Access to credit by investors is a critical factor for economic development of any nation. A country like Nigeria that says it is in a hurry to catch up with others can not but make policies that gives local, as well as foreign investors access to credit. President Goodluck Jonathan's core economic policy is transformation of the Nigerian economy. Transformation agenda is critically dependent on the quality of investment climate.
Since his appointment as Minister of Trade and Investment, Dr Olusegun Aganga and the Managing Director of the Bank of Industry, Ms Evelyn Oputu, have been going around the world in search of foreign investors who would put their money in the economy. Hard as they try, investors seem not to be interested in the economy, at least in the way the duo want to jump start or leap frog the economy. The investment climate seems not to have changed for the better to attract investors. Local investors are suffocating under the weight of high interest rate and lack of access to fund from both the money and capital market.
Industry report suggests that in 2012, funding was a major problem for investors in the country. The cost of fund in the economy is high and access to credit is even a more serious problem. The CBN in its avowed war on inflation has not made things easier for investors. The tight monetary policy stance of the apex bank is identified as a major factor that affects the credit conditions in the economy in 2012. Other areas of concern to local investors include the demand by banks for collateral cover which is beyond many investors.
Also, interest rates and regulatory uncertainty have adverse impact on the banking sector. This tough operating environment made lending very difficult as it increases the risk of loan default. Businesses, especially small and medium enterprises have become reluctant to take loans because of the high interest rates which affect the banks on the long run. Businesses are also prone to defaulting on their loans because of the cost of these loans and business fundamentals which affects the quality of the bank's balance sheet. This vicious circle does not appeal to would be investors.
This impedes access to credit, slows down the tempo of economic activities and undermines intermediation role of banks in the financial system. Government borrowing at a high cost of between 14-16 percent 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 government coffers; a scenario which was clearly not healthy for the economy.
The business and economic environment in Nigeria in 2012 as reported by the business community was typically characterised by upsides and downsides, but the capacity of investors to harness the opportunities was constrained by the prevailing challenges of the operating environment. The operating environment was generally adjudged to be unsatisfactory by many investors. This had profound impact on returns on investment and profit margins.
Lagos Chamber in it review of the operating environment in 2012 said The interest rate regime made it uneconomical to access bank borrowings for the purpose of investment . The dearth of capital sourcing by companies affected the tempo of activities in the capital market. The huge inflow of bank assets into government securities also had a profound adverse effect on capital market operations during the year. Most businesses have placed expansion plans on hold because funding has been a major challenge during the year. Without expansion there will be no need for new capital which is a core activity in the capital market".
The broad issues thrown up by this development in the economy during the year were a weak consumer demand atmosphere, high cost and access to credit, difficulty in cargo clearing processes, high transportation costs, especially the collapse of the rail system; institutional problems, corruption, especially in relation to public sector transactions. Other concerns were the uncertainty and inconsistency in the policy environment, growing insecurity, manpower issues and the relevance of educational curriculum to the needs of the economy; high level of receivables across sectors, power supply challenges, poor sectoral linkages and weak commitment to the development of indigenous enterprise".
If this government is serious about its transformation agenda it must come up in 2013 with business friendly policies that will encourage investors. Monetary policy in 2013 should be geared toward lowering interest rate, reduction in corporate tax to release investible funds, Existing companies should be encourage to expand through the stimulation of household demand for goods and services.