Opanachi: No Bank Will Take Credit Risk for Political Borrowers

The Development Bank of Nigeria was established in 2017, with the aim of alleviating financing constraints faced by micro, small and medium enterprises in the country. The Managing Director of the bank, Mr. Tony Okpanachi, in this interview speaks on the

The Development Bank of Nigeria (DBN) just marked its one year in operations, what has been the experience so far. Are the Participating Financial Institutions(PFIs), which you use as intermediaries not seeing this as another profit-making venture because lending rates have remained high. Besides, what has been the sectoral spread?

We are a wholesale institution so we encourage the financial institutions ( DFIs) to go into different sectors. We are not excluding any sector, especially any sector that has growth and job creation potential benefit. In terms of the nature of our intervention, so far, what we have seen is that funds have been used for expansion, because we are encouraging longer tenure funding. That is the key differentiating factor of DBN. We encourage PFIs to give longer tenure long loans to MSMEs so that they have enough time to stabilise their business and begin to repay. So in the education sector, for instance, what we have seen is one or two taking DBN loans to build hostels, classrooms and laboratories. It is more like infrastructural lending and not for working capital. Now, if you talk about the on-lending and single digit interest rate, I have said that financial stability is one of the things DBN has to focus on and in doing that, in our pricing model, we want to put that into consideration. We are not an intervention fund. This is funding by a financial institution that is providing longer term fund. So the risks of the borrowers lie in the financial institutions. The PFIs also price the risk appropriately to determine what rate. But in our engagement with them, we influence to some extent how the rate will go. Remember they are the ones to give the credit risks, so we engage them. If you look at the difficulty of that segment accessing funds, not only about the pricing, but also stability and availability of the funds is key. If you talk to most MSME operators, they will you tell you give me the money let me even see the money first. So, we work to encourage these financial institutions to lend to them and in encouraging them to lend to them, you must realise that they take credit risk and this should be priced appropriately. However, in the long- run, the strategy of DBN is how to see the continuous provision of the funding and be able to keep the pricing lower and on a sustainable basis. But the key thing for us is sustainability not just intervention once and then you run out funds and not be able to continue to lend on the long run. If you look around, it is the sustainable financing of that sector that has brought down interest rate and pricing because once the funding is there, you create competition even among the financial institutions. So, without being prompted, if you have option, you go to bank A and if it is charging you rate that is high, you can switch to another bank and this will bring down the pricing on the long run. However, if you look at the MSME segment very well, pricing alone is just one cost. There are so many other factors that affect their eventual cost. If you look at the study that has been done over time in terms what is key that affect MSMEs most, you will find out that the cost of funding is almost about the fifth item. There are so many issues that need to be dealt with for them to be able to breakthrough, even if you give them loan at one per cent there are so many other factors that affect them. For instance, infrastructure and others, are things that are being dealt with at the macro level. We should be not fixated on the issue of pricing because it is just one key. If you look at hierarchy of issues affecting that segment, pricing will be about number five. A lot of them will tell you that availability is not even there. Two, most of them will tell you give me the money, I know how to price my products in such a way that I will still make my money. So, pricing is key and very important but that is not the only factor affecting overall operations in the sector. From experience, commercial banks are set up for business, right? but they also know that as long there is competition, free market bring competition. And what determines which bank you go to is the one that gives you the best pricing. So, as long as we going to create competition in the market and availability, then be assured there will be more sustainable pricing at affordable rates. Commercial banks are not set up to fleece their customers and of course if they run customers out of business, they will not be there to do operate tomorrow. So, it is the pricing of whatever risk they are taking that will determine their eventual rate. DBN does not have any fear that the PFIs would want to take advantage of MSMEs because it is just that we provide an intervention fund and we give it out at particular rates. However, we engaging with the financial institutions in terms of sustainable pricing.

But there is the fear that there could still be people who borrow these funds and divert the loan for political purpose?

I can assure that the way DBN operate, we are a wholesale financial institution. I can assure you that no microfinance bank or commercial bank will want to take credit risk for any political borrowers whom people think may come in to hijack the system. Secondly, we ought to get to see who the end borrowers are. We also do monitoring and evaluation. We still go beyond to see if the money is being utilised as stated by the borrowers. So, I can assure that the fact these financial institutions do their analyses and assessments, we still do our part to ensure that the PFIs do not accommodate political borrowers.

Talking about guarantees, why do you have to float a separate company for this. How much loan have you given out so far, what has been the spread and what are you projecting this year?

You know, the business of providing guarantee is different from lending. This is the first time we want to set up such a company in Nigeria, a wholly credit guarantee company whose job will be to provide guarantee. You have some in Africa but in Nigeria we don’t have any. Now, being a subsidiary also ring fences it from what DBN will do. We can go on with our lending activities and also provide guarantees. For example, when financial institutions say their need is not funding but they want you to share with them, you have to have a specialised institution that can dissect that situation properly based on the risks involved. That is why a subsidiary is being set basically for that. It is going to be fully owned by DBN so that its objectives too are aligned with DBN’s overall objectives. That is one.

As you know DBN formally commenced lending operations in October 2017, to its first two PFIs, which were microfinance banks. But with a strong on-boarding exercise it carried out within the year, the bank currently has a total of 29 PFIs which include commercial banks at various stages