The launching of the Development Bank of Nigeria is a most remarkable progress in the government's efforts to diversify the economy.
SME Support: Development Bank of Nigeria launched
The launching of the Development Bank of Nigeria (DBN) is a most remarkable progress in the government’s efforts to diversify the economy.
Nigeria has been a mono-economic nation since the discovery of commercial quantities of crude oil.
This has contributed to the adverse effect of the current recession triggered by a crash in global oil prices.
Africa’s biggest nation’s dependence on the oil sector along with and the favour granted to a small clique of business magnates by both the government and banks also resulted in the almost complete nonchalance to thousands of small and medium-sized businesses (SMEs).
The typical Nigerian entrepreneur is starved of essential business funding. The main sector that has been a bit fortunate in the last decade is the technology sector. It has managed to attract foreign direct investment from abroad with $1.2m flowing into Mark Essien’s start-up hotels.ng, $24m from Mark Zuckerburg and wife coming into Andela and others.
Development Bank of Nigeria means Hope for Other Sectors
Recently, things took a new turn with the formation of the new Development Bank of Nigeria (DBN). This institution is a joint venture between the Nigerian government and international development finance institutions.
The $1.5bn DBN recently finished hiring its leadership and is expected to facilitate the disbursing funds to Nigeria’s banking sector, who will then lend to the real economy. This is a bit similar to what the Bank of Industry BoI is doing.
Need for change
Change was the theme of the current party in power’s campaign. Right now, Nigeria’s need for economic change is even dire.
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 according to the World Bank
It is estimated that SMEs account for 95% of all Nigerian businesses. The failure of the government and commercial banks to support the sector undermines national economic growth as well as the opportunity to diversify into other sectors of the economy.
“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. 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.” – Ousmane Dore, Country Head, African Development Bank
AfDB is a $50m equity shareholder of the Development Bank of Nigeria offering $450m in loans.
In responding to these, what the Goodluck administration first did in 2013 was to find examples of development banks with a track record of lending to the real sector.
They found this in the German government-owned development bank KfW, an institution able to advice on strategy that also provided $200m in financing.
KfW was founded as part of the post-World War II Marshall Plan to rebuild the Germany. It has built a reputation for helping smaller enterprises by providing 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. 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.”
– Matthias Adler, Head, West Africa division for infrastructure and financial systems development, KfW
What Development Bank of Nigeria Needs to Change
The hope is that when Development Bank of Nigeria provides a large pool of funds and incentives to lend money, commercial banks hitherto focused on meeting the insatiable appetite of big business will finance the SME ecosystem.
With this said, financial analysts know that a new development bank cannot be the cure-all for all of the sector’s ills.
Nigeria’s legal system and regulators need to be more efficient for SMEs to excel. The legal and regulatory framework makes banks see loaning money out to SMEs as costly. Many don’t have the necessary business documentation to successfully apply for funding as well as a lack of personal identification systems and credit data is quite limited.
Another area where change is needed is Nigeria’s difficult business environment. The latest World Bank Doing Business report, Nigeria was ranked as the 169th out of 193 countries with businesses facing difficulties in accessing electric power, business registration and doing cross border trading.
Nigeria was ranked 44 for the ease of getting credit, compared to 139 for enforcing contracts. This means that getting finance is not always the issue.
While a development bank might help alleviate the finance limitations the real sector constraint is getting projects off the ground and it requires a good investment climate, proper projects, an energy and regulatory framework – D. Willem te Velde, Head, International Economic Development group, Overseas Development Institute
The DBN must also avoid and guard against corruption in the Nigerian political setting. The officials of the bank must refuse to be tempted to turn the Development Bank of Nigeria into a piggy bank for improper projects.
In its relations with the government, the Development Bank of Nigeria must be independent and not allow any political interference with projects financed regardless of whether they make sense.
There needs to be an investment code, and an autonomous head and board for the Development Bank of Nigeria – D. Willem te Velde
This may be a bit of a challenge as the Federal government had significant say in appointments due to its $300m equity investment, the involvement institutions like the World Bank with an investment of $500m, the Agence Française de Développement, with $100m, and the AfDB and KfW should help to maintain 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” – Ousmane Dore, Country Head, African Development Bank
Yet for the Development Bank of Nigeria to be successful, it must do more than shun inappropriate projects. While the Development Bank of Nigeria will ensure that Nigerian commercial banks it lends to report back, her success is unlikely to be immediately obvious 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. With the mechanism to channel funds through the financial sector we think it will make a difference, but it’s not a quick win.” says KfW’s Adler.