By Mordi, Frederick
African Business , No. 361
During his first term in office, Nigeria's immediate past president, Olusegun Obasanjo, caused a stir at a meeting with the Bankers' Committee when he declared that he would not leave the venue until the nation's bank chiefs gave him their word that they would reduce loan interest rates. Obasanjo made the declaration following the avalanche of petitions that he received from manufacturers in the country, especially the small and medium enterprises (SMEs), over their difficulty in accessing credit from the banks and charging high interest rates when they do.
It was chiefly due to his efforts that the Bankers' Committee eventually approved the Small and Medium Enterprises Equity Investment Scheme (SMEEIS), at its 1999 meeting. The voluntary scheme required all the eight banks in the country to set aside 10% of their profit after tax each year for equity investment in SMEs, regarded as the most effective vehicles for rapid industrialisation, poverty alleviation and employment generation. It was further stipulated that 10% of their funds went into lending to microfinance enterprises. This gave many SMEs a new lease of life. But three years after Obasanjo left office, loan interest rates have crept up, eroding the profit margins of those small business owners who eventually managed to access bank loans. Nigeria's current president, Umaru Yar'Adua, has also directed the banks to make lending to the real sector of the economy a priority but the president's directive has not had that much impact. Their major preoccupation has been how to recover funds trapped outside the financial system.
The managing director of Afrinvest West Africa Ltd, Ike Chioke said: "Credit availability in 2010 will be more constrained and targeted only at borrowers with excellent credit ratings: governments, blue-chip corporates and 'select' high-net-worth individuals. Retail consumers who have borne the brunt of a near-total credit freeze will still remain largely frozen out for much of 2010, in our view."
The group MD of the United Africa Company of Nigeria plc (UACN), Larry Ettah says: "The whole banking issue has aggravated what was already a problem for manufacturers. Nigeria, even before the banking crisis, required an economic stimulus package and the banking crisis has now made us require a greater amount of stimulus. The educated guess is that this may be with us for another year."
In his assessment of the current situation in the sector, the president of the Manufacturers Association of Nigeria (MAN), Alhaji Bashir Borodo, echoed these sentiments. He added, "The current interest rates charged by the banks hover between 15% and 25%. It appears there are still some hidden charges.
This is what drives the rate up. The government should do something about this because high interest rates erode profit margins. The banks are even more strict now in lending to the SMEs who do not have adequate collateral, for fear of entering into bad debt."
Faced with this scenario, manufacturers may be forced to scale down their operations. This may affect profitability and growth, lead to a downsizing of the workforce and ultimately to factory closures, if something is not done about the credit crunch fast, he warns. …