How poor access to cheap credit affects manufacturers
James Obi, a 35-year-old medium-scale manufacturer, makes paints in Ikeja, Lagos. Due to the need to expand his business, he proceeded to request a loan of N10 million from one of Nigeria’s tier- two lenders.
The bank demanded collateral that would cover the amount he needed. The interest rate was 24 percent and the money must be returned in 12 months.
After analysing the requirements, he could not proceed. This left him in a fix and made him lose an opportunity to meet supply needs.
Manufacturers, especially SMEs, are increasingly facing frustration in the hands of deposit money banks.
Lending rate to the manufacturing sector averaged 22.21 percent in 2018 and 22.84 percent in 2017, according to the Manufacturers Association of Nigeria (MAN).
“I am encouraged to expand my business, but my inability to access loans has made it almost impossible and even banks are not helping matters with the high interest rate and the difficult requirements,” Komolafe Abisola, CEO of K-BIS Bags, said in an interview.
According to MAN CEO’s Confidence Index report for Q1 2019, high interest rate as well as difficulty in accessing loans ranked 3rd place in the list of challenges facing Nigerian manufacturers. The constrained access to loans has hindered the prospects businesses have to offer, especially in terms of expansion and growth.
Following responses given by CEOs contained in the report, the majority of them complained that the rate at which commercial banks lend to manufacturers discourage productivity in the sector considering the double digit-interest rates across banks.
“Sixty-three percent of the respondents do not agree that the rate at which commercial banks lend to manufacturers encourages productivity in the sector. This can be justified with the double-digit cost of borrowing from the commercial banks, which no doubt, discourages investment,” 200 chief executives said in a recent MAN survey.
The Central Bank of Nigeria (CBN) reduced the benchmark interest rate to 13.5 percent from the previous rate of 14 percent in a bid to improve the economy. The South African Reserve Bank and the Central Bank of Kenya maintain its interest rate at 9 percent and 6.5 percent respectively.
However, a report released by CEIC Data Company shows that the lending rate of Nigerian banks dropped by 7.21 percent from 16.08 in February 2019 to 14.92 in March 2019.
The double-digit interest rate hinders investors from pursuing investments in the country, bearing in mind high production cost and infrastructure deficit that remain challenges for the business environment.
Affirming the need for measures that will lower cost of borrowing, particularly to the manufacturing sector, the report proposes that “It is important that a policy should be designed to improve the proportion of commercial banks loanable funds that goes to the manufacturing sector.”