Loan: ‘Why banks prefer big firms to SMEs’

Nigerian bankers have attributed the inability of operators in the Small and Medium Enterprises to access fund from financial institutions to the four challenges facing the sector.
The Managing Director, Sterling Bank Plc, Mr. Yemi Adeola, explained that SME operators lack ed proper training on corporate governance, sound decision-making, effective management of risks and cash flow, among others.
He said, “One of the challenges facing the sector is the lack of data. In other jurisdictions, before starting a small business, individuals already have a credit card history because they have been borrowing and paying back. The system takes their individual history and builds on it. Here, we lack that data. When SMEs approach us for loans and we have our first interaction with them, there is no credit history, no background data, etc. That should not be.
“Collateral-dependent lending is another challenge. While large corporates have no problem with this, most SMEs do not have properties to use as collateral. The good news is that, with the introduction of the collateral registry in Nigeria, this problem will soon be over.”
Another banker, Mr. Abimbola Osho, explained that another challenge of the sector was the inadequate expertise or lack of skill, either on the part of the SME or even the banker.
According to him, a few bankers have an in-depth understanding of the dynamics of the Nigerian movie industry; same for the music industry and the emerging Fintech industry as there are so many small emerging areas, which are opaque to bankers and for this reason, they tend to avoid lending to those industries.
“Many SMEs operating in the country lack proper structure. There are several instances of such businesses not adopting proper book-keeping and governance practices,” he said.
Osho added that while large loans dominated the economy, it was also true that credit to the private sector “goes to large corporates in billions, with less than 20 per cent going to the SMEs.”
The logic behind this, according to him, is that it is better to have fewer loans with less effort, than millions of loans with huge resources and manpower requirements.
“It has been proved that where SME loans are properly modelled, with clear target markets, risk acceptance criteria, thorough cash-flow analysis, then, the character and integrity of the borrower are taken into consideration. Such loans hardly become delinquent. Of course, in a recessionary economy, the operating environment might be so harsh and the loss norm rises beyond what is typical – but this is an abnormal situation,” he pointed out.
Going forward, Adeola said, “We are developing capacity internally to improve lending to the newly emerging areas. We presently have in-house experts in the areas of Education, Health, and Agriculture, and are also building capacity in Renewable Energy. We believe that if our people understand the dynamics of these sectors, it becomes easier to lend to SMEs.”
Despite the statistics released by the National Bureau of Statistics and Central Bank of Nigeria, regarding the health of the economy, Adeola observed that “ tend to disbelieve because there doesn’t seem to be anything on ground when you compare the realities with such statistics.”
“This sentiment is quite understandable, and I agree that for the vast majority, perception is based on current realities. Although the economy has officially come out of recession, it remains in a fragile state. The average individual or business is unlikely to feel any meaningful growth effects at this level of fragility,” he added.