ABUJA – The business and investment ecosystem in Nigeria today is one that is grappling with liquidity related challenges as maximum interest on business loans stands at a ten high of average 31.46 so far in 2018, signalling low risk appetite of commercial banks.
Commercial banks’ maximum lending rate according to the Central Bank is the rate charged by deposit money banks for lending to customers with low credit rating has been on a steady upward trajectory from May 2008 to the end of May this year according to data from the Bloomberg Terminal.
A source in a tier one bank told BusinessDay off record that “most of the time, we avoid these start-ups because they don’t have the track records. If you have at least 3 years financial statement of any company, you can do your ratios and actually determine how profitable the company is but starts up normally do not have these. “If you are giving out loans you must know that you can get it back else, these loans become bad loans and it greatly affects banks liquidity.”
He further noted that the promoters of some start-ups are inexperienced, so to avoid been used as test run for their business, banks shy away from giving out loans to them.
The source concluded by saying “start-ups need more equity financing than debt financing which banks do not like to get into. That is why banks even advise start-ups to go to other medium to source for these loans as equity is cheaper in terms of financing than debt.”
Kayode Tinuoye, Fund Manager at United Capital Plc said “generally the lending rate in Nigeria is prohibitive as you hardly get a single digit interest loan from any commercial banks or financial intermediaries meaning that SMEs and start-ups that are looking for loans get them at higher cost.”
“Cost of funds from Nigeria banks need to be better structured to suit start-ups and entrepreneurs. A situation where the banks are mostly willing to give out short term loans than long term loans must also be looked into.”
“There has to be a good and deliberate effort on the part of the CBN to bring down these rates. Looking at the policy rates among the emerging/ frontier markets, Nigeria’s still has one of the highest rates,” Tinuoye concluded. Charles Robertson, Global Chief Economist, Renaissance Capital said “the main challenges for investors are on how Nigeria can increase liquidity in the near future.”
He added that “Nigeria is looking better on most metrics, having accelerated growth, a stable currency and rising FX reserves, but needs to improve on bank lending which remains weak.”
The role of the financial institutions especially the commercial banks in mobilizing and channelling of funds to the real sectors of the economy has been relatively passive in Nigeria as start-up owners and entrepreneurs BusinessDay spoke with narrated the difficulties faced not just with the very high interest rate but also on requirements to access these loans.
“I obviously need funds to expand my business, but going to the bank for loan, I’ve not even attempted to because of the interest rate that Nigerian banks charge coupled with the rigorous process around it. I am just looking for alternatives like grants,” said Tolu Craig founder of a tech start-up in Lagos
Commercial banks’ maximum lending rate according to the Central Bank is the rate charged by deposit money banks for lending to customers with low credit rating has been on a steady upward trajectory from May 2008 to the end of May this year according to data from the Bloomberg Terminal.
A source in a tier one bank told BusinessDay off record that “most of the time, we avoid these start-ups because they don’t have the track records. If you have at least 3 years financial statement of any company, you can do your ratios and actually determine how profitable the company is but starts up normally do not have these. “If you are giving out loans you must know that you can get it back else, these loans become bad loans and it greatly affects banks liquidity.”
He further noted that the promoters of some start-ups are inexperienced, so to avoid been used as test run for their business, banks shy away from giving out loans to them.
The source concluded by saying “start-ups need more equity financing than debt financing which banks do not like to get into. That is why banks even advise start-ups to go to other medium to source for these loans as equity is cheaper in terms of financing than debt.”
Kayode Tinuoye, Fund Manager at United Capital Plc said “generally the lending rate in Nigeria is prohibitive as you hardly get a single digit interest loan from any commercial banks or financial intermediaries meaning that SMEs and start-ups that are looking for loans get them at higher cost.”
“Cost of funds from Nigeria banks need to be better structured to suit start-ups and entrepreneurs. A situation where the banks are mostly willing to give out short term loans than long term loans must also be looked into.”
“There has to be a good and deliberate effort on the part of the CBN to bring down these rates. Looking at the policy rates among the emerging/ frontier markets, Nigeria’s still has one of the highest rates,” Tinuoye concluded. Charles Robertson, Global Chief Economist, Renaissance Capital said “the main challenges for investors are on how Nigeria can increase liquidity in the near future.”
He added that “Nigeria is looking better on most metrics, having accelerated growth, a stable currency and rising FX reserves, but needs to improve on bank lending which remains weak.”
The role of the financial institutions especially the commercial banks in mobilizing and channelling of funds to the real sectors of the economy has been relatively passive in Nigeria as start-up owners and entrepreneurs BusinessDay spoke with narrated the difficulties faced not just with the very high interest rate but also on requirements to access these loans.
“I obviously need funds to expand my business, but going to the bank for loan, I’ve not even attempted to because of the interest rate that Nigerian banks charge coupled with the rigorous process around it. I am just looking for alternatives like grants,” said Tolu Craig founder of a tech start-up in Lagos
Another start-up business owner Isaac Jacob said “It’s easier and better to go to cooperatives and microfinance institutions to gain access to loans because interest rates are relatively cheaper than that of commercial banks.”
The Central Bank during the last MPR meeting reiterated its commitment to reducing the interest rates given to business entities while also creating innovative ways to improve bank lending to the real sector of the economy.
*Source: Businessday
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