Stories by Omodele Adigun
There is no gainsaying the fact that Small and Medium Enterprises (SMEs) are critical to the development of any economy.
This is due to their “great potential for employment generation, improvement of local technology, output diversification, development of indigenous entrepreneurship and forward integration with large-scale industries,” according to the Central Bank of Nigeria (CBN).
However, there has been gross under-performance of the SMEs sub-sector in the country, and this has undermined its contribution to economic growth and development. The Financial Sector Strategy (FSS) 2020 SME Sector Report of 2007 blamed this on four key issues. These are unfriendly business environment, poor funding, low managerial skills and lack of access to modern technology. Among these, shortage of finance occupies a very central position.
To worsen their situation, commercial banks, which remain the biggest source of funds to SMEs have, in most cases, shied way because of the perceived risks and uncertainties. The fragile economic environment and absence of requisite infrastructure do not help the matter as they have rendered SME practice costly and inefficient, thereby worsening their credit competitiveness.
To improve access to finance by SMEs, the CBN recently approved the investment of N500 billion debenture stock to be issued by the Bank of Industry (BoI) with effect from May, 2010. In the first instance, the sum of N300 billion was to be applied to power projects and N200 billion to the refinancing/restructuring of banks’ existing loan portfolios to SME/manufacturing sector.
The central bank has published the procedure for accessing the fund. According to Lesgupnigeria, an online financial platform, they include: Is your business in any of the following areas – agriculture, manufacturing, cottage industries, artisanship, services, trade and general commerce, renewable energy/energy efficient products and technologies; other income generating projects as may be prescribed by the CBN. If yes, prepare your business plan or statement on how much you want for your business. You can get loan of up to N500,000 for your micro-business and N50 million for SME. Then go to your bank or any of the following institutions to access the fund: microfinance banks, commercial banks, cooperatives, finance companies, NGO-microfinance institutions, Development Finance Institutions (DFIs), such as Bank of Industry (BoI) and Bank of Agriculture (BoA). Tell your bank how much you need. Your bank will discuss your request and provide you the money. The maximum interest rate of nine per cent pa (charges inclusive) is applicable to all loans.
Period for the repayment of the loan
For micro business, it is a maximum of one year, while for SMEs, it is a maximum of three years.
NOTE: 60 per cent of the fund is reserved for enterprises owned by women; two per cent for persons living with disability and 10 per cent for start-up businesses.
The apex bank also issued the guidelines for the N200 billion re-financing and restructuring of banks’ loans to the manufacturing sector with the objectives of fast-tracking the development of the SMEs and manufacturing sector of the Nigerian economy and improving the financial position of the deposit money banks.
Complementary to this, the CBN also established a N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) for promoting access to credit by SMEs in Nigeria. The guidelines are as follows:
The activities to be covered under the scheme are manufacturing, agricultural value chain, educational institutions and any other activity as may be specified by the managing agent from time to time.
Criteria for participation
Participating Bank (PB): All Deposit Money Banks (DMBs) and Development Finance Institutions (DFIS).
A borrower is expected to meet the following criteria to be eligible: Any entity falling within the definition of an SME; a wholly-owned and managed Nigerian private limited company registered under the Companies and Allied Matters Act of 1990; a legal business operated as a sole proprietorship and a start-up company with satisfactory cash flows indicating a fixed asset cover ratio of 100:150.
Others include a franchise; have no non-performing or delinquent loans with any financial institution; be a member of the Organised Private Sector bodies/associations such as Nigerian Association of Small & Medium Enterprises (NASME), the Manufacturers Association of Nigeria ( MAN), etc.; have a clear business plan; provide up-to-date records on business operations, if any; and satisfy all requirements specified by a participating bank.
A borrower is expected to have one loan under the scheme at any point in time.
Maximum loan amount is N100 million, which can be in the form of working capital, term loans for refurbishment/equipment upgrade/expansion, overdrafts.
The guarantee cover is 80 per cent of principal and interest and is valid up to the maturity date of the loan with a maximum tenure of seven years, inclusive of a two-year moratorium. The guarantee shall be executed at the point of the loan disbursement by the bank to the customer and shall be redeemed when the facility becomes non-performing and classified under the loss category of the Prudential Guidelines.
In the event of recoveries after payment of claims by the CBN, such recoveries shall be shared in the ratio of 80:20 for CBN and participating banks respectively.
Procedure for applying
All loan applications by SME promoters under the scheme shall be made directly to the PB accompanied by the necessary documents as per normal loan processing requirement and the PBs applying the same degree of due diligence and professionalism as in the normal course of banking business.
Applications received by PBs should be processed promptly and the period elapsing between the submission of an application and requisite documents for appraisal under the scheme and its approval or otherwise will not exceed 60 days. Banks may call for information, which has not been sufficiently provided by the applicant. Officials of the managing agent may call on banks, which have not acted within a reasonable time on any application submitted to them.
PBs should submit application for guarantee using a standard application form, on behalf of their clients to the managing agent (CBN).