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SMEs left out as banks open tap on lending

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries.

SMEs account for the majority of businesses worldwide and are important contributors to job creation and economic development. They represent about 90 percent of businesses and more than 50 percent of employment worldwide. Formal SMEs contribute up to 40 percent of national income (GDP) in emerging economies. Despite this important role, banks’ lending to SMEs are said to be declining.

“After an initial spike during the early days of the COVID-19 pandemic, there was a decrease in the outstanding loan amounts to SMEs as a share of GDP across many economies in 2022,” said the International Monetary Fund (IMF) in a recently released results of its fourteenth annual Financial Access Survey (FAS).

The FAS data, which also point to a concerning dip in the outstanding value of commercial bank loans extended to SMEs relative to GDP, indicate that SMEs’ ability to access bank financing may be more constrained and/or demand for credit might have weakened due to tighter financing conditions.

One of the biggest challenges faced by SMEs in Nigeria is limited access to traditional funding sources. Many SMEs do not have the collateral or credit history required to secure loans or other types of financing from banks or other financial institutions.

In Nigeria, lack of capital at affordable interest rates hinders the business growth. Banks give out loans with an average interest rate of 25 percent. With such a high interest rate, many businesses are unable to find suitable funding for their enterprise.

The IMF further noted that of the 61 economies that have consistently reported SME data over the past four years (2019-2022), a large majority (75 percent or 46 economies) reported a decline in outstanding commercial bank loans to SMEs as a share of GDP between 2021 and 2022.

Recently, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) said that small businesses in the country will continue to struggle for breath due to lack of credit facilities. The agency noted that only 2,083,222 out of 49.6 million existing micro, small and medium enterprises (MSMEs) have access to credit facility for business expansion and sustainability.

“This decline can be attributed partly to the unwinding of support measures such as credit guarantees and moratoriums on debt repayments, implemented in 2020 in response to heightened liquidity demands and to stave off potential bankruptcies and job losses in SMEs,” the IMF said.

“SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises,” the World Bank said. It noted that “about half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account”.

In Nigeria, the Development Finance Project of the World Bank supports the establishment of the Development Bank of Nigeria (DBN), a wholesale development finance institution that provides long-term financing and partial credit guarantees to eligible financial intermediaries for on-lending to MSMEs. The project also includes technical assistance to DBN and participating commercial banks in support of downscaling their operations to the underserved MSME segment.

On behalf of the federal government and multilateral institutions, Nigeria’s Bank of Industry said it disbursed over N1.6 trillion to MSMEs through direct interventions and various intervention funds between 2015 and June 2023.

DBN had said its disbursement to more than 225,000 MSMEs exceeded N512 billion in five years.

The International Finance Corporation estimates that 65 million firms, or 40 percent of formal MSMEs in developing countries have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending.

Many small businesses often do not have the assets on which to secure a loan. Banks usually have a risk-averse attitude to new projects/businesses. If a business/project is considered risky, banks may charge a higher interest rate, which a small business cannot afford, or the bank may decide not to lend at all.

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