After five decades of floating Development Finance Institutions, the Federal Government has rolled out a new initiative that it hopes will succeed where others have failed. The newly-minted Development Bank of Nigeria seeks to break old barriers by delivering it to the private sector at birth and making job creation the focus of its lending. But the bank will succeed in its mandate only if all stakeholders, especially the government, break with the negative practices of the past to adequately fund and unfetter its management.
Nigerians and our development partners have every right to be sceptical. This country has been the graveyard of many such lofty schemes that helped in the radical transformation of other nations’ economies.
President Goodluck Jonathan was hopeful that the new bank would support micro, small and medium scale enterprises, described by the United Nations Industrial Development Organisation as “primary engines of industrial growth,” as well as create hundreds of thousands of jobs. He said the bank would provide medium to long-term lending to MSMEs with up to 10-year repayment period and 18 months moratorium. With an initial capital base of $1.5 billion, which is planned to rise to $5 billion in the “medium term” and N2 trillion “within the next 10 years,” Jonathan and his team are optimistic that about 200,000 new loans would be provided to MSMEs and would, in turn, create at least “one million direct jobs.”
The strategic importance of DFIs and MSMEs for a developing nation has been established. As financial institutions dedicated to fund new and upcoming business and economic development projects, DFIs have been pivotal in providing loans and equity capital to start-ups and accelerating industrialisation in emerging markets. The World Bank says these specialised financial intermediaries were effectively deployed by Japan and the Asian Tigers to achieve their socio-economic development objectives. They are especially critical in the funding of MSMEs, the major mobiliser of exports and jobs and lodestone of transformation from an agrarian to an industrialised economy. The United Nations Conference on Trade and Development found that access to low-cost, long-term financing is often the single most important constraint to MSMEs development and recommends robust state-backed funding through DFIs. In Nigeria, policymakers have identified the problems, the importance of MSMEs to export diversification, job creation and industrial take-off.
Accordingly, the government has established a slew of DFIs with, at best, tepid and, at worst, miserable results. Since the NIDB, the forerunner to the Bank of Industry, was established in 1964, others have followed: Bank of Agriculture, Nigeria Export-Import Bank, Infrastructure Bank (formerly Urban Development Bank) and Federal Mortgage Bank of Nigeria. We strongly suggest that a thorough appraisal of the weaknesses and the causes of failure of several DFIs here be undertaken to avoid wasting taxpayers’ resources and once more disappointing our long-suffering development partners.
The President and the Finance Minister spoke robustly of how DBN would fund MSMEs and create jobs, but glossed over why BoI, which is primed for the same assignment, has had limited success. The provision of funding to DBN by the World Bank, Africa Development Bank, and French and German development agencies is only partly reassuring. Multilateral agencies also helped mid-wife our previous and existing DFIs. When it was re-born from the old Nigeria Industrial Development Bank in 2001, BoI had 75 per cent of its equity held by the International Finance Corporation, the private sector affiliate of the World Bank, and other local and foreign investors. Today, BoI proudly displays on its web page, an equity holding structure where the government, through the Central Bank of Nigeria (59.54 per cent) and the Finance Ministry (40.36 per cent), holds 99 per cent and private interests 0.10 per cent!
One reason for the flight of IFC and other private investors is the failure of the Federal Government to fulfil its obligation of providing N50 billion at the take-off and DBI should not suffer the same fate. Others are political interference and, crucially, the adverse macroeconomic environment that discourages long-term deposits and, hence, low interest lending. Jonathan and his successors must resolve to steer clear of interfering in the running of the DBN. A more difficult task will be re-making the operating environment where interest rates have remained at the prohibitive 19 to 28 per cent range, forcing credit away from the productive sectors to trade and rent-seeking transactions.
Europe and Japan after World War II and South-Eastern economies in the post-colonial period, found, according to the World Bank, that institution-building and allocation of resources among competing demands could not be left wholly to market forces and skillfully utilised DFIs. Nigeria should fully back its DFIs through policy frameworks that would liberalise the economy and harmonise its fiscal and monetary policies to drive lending rates to the bottom and keep inflation low.
We should follow the global trend of moving away from ownership of DFIs to allow the private sector to run them. Some Indian DFIs have transited from publicly-owned to private ownership. DFIs that helped create the post-war German and Japanese economic miracles have also largely been wound down and in emerging economies like Singapore, Malaysia and South Korea, others now operate in niche segments.
Nigeria’s best course of action is honest, corruption-free interventionist funding to be transmitted through DFIs and commercial banks while leaving the DFIs in private hands and restructuring the economy for efficiency.
