The views expressed in this post don’t necessarily reflect those of CFI.
The Development Bank of Nigeria (DBN) was conceived in 2014 and this year it has come into fruition with the green light from the Federal Executive Council on April 5th. The only step standing in the way of disbursement of funds is the required approval from the National Assembly. With $1.3 billion in its coffers, the new development bank aims to spur economic development by increasing access to finance for micro, small and medium-sized enterprises (MSMEs) through relatively lower interest rates compared to commercial banks, and relatively longer loan repayment periods.
The DBN will serve as a wholesale bank to microfinance banks (MfBs) which will in turn provide medium and long-term loans to MSMEs. It will provide loans to all sectors of the economy including manufacturing, the services sector, and other industries not currently served by existing development banks, thereby filling an important gap in the provision of finance to MSMEs.
A group of development banks are funding the DBN: the World Bank contributed $500 million, the African Development Bank with $450 million, German government-owned development bank KFW with $200 million, and $130 million from the French Development Agency. The bank’s goal for the first year of operation is to support 20,000 MSMEs.
Of course, MSMEs contribute significantly to national GDPs, whether it is a developed country like the United States, where they account for about 50 percent of private sector employment and create 46 percent of the private sector output, or a developing country like Nigeria where they are estimated to contribute 49 percent of the country’s GDP.
As invaluable as they are, however, access to funding for MSMEs has long been a global problem. In Nigeria, MSMEs receive only 5 percent of the country’s total bank lending. Challenges faced by Nigerian MSMEs, such as bias favoring large corporate borrowers and being regarded as high risk, highlight the need and importance of the creation of an MSME-focused development bank like the DBN. In Nigeria, MSMEs’ estimated unmet credit gap is 50 to 60 percent.
Despite the DBN’s potential to facilitate economic growth from the bottom-up and contribute to financial inclusion, it risks excluding certain essential stakeholders, according to Tiko Okoye, the CEO of Smart Certified MfB Fortis Microfinance Bank.
Mr. Okoye warns against the DBN following in the same footsteps as the MSMEs Development Fund set up in 2013 by the Central Bank of Nigeria (CBN), which, similar in mission, channeled funds through microfinance institutions for on-lending to target customers. Mr. Okoye says the fund “was not accessed that much by microfinance banks because of the conditions attached to accessing the funds.” Mr. Okoye further expressed his frustration with the imposed conditions of the MSMEs Development Fund: “You expect me to lend to the grassroots who have virtually no collateral. Then, why ask me for collateral? Where am I going to get collateral from?” Mr. Okoye cautions that like the CBN MSME fund, “If the DBN asks us to bring bank guarantees, many MfBs may not to be able to access it.”
Other threats to the efficacy of the initiative, as cited by Mr. Okoye, include large scale corruption, policy inconsistency, and the lack of any representation from the MSME or microfinance sector on the DBN board, which is entirely made up of representatives from commercial banks and other financial organizations.
Despite his criticisms, Mr. Okoye welcomes the initiative for its potential to bring down the cost of lending for clients whose loan interest rates remain around 100 percent. This is great news for clients in Nigeria who, as it stands, are not subject to interest rate caps.
The appointment of Anthony Okpanachi, former Deputy Managing Director of Ecobank Nigeria Limited, to lead and manage the DBN was also lauded by stakeholders given Okpanachi’s track record of furthering inclusive finance in the country.
Development economists Janine Thorne and Charlotte du Toit analyzed the factors that contribute to a successful development bank in their paper, “Marco-Framework for Successful Development Banks.” They found that six inter-dependent dimensions of a successful development bank include:
- An enabling environment absent a weak economy, high levels of corruption, and a limited political will to foster good governance;
- Strict regulation and supervision that renounces inherent conflict of interest of the State in both ownership and the supervision of the bank;
- A clear mandate which ensures it is correctly positioned within the environment and avoids mission drift and mission shrink;
- The quality of governance and management in terms of a competent board, effective internal management, and efficient performance management;
- Financial stability in terms of successfully managing funds; and
- Proper performance assessment.
One other avenue for strengthening the path forward for the DBN would be to introduce a business incubation system, which Mr. Okoye noted, can reduce the failure rates of businesses. In addition, he proposed the DBN collaborate with the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) to help de-risk the sector by creating an SME credit guarantee scheme.
As exhibited by the practical advice already offered to the development bank from the MfB sector, having the voice of implicated stakeholders on the board of an initiative of this scale is crucial to its success. MfBs have traditionally been the vehicle through which the unbanked have been reached, and they’ve made significant strides in Nigeria increasing national financial inclusion rates and fostering economic development. The DBN should be a model for a vision of inclusion that it hopes to see within the Nigerian financial sector, as it would be in everyone’s best interest, including the bank itself.
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