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Productive sector still limps...Despite consolidation of banks

Posted by By EMEKA OKOROANYANWU, AMECHI OGBONNA and SEUN ADESIDA on 2007/12/11 | Views: 994 |

Productive sector still limps...Despite consolidation of banks


That the Nigerian industrial sector has become endangered is certainly not an overstatement to those who understand the dynamics of the sector. Perhaps what is very worrisome is the fact that there seems to be no visible solution to the abysmal financial crisis.

That the Nigerian industrial sector has become endangered is certainly not an overstatement to those who understand the dynamics of the sector. Perhaps what is very worrisome is the fact that there seems to be no visible solution to the abysmal financial crisis.

Indeed things are happening very fast in the Nigerian real sector and most of them, not palatable.
For most Nigerians, there is a consensus that the nation’s industrial sector is in dire need of financial lifting and which only the banks as custodians of financial resources are being looked upon to provide.
Banks’ inability to meet aspirations over the years has been blamed for the deterioration in the industrial sector, a phenomenon that has made Nigeria a dumping ground for foreign products.
Economic experts still see the development as one of the inexplicable paradoxes for a nation, where expectations of industrial breakthrough was high at independence.
However, several years after the dream turned elusive, many have been wondering how the Nigerian industrial sector can move to the next level.

Indeed questions have been raised as to how the huge funding gaps in the manufacturing sector can be bridged in the interest of the economy and particularly the citizens of the country.
The chronic dearth of investment capital had forced many budding entrepreneurs to retreat from their dreams, with many selling off their premises to churches and other less stressful businesses.
Those who dared to operate did so at lower capacity, while millions of jobs had since been lost as a result.

But just as fingers were being pointed in the direction of the financial sector, operatives of that industry say they are not to blame, pointing out that the malady had more to do with government insensitivity to the plight of the sector than mere absence of capital.

Banks seem to have enough grounds for this argument considering previous efforts and programmes imposed on them for implementation by government, but which failed to yield much dividend in terms of alleviating the plight of the industry.

In the eighties for instance, government had operated a regime where banks were compelled to allocate specific percentage of the annual credit to priority sectors like agriculture and manufacturing and organizations that failed to observe such credit ceilings were sanctioned.
Most of the banks complied with the directives while it lasted, yet the situation did not improve.

As a means of reducing the financial squeeze on small and medium scale enterprises, the Federal government had introduced the Small and Medium Enterprises Equity Investment Scheme (SMEEIS). It was introduced with the objective of providing both finance and managerial expertise to the small and medium industries (SMIs) in the Nigerian economy. The guidelines for the scheme require all deposit money banks in Nigeria to set aside 10 per cent of their pre-tax profit for equity investment in the SMIs. They also provide among others that funds set aside be invested within 18 months in the first instance and 12 months thereafter.

After the grace period, CBN is required to debit the bank that fails to invest the set aside funds and invest same in treasury bills for 6 months. The funds set aside by the banks under the scheme increased from N13.1 billion in 2002 to N41.4 billion in 2005. However, actual investment grew much slower from N2.2 billion in 2002 to N12.1 billion in 2005 representing only 29.1 percent of the funds set aside.
Worried by the slow pace of investment relative to the amount set aside, CBN conducted two studies in 2003 and 2004 respectively, to ascertain the bottlenecks on investment operations and recommend ways of tackling them.

The studies found that major constraints to the implementation of the scheme included the desire of banks to acquire controlling shares in the funded enterprise, poor state of infrastructure, limitation of funding to only equity investments, restriction on range of activities covered under the scheme and the reluctance of Nigerian entrepreneurs to go public. In February, 2005, two major policy actions were taken by the Bankers Committee to restructure the scheme. One, all business activities can be funded under the scheme and it was therefore, changed to Small and Medium Enterprises Equity Investment Scheme (SMIEES), to reflect the expanded focus.

Two, the limit of banks’ equity investments in a single enterprise was increased from N200 million to N500 million. Thus, accommodating the real medium size industries that constitute the missing middle in Nigeria’s industrial structure. These two measures had an immediate impact on the scheme, as investments rose by 29.4 percent in 2005 to N12.1 billion. Also, the cumulative amount set aside by the banks at the end of December, 2005, stood at N41.4 billion, compared with 28.8 billion at the end of the preceding year. Similarly, cumulative investment increased by 41.3 percent to N12.1 billion. Analysis of the investments showed that the real sector received N6.9 billion on 136 projects compared with N5.6 billion on 115 projects in 2004.

However, even with all these interventions, the manufacturing sector is still beset by a plethora of problems to the extent that capacity utilization is still below 50 per cent. Operators believe that the funds are not reaching the real sector. They claim that much of the funds are going to the service sector. They said that with the recapitalization of the banking industry, they had thought that the real sector was in for a good time.

At a point, many had seen the Bankers Committee proposal that banks should reserve 10 percent of their profit after tax for the funding of small businesses as the magic wand that would solve the problem.
To prove their commitment, most banks came out with great enthusiasm to celebrate and implement what could indeed turn around the fortunes of the SMEs, but the joy of the entrepreneurs was shortlived when due to poor performance of the scheme, the CBN decided to make it optional. Today it has become the old refrain and from indications the manufacturers are on their own as there is no leverage anywhere, although the financial industry has continued to post fantastic results, which has also made them the toast of the investing public.

In reviewing the performance of banks with respect to the Small and Medium Enterprises Equity Investment Scheme (SMEEIS), CBN had turned in a damning report about the industry, when it recorded that out of the over N40 billion earmarked for the development of the SMEs, only an insignificant proportion was indeed utilized due to poor credit culture. The apex bank noted that only a little over N16 billion, of the estimated N40 billion was actually invested in various SME projects across the country.

With the exception of a few banks that actually devoted enormous resources to the projects through the establishment of venture capital companies, other banks can best be said to have paid lipservice to the scheme, resulting in the poor performance at least by the CBN assessment.
It was obvious that despite the consolidation programme, bankers’ short term funding orientation have not changed significantly, although they still claim that their enlarged capitalization has given capacity to create more risk assets.

The main reasons cited for this lacklustre performance was because the banks implementing the scheme saw it as conventional loan arrangement rather than doing so basically as an equity investment scheme in the affairs of the companies.

It was against this background that the investing banks were to come out with new management and reform package that would sharpen the mood and concentration of the companies such that the financial rescue programme would go in tandem with managerial process improvement.

That was again one of the times that the commitment of the banking sector would be called into question and the real sector was left alone. But the truth is that the future of the Nigerian state and its economy rests squarely on the real sector and, indeed, the small-scale sector, which currently employs more than 75 percent of its estimated 57 million working population.

Over the years, one of the most recurring problems that Nigerian governments have had to contend with remains the issue of adulterated and substandard goods imported mainly from South-East Asia.
The problem had continued unabated because Nigeria as a nation failed to make its real sector function efficiently and to compete with imported products.

Several captains of industry have drawn the attention of the government to the perennial funding and infrastructural constraints of the sector as one that calls for urgent attention from all stakeholders.
Regrettably, the nation’s experiment with the Export Processing Zone (EPZ) has to date remained a colossal failure despite the huge amount of money spent on such projects.

But according to the Global Monitoring Report, an average investment of 9 per cent of the Gross Domestic Product (GDP) is needed by Africa to achieve the Millennium Development Goals over the next 10 years.

The Nigerian government said it is fully committed to achieving the Millennium Development Goals and this has informed most of its recent policy initiatives for both the private and public sectors of the economy.

It was in the light of this that CBN has set out to pursue the policy of establishing an African Finance Corporation.

According to Professor Chukwuma Soludo, the governor of the bank, the focus of AFC would include funding of private sector-led projects and development of infrastructure across Africa. The rationale was informed by the need to harness the potentials created by the massive funding gaps for the key economic sectors in Africa and the development of an infrastructure base, which would mobilize and distribute the required capital to drive development on the continent.

Besides that proposal, the Nigerian private sector in liaison with the public sector are already thinking of a financial corridor in Lekki, in Lagos State.

Commenting on the dearth of funds for the manufacturing sector, chairman of Flour Mills of Nigeria Plc, Mr. George Coumantros said manufacturing industries are supposed to derive substantial gains from the banks in terms of interest rate on their loans, which continue to remain high.

His words: “The liquidity situation in the Nigerian economy has vastly improved, thanks to the reform and consolidation of the banking industry. Banks now have more funds at their disposal to lend to the real sector. However, the industry is yet to derive any substantial benefits in terms of interest rate, which continues to remain high.”

Group Managing Director and Chief Executive Officer of United Bank for Africa, Mr. Tony Elumelu, blamed the stunted growth of the nation’s productive sector to the chronic absence of basic infrastructure in the economy.

Mr. Elumelu, who was speaking at the presentation of the bank’s 2007 audited results in Lagos, said that as long as the manufacturers continue to face the challenges of having to contend with lack of facilities that ordinarily should be taken for granted in other economies, their performance would remain below average and unimpressive.

He argued that even if all the banks decide to give more than half of their total credit portfolio to the industrial sector in any given year, the overall output would remain poor.
He said that the nation had a tremendous opportunity to make a strong statement in the nation’s real sector with SMEEIS, but wondered why it was not utilized by the operators for inexplicable reasons.
Said he, “In Nigeria, energy is an issue, water is also an issue, so also are the roads and several other things and I don’t know how real the real sector can perform well without these conditions. However, as far as I know, banks can only play a complementary role with capital but without efficient infrastructure, there is little that that capital can do for the sector.”

He explained that capital was necessary in improving the performance of the companies but not sufficient to make them grow as expected.

The banks appear constrained by the realities of the nation’s economy, consenting to loan requests only when a convinced borrower would pay back.

As specialized institutions charged with the responsibility of oiling the wheel of the industrial sector, banks have always argued that their major limiting factor remains the fact that they are merely trading with depositors’ money and would not compromise on any matter that could imperil their trust and confidence in a highly unstable economic system. Even the shareholders, as fund owners in the banking industry, are also looking forward to returns on their investments and would ask questions when standards seem to have been compromised.

When a bank gives a loan to a manufacturer or any other businessman, the foremost desire is for the principal sum and other interest charges to be paid back at maturity. If this objective is not met, the lending institution is in jeopardy.

While it is taken for granted in other developed or emerging economies that government should as a matter of responsibility provide the basic infrastructure for the private sector to pilot the economy, the situation in Nigeria is such that companies would have to factor into the production process such heavy costs as energy, road, water and other costs that naturally push up the cost of production, making their products uncompetitive compared with imported variants.

These are among the factors that seem not to be giving financiers enough confidence to lend to the productive sector.

A casual study of the lending profile of Nigerian banks in the last couple of years reveal that a high percentage of the loans advanced to manufacturers end up as bad loans from the first day of the contract.

While the Nigerian business community, including entrepreneurs in the manufacturing sector, have looked up to the banking sector to provide the financing needed to meet the challenges of manufacturers, banks in their typical ways tended towards being cautious, coming to the conclusion that it is not just a matter of cash, when several factors have made operation in the real sector more of a suicide mission for entrepreneurs.

Available data from CBN revealed that growth in aggregate domestic credit declined by about 88.84 per cent at the end of 2006 relative to its level at the end of 2005 despite 37 per cent credit growth in the private sector.

Also, money supply during the year was largely influenced by growth in banks’ credit to the private sector.

Shortly after the consolidation of the banking industry, the Central Bank of Nigeria had seen the need to improve access to financial resources when it granted licences to about seven micro finance banks in 2006, while encouraging most community banks in the country to transform into micro finance institutions.

Despite its good intentions to mobilize the more than N450 billion believed to exist outside the banking system, which could help to strengthen activities in the small and medium scale industries, indications from that sector suggest that Nigeria is not there yet. One year after the micro finance policy was launched, the number of banks has grown to 37 from the initial 14 registered last year.
Commenting on the fate of Nigeria’s productive sector, Mrs. Olufunke Osibodu, Chairman of Citiserve Microfinance and former Managing Director of Ecobank Nigeria Plc, said the concept of microfinance was one that could revolutionise the sector if given the necessary impetus by all stakeholders.

According to her, there is no country that is built without getting its businesses both at micro, middle, small-large scale and that any country that is interested in making that lower level breakthrough must be prepared to leverage on the opportunities at the grassroots. She argued that community banks hardly fail. She said that it was not all of them because the concept was largely based on what was strictly neighbourhood banking.

She said that the Central Bank would hold a seminar and workshop on microfinance banking soon, where even the President would be participating. This, she said, shows the importance the government places at that level.

“For each of us, you will see that the businesses around us are so many that those businesses are the ones that if you get them going, they make a difference in your bottom line at the end of the day. So, it’s here to stay. I am very sure about that and I think those are the institutions that I know that are serious about making a success of it.

“For instance, Citiserve Microfinance is serious about making a success of micro finance business. In its short period of existence, it has seen quite a lot of initiatives at that micro level that makes sense. So it’s real good that Nigerians should exploit the goldmine to improve the real sector.”
Osibodu said unlike the community banking experiment that failed, micro finance business is not based on community help effort. “It is a business, and you know that the mentality of a business is slightly different from that of charity organizations.

“So that is the huge difference, but in addition, you find out that for the micro finance banks, any party that is involved in that wants to make sure that he or she employs good parties that not only assist these businesses based on their knowledge, but also really evaluating potentials they themselves have to trade with.”

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Comments (3)

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Abieyuwa(Edo, Nigeria)says...

Otasowie means evening life is better than morning life. There is an error in your “evening life is better than evening life”?

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Naija g(Houston, Minnesota, US)says...

Sokari doesn’t mean joy. Joy is Biobela. Go to the village and ask the meaning of the name.

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Fay(Katy, Texas, US)says...

Actually translates to bravehearted.