Access to Credit and Nigeria’s Economic Development
Current policy initiatives signpost commitment to push economic growth and development, argues Bernard Okumagba
There is broad agreement that Nigeria with over 160 million people, an entrepreneurial spirit, natural resources, and an economic policy framework that looks increasingly market – driven has a promising future. In the last few years as Nigeria has come into the global development picture with GDP growth averaging 6-7.5 per cent a year, it has become fashionable to look at the unlocking of Africa’s biggest economy. Only in April, a rebasing of the country’s economy captured economic sectors like entertainment and fashion and pushed the country’s GDP to the fore on the continent. The rebasing of the GDP released in April this year put Nigeria’s GDP at $510 billion, eclipsing that of South Africa and moving up to the 26th largest economy in the world. However, even as lovely as the figures are, with the deficiencies in infrastructure and untapped economic potential, the opportunities for growth are bountiful. Just an indication would do. Before the Telecommunications sector was commercialized in the late 1990s, that sector hardly contributed much to the GDP but after the licensing of new operators and the expansion of opportunities in ancillary industries, telecoms is now a major economic sector. Similar opportunities beckon in the power sector, midstream and downstream sectors of the oil industry, where the operating templates have either been restructured or are in the process of being restructured. In the power sector, for instance, there is a convergence across all classes that once the nascent industry settles on the path of growth, the multiplier effect on the rest of the economy will be akin to a positive explosion.
The overriding goal of Nigeria’s Vision 2020 Economic Transformation Blueprint is for the country “to become one of the top 20 economies in the world by the year 2020.” One of the sub goals is to grow the contribution of manufacturing and services to 25 per cent of GDP, up from about seven (7) per cent currently. Vice President Namadi Sambo said at the 42nd annual general meeting of Manufacturers Association of Nigeria (MAN) in August this year that, “The manufacturing sector reported 22 per cent growth in 2013, compared with 14 per cent in 2012. Capacity utilisation increased from 46.3 per cent at the start of 2013, to 52.7 per cent at the end of 2013, with further improvements continuing this year 2014. “In 2013, the Central Bank of Nigeria, reported a 952 per cent increase in receipts from exports of manufactured products from Nigeria”.
There are expectations it could match the runaway success stories of the Asian Tiger economies, going by a report by McKinsey Global Institute, an arm of the US-based consultancy McKinsey and Company. It said that, “We believe Nigeria is more likely to follow the pattern seen in high-growth developing countries such as Indonesia, Malaysia, and Thailand during their periods of strongest expansion in manufacturing. The contribution of manufacturing to GDP at the start of these countries’ growth periods is much more like that of Nigeria today than those of China or Vietnam in the early 1990s.”
The country has a large pool of talent and entrepreneurial capital, evidenced by creative startups in Information and Communications Technology, online trading platforms, fashion, entertainment and of course, big business.
Nigeria’s pool of talent is a major attraction for potential investors. However, businesses have a hard time accessing capital to set up and grow. This problem has seen ideas wither along the line. Access to capital is a major ingredient in growing businesses and economies. Nigeria performs poorly in this regard, as are most developing economies. The International Finance Corporation (IFC), the private sector lending arm of the World Bank, states the problem in perspective thus: “Lack of access to finance is a key constraint on the growth of small and medium enterprises in Sub-Saharan Africa, and thus also an important limitation on employment, economic growth and shared prosperity. African financial systems have improved in the past two decades but still lag behind other developing economies, hampering the positive effects of current record financial inflows.” On this score, Nigeria performs poorly when compared to the upper cadre of developing economies, countries such as Brazil, India, Malaysia and Indonesia. Our country needs to improve credit access to build capacity and be in a position to compete.
The problem of access to credit is a recurring complaint from manufacturers and businessmen. Aside the fact that interest charges are high, many small businesses cannot access credit. Loans to consumers are as important as loans to businesses for productive purposes, because they generate demand. The IFC in a 2013 survey show that no more than 30 percent of adults had access to bank loans in Nigeria, which compares poorly with the higher rates recorded in a number of other developing countries.
Nigerian Banks generally seek to lend money and earn the resultant incomes. However, they have become extremely careful due in part to the level of defaults being experienced. While most banks today will advance credit to blue chip companies and their employees, the willingness to lend to small businesses is hampered by lack of credible information. Reforming the system and getting access to capital up must begin with credible data. Also, the transfer of land titles is still time-consuming and cumbersome and negatively militating against their ready use as collateral for credit facilities from banks. However, some important milestones on the road to progress are being recorded and deserve mentioning.
The CBN and IFC are setting up a collateral registry which would help MSMEs access credit with their moveable assets such as power generators and less tangible assets. A similar system was employed in China to great success after the Asian economic crisis. Aside that, the registration of bank customers under the Bank Verification Number (BVN) biometric registration is one positive step to capturing bank users information and avoid the cases of chronic debtors chalking up multiple debts across banks. Overall, the essential data for a credit bureau is being sourced. The BVN should help to build a reliable database for banks and credit agencies to track potential debtors and help credit assessment for bank users. Hopefully, if that is done properly and macroeconomic positions stay on course, the economy can only be better for it.
A number of current policy initiatives such as The Power Sector Reforms, support for local industrialization, Agricultural reforms and investments in infrastructure signpost a commitment to push economic growth and development by the federal government and across some states; some more work to address access to credit will further unlock possibilities in production and market expansion. It is important that the current initiatives to build financial capacity for businesses are expanded and followed through.