MIs constitute a part. Therefore, policies directed at making MIs more viable should not end up by relegating the provision of efficient financial services to small enterprises and poor households to a separate and unequal existence. Rather, the goal should be to make efficient financial service available to all, even though their providers may vary quite widely.[66]
2. In an integrated financial system, there will be strong relationship between MIs and full-fledged banks (FFBs). As they complement each other by servicing substantially different client bases, the linkages between them should enhance financial deepening in the economy and, thus, promote growth. Both MIs and FFBs gain from a closer relationship.
• The MIs increase their effectiveness through access to financial services (provided by the FFBs) which facilitate their liquidity management; for example, emergency credit lines to cover cash shortfalls and expand their services.
• By working with MIs, FFBs can also expand their client base beyond a usually highly concentrated corporate or high net-worth clientele; in addition, FFBs benefit by helping to monitor MI clients.
• Clearly, stronger links between the MIs and FFBs in an economy would provide an important means of strengthening the links between the formal and informal sectors of the economy- this being, in itself, an important goal of the central bank.[67]
The achievement of this goal is not without a number of pre- requisites.
Among these are:
➢ Establishment of the infrastructure that will enable technology reduces transactions costs such as:
➢ Giving every individual a national identity number;
➢ Creating full-functioning and comprehensive credit registers;
➢ Reducing the costs of registering or repossessing collateral
➢ Improving consumer protection laws and services
➢ Encouraging competition across the board in the financial
sector
➢ Data base.
These would create and appropriate environment that will provide all financial institutions the incentives to develop innovative products and services for all segments of the economy and consumers.
CHAPTER SEVEN
ANNEX
Distinguishing features between a Microfinance Banks and Universal Banks
| |Criteria |Microfinance Banks Licensed to |Microfinance Banks Licensed to Operate in a |Universal Banks |
| | |Operate in as a unit bank in a LGA |State | |
| | |(a.k.a Community Banks) | | |
|A |Minimum paid-up |N20.0 million (increased from N50.0 |N1.0 billion |N25.0 billion |
| |capital/shareholders’ funds |million) | | |
|B |Scope of Activities covered by |To operate within a Local Government |To operate within a State |To operate nationally and in |
| |licensed |Area. |Not to engage in sophisticated banking |international markets |
| | |Not to engage in sophisticated |services such as forex business but can | |
| | |banking services such as forex |receive tenured loans and equity from abroad |To operate forex transactions |
| | |business | |and domiciliary accounts for |
| | | | |customers |
|C |Limitation on credit to an |Credit subject to a single obligor |Credit subject to single obligor limit of 1% |Single obligator limit applies |
| |individual |limit of 1% for an individual |for an individual /c | |
| | |corporate entity and 5% for a group | | |
| | |him | | |
|D |Limitations on deposits from an |No Limit |No Limit |No Limit |
| |individual a company | | | |
|E |Access to public sector deposits |Permitted for only micro-finance |Permitted for only micro-credit programmes on|Permitted |
| | |credit programmes on a non-recourse |a non-recourse basis and for payment purposes| |
| | |basis and for payment purposes | | |
|F |Cheque writing accounts |Cheque issuing customized to the |Cheque issuing customized to the |Cheque issuing permitted |
| | |correspondence bank |correspondence bank | |
|G |Geographical Coverage |In rural and urban areas |Must operate in both rural and urban area |All parts of Nigeria and |
| | | |within a State in a proportion prescribed by |foreign branches and |
| | | |the CBN |subsidiaries |
The central Bank of Nigeria (CBN) shall define the rural/urban areas for the purpose of this policy.
-----------------------
[1] Institutional lenders refer to commercial and investment banks, insurance and finance companies whose primary and secondary businesses involve the granting off loans to investors in returns for profit.
[2] See, A. Aderinoku, Managing Director of Guaranty Bank, “SME Lending in Nigeria”, Sunday Punch, 20th June 2004 (contending that there is no free munch in corporate finance and that there is no long-term money in the systems to justify any lending to MSMEs whose business ventures are risky and unpredictable and calls for more governmental encouragements to stimulate investment in this sector).
[3] Hse-Yu Chiu, “Can U.K. Small Businesses Obtain Growth Capital in the Public Equity Markets? - An Overview of the Shortcoming in the U.K. and European Securities Regulations and Consideration for Reform”, (2003) 28 Del. J. Corp. L. 933 (undertaking a comparative analysis of the regulatory regime for the raising of public equity capital from the capital markets in Europe and U.S.A. Chiu concludes that apart from the legal requirements for the insurance of securities at the capital market, the main obstacle to small businesses lies in the fixed costs associated with mandatory disclosure requirements that are applied to all forms of issues. He calls for a legal control of the cost of public offer to reduce cost of capital to small and medium businesses willing to attract funds from the capital market).
[4] As noted by the Central Bank of Nigeria, the formal financial system provides services to about 35% of the economically active population while the remaining 65% are excluded from access to finance services. The 65% are often served by informal financial sector comprises of Non-Government Organisation (NGO) – microfinance institutions, money lenders, friends, relatives and credit unions. See, Micro Finance Policy, id. Note 1 at pp. 2 & 4 respectively.
[5] Public choice can be defined as the economic study of non-market decision-making, or simply the application of economics to political science. The basic postulate of public choice, as for economics, is that man is an egoistic, rational, utility maximiser. Public choice theory focuses on the problems of aggregating individual preferences to maximiser. Public choice theory focuses on the problems of aggregating individual preferences to maximize a social welfare function or satisfy some set of normative criteria. In the context of governmental regulation, public choice theory justifies governmental regulation or establishments of conditions for efficient allocation of resources in the presence of market failure. For a seminal treatment of this theory, see, D. C. Mueller, “Public Choice: A Survey”, (1976) 14(2) J. Econs Lit. 395-433.
[6] SMEs: Engines of World’s Economies-Diamond Bank Publication, Punch Newspaper of 12/12/08.
[7] Ibid.
[8] Self-help groups and Grameen Bank groups: What are the differences? By Malcolm Harper.
[9] Ogunleye G. A., “Small and Medium Scale Enterprises as Foundation for Rapid Economic Development in Nigeria” in Ojo T. A. (ed.), op. cit 33 at p. 51; Mann R., “The Role of Secured Credit in Small-Business Lending”, (1997) 86 Geo. L. J. I. See also, Micro Finance Policy, id note 1.
[10] Mann R., op. cit. (suggesting that under US economy, large firms use more of unsecured credit to finance their businesses while small firms depend more on secured credit arrangements. He attributed this phenomenon to the limited capital of secured credit to lower the lending costs of creditworthy companies. In addition, big enterprises do not require secured financing because of the leverage they have but rely heavily on negative pledge).
[11] See generally, White J. J., “Efficiency Justifications for Personal Property Security”, (1984) 37 Vand. LR 473, 491-502 (absent security, risk-averse creditors would not lend to risk creditors); Ross, “The Determination of Financial Structure: The Incentive-Signaling Approach”, (1977) 8 Bell I, Econ. 23 (absent security, high risk companies are undervalued and managers have no incentive to extend credit); But see Barnes R. L., “The Efficiency Justification for Secured Transaction: Foxes with Soxes and Other Fanciful Stuff”, (1993) 42Kan L. Rev. 13; Schwartz, “The Continuing Puzzle of Secured Debt”, (1984) 37 Vand. L. Rev. 1051 (criticizing risk aversion explanation); V. Finch, “Security, Insolvency and Risk: Who pays the Price” (1999) 62 MLR 633, 637-653 (analyzing the efficiency theory in relation to SMEs)
[12] Modgliani & Miller, “Cost of Capital, Corporation Finance and the Theory of Investment”, (1958 48(3) Am Econ. Rev 261-270-75 (The M7M Theorem states that under certain idealized assumptions, the cost of capital to the firm and the total value of the firm are independent of the firm’s capital structure. Succinctly stated, the corporate capitals structure is irrelevant in the investor’s decision to grant loan to any firm provided the firm can meet the cost of capital charged by the investor. The assumptions, upon which the M&M Theorem rest can be categorized as follows: (1) No income taxes: There are no income taxes in the economy, either at the firm level or the individual level, (2) Equal borrowing cost: Individuals can borrow at the same interest rate as corporations. (3) Efficient market hypothesis: Information regarding securities, corporations, and markets is freely available and commonly understood by all market participants. This implies that insiders do not have better information than other investors and that all investors share homogeneous expectations about the future prices of securities. (4) Perfect markets: There are no bankruptcies, transaction, contracting, or agency costs. This assumption implies that the firm’s investment policy is fixed and its cash flows are given. The basic insight of the irrelevance Theorem is that investors (under the conditions specified by the Theorem) can purchase stocks of firms with differing mixes of debt and equity securities, thus achieving an optimal portfolio of risk). See also, Stiglitz, “On the Irrelevance of Corporate Financial Policy”, (1974) 64am. Econ. Rev. 851, 859.
[13] F. H. Oditah, Legal Aspects of Receivable Financing, (Sweet and Maxwell, London 1990) pp. 15-17; S. L. Harris & C. W. Pooney, “A Property-Based Theory of Security Interest: Taking Debtors’ Choice Seriously”, (1994) 80 Va. L. Rev. 2021, P.M. Shipack, “Solving the Puzzle of Secured Transactions” (1989) 41 Rutgers L. Rev. 1067.
[14] See H. Chiu, supra note 4.
[15] See generally, Stiglitz, J. and Weiss A., “Credit Rationing in Markets with Imperfect Information” (1981) Am Econ. Rev. 71, 93-40 (observing that small and medium scale firms with opportunities to invest in positive net present value projects may be blocked from doing so because of selection and moral hazard problems. Adverse selection problems arsie when potential providers of external finance cannot readily verify whether the firms have access to quality projects). See also Oditah, Id Note 16 at p. 15. J. J. White, Id. Note 14; A Schwartz, The Continuing Puzzle for Secured Debts, Id Note 14. R. T. Smith, “Money and Credit with Asymmetric Information”, (1994) 3J. Fin. International 215; H. Berger, “Screening v. Rationing in Credit Market with Imperfect Information” (1985) 75Am. Econ Rev. 850; O. G. Amokaye, “The Efficacy of Guarantee as Security in Contemporary Climate”, in I. O. Smith (ed.), Secured Credit in a Global Economy (Department of Private & Property Law, Faculty of Law, University of Lagos, 2003) 203 at p. 223 (analyzing the informational asymmetric theory in the acceptance of surety by banks).
[16] F. H. Oditah, supra note 16 at 15; Armen A. Alchian & H. Demsetz, “Production Information Costs, and Economic Organization” (1972) Am. Econ. Rev. 777; Jackson & Kronan, “Secured Financing and Priorities Amongst Creditor” (1979) 88 Yale L. J. 1143; A Schwartz, “Taking the Analysis of Security Seriously” 1995 80 Va. L. Rev. 2072 at 2076-86.
[17] The concept of “national Cake” emanated from the false assumption by Nigerians that Nigeria is a rich country given her earnings from oil resources. Due to the persistent corruption in the polity, Nigerians see access to public offices or public funds as an opportunity to line their pockets.
[18] Ogujiuba, K. K., Ohuche, F. K. & Adenuga, A. O., “Credit Availability to Small and Medium Scale Enterprises in Nigeria: Importance of New Capital Base for Banks-Background and Issues”, Unpublished working chapter of AIAE (2004.
[19] CBN, Micro Finance Policy, op. cit at p. 6. See also The Guardian, November 26, 2001.
[20] Central Bank of Nigeria Statistical Bulletin, Volume 13, December 2002, p. 57.
[21] NLNG Projects were financed by a consortium of international and local banks.
[22] Following the pull-out of EWI from V-Mobile, the bulk of financial assistance was procured from First Bank Plc., a major shareholder in V-Networks Limited (operators of V-Mobile). The bank also served on V-Mobile Board until fairly recently when it finally diverted itself from the companies.
[23] Between 1992 and 2002, the ratio of loans to SMEs by commercial banks dropped from 48.8% in 1992 to 8.6% in 2002.
[24] Central Bank of Nigeria Statistical Bulletin, Volume 13, December 2002, p. 57.
[25] Central Bank of Nigeria Statistical Bulletin, Volume 13, December 2002.
[26] Any commercial and merchant banks involved in granting loans to eligible enterprises and projects under the Act.
[27] National Economic Reconstruction Fund Act, Cap. 254, Laws of the Federation, 1990, section 5 (1) (b) (requiring participating bank to evaluate eligible enterprises and projects and approve loans in accordance with the practice of the particular banks and be responsible for the disbursement, monitoring and recovery of the loans). See in particular section 2(b).
[28] National Economic Reconstruction Fund Act, Cap. 254, Laws of the Federation, 1990, section 5(2).
[29] During the Second Republic (1979-83), there were reports of abuse of executive powers by many ministers who used their influence to appoint their friends, cronies and patrons to many juicy government parastatals. Cases of over-invoicing and import licensing racketing were massively reported.
[30] Interest rates in Nigeria officially are as high as 23.6% and this has a negative impact on the ability of SME to obtain credit from the banks.
[31] Managing exchange rates in Nigeria has proved a very challenging task to many regimes. Before 1995, the Exchange Control Act of 1962, which essentially prohibited the sale and purchase of foreign currently, mainly featured a fixed exchange rate regime. The policy was aimed at controlling imports and the incidence of high tariffs. A partial liberation of the exchange rate commenced in 1986, with the addition of Second Tier Foreign Exchange Market (SFEM). While exchange rate management under the then Foreign Control Act of 1962 was reserved for official government business, the Second-Tier Foreign Exchange Market was used for other commercial transactions. The disparities in the management of FOREX introduced distortions in its role in sustaining the business environment. While the FOREX (IFEM) market went as high as N135 per dollar, the government official rate was still N22 to the dollar; this situation made it difficult for businesses to secure FOREX because of round tripping and instability in the price of foreign exchange.
[32] Although debit card and ATM Card have been introduced in Nigeria about a decade ago, credit card financing is not very popular in Nigeria. Many Nigerians still transact business on cash and carry basis.
[33] For a seminal treatment of the role of credit card companies in providing unsecured credit to small enterprises, see generally, R. Mann. “The Role of Secured Credit din Small-Business Lending”, (1997) 86 Geo L. J. 1.
[34] Some of these international donors include foreign governments, international organizations, foundations and international non-governmental organizations.
[35] Basu A., Blavy R. & Yulek M., “Microfinance in Africa: Experience and Lessons from Selected African Countries”, IMF Working Chapter 04/174, September 2004 available online at .
[36] 1999 Constitution of the Federal Republic of Nigeria, section 16.
[37] Cap. 254, Laws of the Federation, 1990 (now retained as Cap. N32, Laws of the Federation of Nigeria, 2004).
[38] National Economic Reconstruction Fund Act, section 1 (2) (a) – (d). See also the preamble of the Act.
[39] Small and Medium Scale Industries Development Agency (Establishment) Act, 2003, section 1.
[40] Small and Medium Scale Industries Development Agency (Establishment) Act, 2003, section 8; see Akintunde O., “SMEDAN Univeils Strategies to Grow MSMEs”, “The Punch, Monday, February 20, 2006 at 29; “SMEDAN Unfolds Strategies for Enterprises Promotion”, Vanguard, Friday, March 1, 2006.
[41] NERFUND Act, section 2(1). For the purpose of this Act, a business is classified as SME if the fixed assets, other than land, including the cost of investment project does not exceed N10million and in case of manufacturing enterprises or project, at least 40 per cent of its raw materials and other production inputs is locally derived or at least 60 per cent of its raw material shall by 30th September, 1990 be so derived. Id. Section 2(1) (1)-(c).
[42] See financing constraints issues discussed under the sub-heading: MSMEs and the Financing Quagmire, supra.
[43] Micro Finance Policy , Id. Note 1 at 9.
[44] Micro Finance Policy , Id. Note 1.
[45] Micro Finance Policy, Id. Note 1 at p. 7.
[46] CBN Dec. 2005: Microfinance Policy, Regulatory and Supervisory Framework for Nigeria.
[47] Ibid.
[48] Ibid.
[49] Ibid.
[50] Ibid.
[51] Ibid
[52] Ibid.
[53] Microfinance Policy, Regulatory and supervisory Frame work for Nigeria CBN Abuja Dec. 2005.
[54] P. A. U. Ali, The Law of Seared Finance, (Oxford, 2002) pp. 8-9; Olaniwun Ajayi, “The Paradox of Cinderella and the Beggar Maid: Legal Aspects of Securitization” in O. Ajayi (ed.) Legal Aspects of Finance in Emerging Markets, (Lexis-Nexis South Africa, 2005) 140, 145-146; P. A. U. Ali, “The Future of Loan Portfolio Management: An Overview of Synthetic Colaterised Loan Obligation”, (2001) 12JBFLP 58; S. L. Schwartz, “The Alchemy of Asset Securitization” (1994) 1 Stan. J. of Law Bus. & Finance 133.
[55] For a seminal treatment of this topic, see generally, Chitty on Contract, (Sweet & Maxwell, 1998 28th ed.,) p. 571; I. O. Smith, Nigerian Law of Secured Credit (Ecowatch Publications Limited 2001) 176: R. Goode, Legal Problems of Credit and Security, (Sweet & Maxwell, 3rd ed, 2003), 31.
[56] I. O. Smith, Globalization of Security: Problems and Prospects, (Department of Private and Property Law, University of Lagos, 2003), 21.
[57] Venture capital is a practical demonstration of the relational theory of financing espoused by Scott which involves the issuance of a privately issued debt to finance a firm’s growth opportunities or financial prospect and for parties to cooperate among themselves and forgo any actions that threaten the relationship in order to reap the benefits of the transactions by both parties. Such cooperation minimizes the demand for collateral, reduces monitoring cost, and promotes profit maximization objects of both parties. See generally, Scott R. E., “A Relational Theory off Secured Financing”, (1986) 86 Column. L. Rev. 901; Eric C. Sibbitt, “Law, Venture Capital and Enterprises in Japan: A Microeconomic Perspective on the Impact of the Law on the Generation and Financing of Venture Business”, (1998) 13 Conn. J. Int’L 61.
[58] R & B. Customs Buckely Co. Ltd v. United Dominion Trust Ltd, (1988) 1 WLR 321, 331, 332.
[59] See generally, Chitty on Contract (Sweet & Maxwell, London). C. Half, “Funding Growth: Leasing and SME Financing in Russia”, (2002) 43 Harv. Int’l L. J. 469.
[60] K. V. Kamath, S. A. Kerrar & T. Viswanath (eds.) The Principles and Practice of Leasing, (Lease Asia, 1990) Chapter 2 at pp. 17-32.
[61] Article by Alao Salimon in Financial Standard. Apirl 24, 2006.
[62] Ibid.
[63] The Challenge of Microfinance in Nigeria by T. Ademola Oyejide: Chairman’s opening remarks offered at the 2007 Annual National Seminar of the Nigeria economic Society held on 3rd April 2007 at Lagos Airport Hotel, Ikeja.
[64] Ibid.
[65] Ibid.
[66] The Challenges of Microfinance in Nigeria by T. Ademola Oyejide: Chairman’s opening remarks offered at the 2007 Annual National Seminar of the Nigeria economic Society held on 3rd April 2007 at Lagos Airport Hotel, Ikeja.
[67] The Challenges of Microfinance in Nigeria by T. Ademola Oyejide: Chairman’s opening remarks offered at the 2007 Annual National Seminar of the Nigeria economic Society held on 3rd April 2007 at Lagos Airport Hotel, Ikeja.
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