The interest rates on bank loans are too high that it cripples SME’s.
The Lagos Chamber of Commerce and Industry has called on the Government to ensure that Small and Medium Scale Enterprises (SMEs) and manufactures get loans at single digit and eliminate delays associated with loan processing.
The Director General of the chamber, Muda Yusuf, in a report issued recently, said that the issue of unavailability and high costs of funding is weighing down economic activities in the nation.
Funding was a major problem for investors in 2012, the LCCI boss said in the report titled ‘2012 Business Environment Report’ available on the chamber’s website, which highlighted funding challenges faced by manufacturers and entrepreneurs.
Mr. Yusuf said the interest rates are as high as 25-30 per cent and even at that, access to credit at these rates was difficult.
“The cost of fund in the economy is high and access to credit was even more serious problem” he said, adding that the tight monetary policy stance of the Central Bank of Nigeria has been identified as a major factor that affected the credit conditions.
He added that other areas of concern such as collateral cover requirements by banks are beyond many investors.
“This impeded access to credit, slowed down the tempo of economic activities and undermined intermediation role of banks in the financial system.
“Government borrowing at a high cost of between 14-16 per cent which is one of the highest globally was a major source of the credit problem in 2012. It created a disincentive to lend to entrepreneurs; put pressure on interest rates and increased the flow of funds from the banking system to the government coffers; a scenario which was clearly not healthy for the economy,” he said.
Interest Rates and Regulatory uncertainty had adverse impact on the banking sector itself, according to the LCCI boss.
He said the tough operating environment made lending very difficult as it increases the risk of loan default.
“Businesses, especially small and medium enterprises are reluctant to take loans because of the high interest rates which affect the banks on the long run”.
Mr. Yusuf said businesses are prone to defaulting on their loans because of the high interest rates on these loans and business fundamentals which affect the quality of the bank’s balance sheet.
“The interest rate regime made it uneconomical to access bank borrowings for the purpose of investment in capital market. The dearth of capital sourcing by companies also affected the tempo of activities in the capital market” he said.
Most businesses have placed expansion plans on hold because funding has been a major challenge during the year and without expansion there will be no need for new capital which is a core activity in the capital market, according to Mr. Yusuf.
He urged the government to de-risk the environment by speeding up the process of reforms to ease the pressure of structural problems on the economy.
“The power sector reforms will help lower the cost of doing business. A moderation in interest rates will also reduce the risk of default.
Government needs to steer the banks into proper financial inter-mediation,” Mr. Yusuf said.
He said there is a need for the government to embark on a more accommodating fiscal and monetary policy and to do more about providing reliable infrastructure services as persistent decline in infrastructure services has increased the cost of doing business and eroded profit margins.
“Government needs to open up the investment space to create more infrastructure funding transactions which will have multiplier effects on the economy” he said.
He also urged commercial banks should do more to give credit/ loan to smaller medium enterprises.
A senior bank official, however, said that despite the challenges faced by manufacturers and enterprises, the era of lower interest rate is not yet in view, as the banks are also in business to make money.
Olusoji Salako, National President, Association of Senior Staff of Banks, Insurance other Financial Institutions (ASSBIFI) said banks, as businesses, have to operate to make profit and not run at a loss.
“The cost of doing business generally is high. The banks are also business entities and must be run profitably. As long as operating environment is tough, Small and Medium Scale businesses would not have the opportunity to get bank loans.
“As long as power is still epileptic, and banks have to power their businesses at their own costs, along with the absence of other basic infrastructure to run businesses, interest rate would continue to be high, because it’s a factor influencing banks’ year end profits,” Mr. Salako said.
Bismarck Rewane, Financial Analyst and Managing Director, Financial Derivative Company, FDC, a diversified financial institution said interest rates, in 2013, will continue to be market driven.
“Interest rates are influenced by the Central Bank’s adjustments of the Monetary Policy Rate (MPR)”.
Reports from FDC show that credit to private sector grew by 16.96 per cent to N15.13 trillion in October, over December 2011 figure of N12.93 trillion.
According to Mr. Rewane, MPR are likely to be reduced from current levels in view of lower inflationary threats this year and that there is a “strong possibility of marginal reduction”.
He however said that the possibility of a complete removal of fuel subsidy will stall interest rate reduction due to possibly high inflationary threats, while a partial subsidy removal is unlikely to cause a rise in interest rate.
He said banks’ profitability is expected to remain relatively the same since there was no cut in rates that would have increased their ability to give out more loans.
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