Ask Nigerians to name the commanding heights of their economy, and most will point to the oil wells of the Niger Delta, the gleaming financial towers of Lagos Island, or the sprawling cement factories owned by Aliko Dangote.
The country’s ruinous dependence on a boom and bust oil sector, and the exposure granted to a small community of celebrity tycoons, means that thousands of small and medium-sized businesses (SMEs) go largely ignored. This blind spot extends to the country’s banking sector, which for years has starved would-be entrepreneurs of essential capital.
The new Development Bank of Nigeria, a joint venture between the government and international development finance institutions, aims to change the picture. The $1.5bn bank, which recently completed recruitment of its leadership is expected to launch imminently, is designed to act as a catalyst by disbursing funds to the country’s banking sector, who in turn will lend to the real economy.
Need for change
The need for change is certainly pressing. The World Bank reports that only 9.5% of Nigerian SMEs had a loan on their books or a line of credit in 2011, while SMEs made up just 5% of commercial bank lending.
With SMEs estimated to account for 96% of all businesses in Nigeria, the inability of the government and commercial banks to support the sector is undermining economic growth and the chance to diversify away from oil.
“The commercial banking activity in Nigeria has been tailored to the big corporations in oil and gas and areas where they can make high returns,” explains Ousmane Dore, Nigeria country head for the African Development Bank (AfDB), a $50m equity shareholder of the DBN offering $450m in loans. “The AfDB has provided so many lines of credit to commercial banks but you don’t see much going to SMEs. That’s why there was a need for a new model.”
The response, first set in motion under the previous administration of President Goodluck Jonathan in 2013 – was to search for examples of development banks with a track record of lending to the real sector.
In Germany’s KfW, they found an institution capable of advising on strategy and providing $200m of finance. The German government-owned development bank, set up as part of the post-World War II Marshall Plan to rebuild the country, has gained a reputation for reaching out to smaller enterprises and provides the on-lending model of the DBN.
“Without the private sector, the entrepreneurial spirit, which we think is quite high in Nigeria, cannot be successful,” says Matthias Adler, head of KfW’s West Africa division for infrastructure and financial systems development. “There is a proper rationale for a development bank that still works in a commercial way of thinking and working, which is private sector-driven and helps to meet the needs of SMEs.”
The hope is that by providing them with a large pool of capital and incentives to lend, banks previously focused on meeting the insatiable appetite of big business or local government will support the SME ecosystem. Yet analysts are under no illusion that a new development bank will be a panacea for all of the sector’s ills. Nigeria’s byzantine legal and regulatory system mires SMEs in a maze of red tape, while a significant number lack the necessary documentation to successfully pitch for funding.
“Constraints mainly arise from a legal and regulatory framework that results in banks seeing SME lending as costly. Some SMEs lack formal documentation, there’s a lack of personal ID systems, and credit data is quite limited. Just having a new institution will not do the job, there needs to be other initiatives,” says Veronika Tscharf, senior project manager for KfWs’ West Africa IFSD division.
Much of those constraints lie in the country’s turgid business environment. According to the World Bank’s latest Doing Business report, Nigeria is ranked a woeful 169 out of 193 countries, with businesses facing significant difficulties in accessing electricity, registering property and trading across borders. Nigeria’s rank of 44 for the ease of getting credit, compared to 139 for enforcing contracts, suggests that finance is not always the issue.
“A development bank might help alleviate the finance constraint, but there’s still the real sector constraint – getting projects off the ground needs a good investment climate, proper projects, an energy and regulatory framework,” says Dirk Willem te Velde, head of the international economic development group at the Overseas Development Institute.
The new bank must also guard against the traditional pitfall of Nigerian political life – corruption. In a country where politicians are no strangers to pork barrel spending, some may be tempted to turn the DBN into a piggy bank for inappropriate projects.
“In terms of how it relates to the government, it needs to be autonomous and it’s very important that there’s no political interference with projects financed irrespective of whether they make sense. There needs to be an investment code, and an autonomous head and board,” says te Velde.
While the government has had a significant say in appointments, given its $300m equity investment, the involvement of respected institutions such as the World Bank, which will invest $500m, the Agence Française de Développement, which will invest $100m, and the AfDB and KfW, ought to prevent a slide in standards.
“The government is a major stakeholder but the composition of the board is tilted towards independent members. It’s been designed to ensure insulation from political pressure and government intervention,” says the AfDB’s Dore.
Yet for the institution to succeed, it will have to do far more than avoid inappropriate projects. While the DBN will insists that the commercial banks it lends to report back, the success of the DBN is unlikely to be immediately apparent from a few data sets.
“It’s a slow process but what makes us convinced is a number of opportunities – Nigeria has an entrepreneurial spirit, SMEs have less difficulty in finding good people and there are fairly good educational levels,” says KfW’s Adler. “With the mechanism to channel funds through the financial sector we think it will make a difference, but it’s not a quick win.”