The Central Bank of Nigeria’s (CBN) N220 billion intervention fund for micro, small- and medium-scale enterprises (MSMEs), which has been in the pipeline since last year, has been launched at last. The fund, coming at a critical point of cash and credit squeeze in the economy, is expected to be a life support to the intended beneficiaries, most of which are gasping for survival breath at the moment.
The fund is highly needed to meet a wide gap in the credit markets, which have not been delivering adequate financial resources to the private sector since the financial crisis in 2008. The worst affected are the MSMEs that usually suffer more in difficult economic and financial market conditions.
While the intervention fund may be necessary as an interim measure, it is only a part of the fundamental changes needed in the operating conditions of the intended beneficiaries. While it provides a way forward in a financially arid operating climate, the equally critical issue of infrastructure situation should be taken into consideration. Otherwise, the loan beneficiaries may be frustrated midstream. Besides, it should not cause CBN to detract from the desired objective of restoring the normal functioning of financial markets such as existed before the financial crisis in 2008.
Before the financial crisis, a large number of economic operators, cutting across large, small, micro businesses and private individuals, all had access to credit opportunities. The strength to stimulate economic activity through productive lending resides in ensuring the normal functioning of credit and capital markets.
Direct intervention in the credit markets such as the CBN is implementing normally has limited impact on the operations of recipients. A one-dose credit injection may raise the operating scale initially but isn’t going to be available to sustain it. This is the reason why such direct interventions in the past haven’t been able to make much positive impacts in the economy. A credit provider is required to follow the borrower all through the business cycle and be ready to inject new funds if and when needed.
In 2010, CBN designed and implemented two lifeline packages meant to revive some critical sectors of the economy. The quantitative easing package then involved a N500 billion facility through a loan stock by Bank of Industry and a N200 billion medium- and small-scale enterprises credit scheme guaranteed by the CBN.
The direct intervention fund of N700 billion at 2010 prices didn’t make any significant impact in the economy. What can we now expect to achieve with the N220 billion MSMEs fund?
The biggest intervention fund ever possible from government or the CBN is nothing to compare with the credit delivery capacity of the credit and capital markets. Before the stock market crash, the capital market was generating in excess of two trillion naira in cheap development capital annually. A 20% increase in total bank lending will add over two trillion naira again to the credit markets annually.
Another low score for direct intervention in the credit markets is that it is usually politicized. Government and the CBN usually begin to take credit for funds that may not reach the intended recipients a long time after it has been noised around. We urge Emefiele to live up to his promise that the funds will get to the beneficiaries without impediments this time around.
We reckon that the proposed direct intervention fund is in recognition of the need for counter cyclical use of credit and capital flows to rev up the Nigerian economy. It is important that the CBN sees the initiative as an interim measure while it takes fundamental steps to rebuild the credit and capital market infrastructures. The bank should not rest on its oars, believing that by throwing the N220 billion dirt chip into a deep market requiring upmost of N5.0 trillion in new money annually, it has lived up to its promise of activating development lending and employment creation.
The CBN should liaise with capital market regulators to rebuild confidence in the capital market. While it is yet unable to bring down interest rates as promised, the capital market can be supported to reopen its low cost funding window. Only a 10% gain in market capitalization will distribute nearly N1.4 trillion gains across the length and breadth of the investing public. This will go a longer way to empower the new issues market and stimulate private investments than we can hope to achieve with CBN’s N220 billion fund.
