Undeterred by scepticism and past failures, the Federal Government is forging ahead with a new development bank project. The Development Bank of Nigeria, it says, is primed to “galvanise” small, medium and micro enterprises across all economic sectors and drive industrialisation. The strategy and expected benefits are not in doubt; it is the doggedness and capacity required of the Nigerian government to see it through that dampen optimism.
As some critics, including executives of the Bank of Industry, have asked, what is new or what will the DBN do differently in a land littered with carcasses of failed development finance institutions? Plenty, replies Kemi Adeosun, the Minister of Finance. For one, it will be strictly a wholesale DFI, lending to financial intermediaries, including microfinance banks, to grant medium and long-term low − interest loans to SMEs across all sectors of the economy. With its main focus on small businesses, the DBN will have strong multinational equity participation and funding to the tune of $1.3 billion from the World Bank, the African Development Bank, the French Development Bank and KfW, Germany’s development bank.
First conceived in 2014 under the Goodluck Jonathan administration, some vigour is now on display. In January, the government applied for an operating licence from the Central Bank of Nigeria, by which time it said it had also completed the recruitment of the top leadership. Agreements are also being finalised with the European Investment Bank for technical and funding support, said a Finance Ministry spokesman, Salisu Dambatta.
But if stakeholders are not cheering, their caution is informed by the country’s dismal record in running DFIs and the terrible state of the SMEs sector. In developed and emerging economies, the small and medium enterprises are the primary drivers of industrialisation, exports and employment. SMEs, according to Japan’s trade and industry ministry, “form the very basis of Japanese economy,” accounting for 99.7 per cent of all companies, 70 per cent of all employment and 50 per cent of manufacturing. SMEs generate 50 per cent of GDP in Poland. Brazil’s six million SMEs generate 52 per cent of all formal jobs and created 47,700 new jobs in January 2014 alone. About 97 per cent of businesses in Malaysia are SMEs, generating 65 per cent of all jobs. According to the World Trade Organisation, where they thrive, SMEs are largely responsible for driving innovation and competition among many economic sectors.
But SMEs, by their puny size − categorised by the CBN as those employing less than 100 persons and assets of less than N5 million − suffer greatly from lack of access to credit. A World Bank Enterprise Survey found that 41 per cent of SMEs in developing countries reported access to finance as their major constraint, compared to 15 per cent in high-income economies. In Nigeria, the problem is magnified by prohibitive lending rates, the short tenor of most credit and by an unfriendly operating environment where businesses supply their own power, water and other municipal services. These are challenges compounded by very poor public infrastructure. Though accounting for 45 per cent of GDP, less than 10 per cent of bank credit goes to SMEs, said Adeosun.
Deploying DFIs is a tested route to stimulating the productive sectors, exports and job creation. Nations have used them successfully, gaining impetus after the devastation of World War I, with national development banks that mobilise cheap funds driving industrialisation by providing low-interest, long-term capital in Europe and Asia.
The DBN must avoid the pitfalls of the past that killed former and weakened existing DFIs. Corruption, nepotism, sectionalism and political interference destroyed our DFIs. The key to success, according to the Centre for the Study of East Asian Development, is a clear mandate from inception as well as high standards of transparency, adequate initial capital, strong internal corporate governance and freedom from political interference. The promise of N50 billion made to BoI at its re-invention in 2001 was not fulfilled, hobbling the bank from the outset.
To realise its objective, the government has to stick resolutely with DBN’s declared mandate of targeting SMEs and ensure strong corporate governance rules, while keeping politicians away from the management and board. It should recruit top managers from within and abroad, a strategy the Gulf Arab states and East Asian Tigers used to drive their economies and build global companies. Options used in Asia and recommended for emerging economies include preferential treatment for DFIs and SMEs in strategic sectors. The World Bank notes that the DFIs were very successful in East Asia due to the ability of their governments to insulate the banks from political pressure. But in Latin America, South Asia and sub-Saharan Africa, failure reigned as corruption, ineptitude and cronyism crippled DFIs.
We strongly recommend that management control be ceded to the participating foreign partners in the first decade, while the private sector should have strong equity participation. The Nigerian government has proved beyond all doubts that it cannot run a commercial enterprise successfully.
This may be our last chance to drive industrialisation through DFIs and SMEs like Taiwan, South Korea, Japan, Singapore and others have done. President Muhammadu Buhari and Adeosun should not fail like their predecessors but pursue this dream resolutely.
A better method is to enable qualified SMEs to obtain loans directly from private banks who would then provide funds to match those provided by the government; that is, the private bank would be required to match government fund and at reduced interest rates. As an example, if bank interest rate is 24% per annum and government wishes to lend to SME at, say, 6% then the average interest rate would be 15% (average of bank and government lending rates). Also, if the SME needs N5 million government would provide half and the bank would provide half (N2.5 million each).
The private banks are much more likely to conduct better due diligence. While not immune to inside loan abuse private banks are at least better than government in managing credit and their shareholders’ funds are at risk so more accountability is expected of banks. If a government development bank fails taxpayers lose money and nobody is blamed; this lack of accountability is sufficient to expose development banks as a bad idea in Nigeria.
The government officials may, indeed, mean well; however, as the article points out, historically Nigeria has proven to use these banks as a means to enrich the politically connected.