11 February 2019

Nigeria: Opanachi - No Bank Will Take Credit Risk for Political Borrowers

interview

The Development Bank of Nigeria was established in 2017, with the aim of alleviating financing constraints faced by micro, small and medium enterprises in the country. The Managing Director of the bank, Mr. Tony Okpanachi, in this interview speaks on the achievement of the bank one year after it commenced operations. Excerpts:

The Development Bank of Nigeria (DBN) just marked its one year in operations, what has been the experience so far. Are the Participating Financial Institutions(PFIs), which you use as intermediaries not seeing this as another profit-making venture because lending rates have remained high. Besides, what has been the sectoral spread?

We are a wholesale institution so we encourage the financial institutions (DFIs) to go into different sectors. We are not excluding any sector, especially any sector that has growth and job creation potential benefit. In terms of the nature of our intervention, so far, what we have seen is that funds have been used for expansion, because we are encouraging longer tenure funding. That is the key differentiating factor of DBN. We encourage PFIs to give longer tenure long loans to MSMEs so that they have enough time to stabilise their business and begin to repay. So in the education sector, for instance, what we have seen is one or two taking DBN loans to build hostels, classrooms and laboratories. It is more like infrastructural lending and not for working capital. Now, if you talk about the on-lending and single digit interest rate, I have said that financial stability is one of the things DBN has to focus on and in doing that, in our pricing model, we want to put that into consideration. We are not an intervention fund. This is funding by a financial institution that is providing longer term fund. So the risks of the borrowers lie in the financial institutions.

The PFIs also price the risk appropriately to determine what rate. But in our engagement with them, we influence to some extent how the rate will go. Remember they are the ones to give the credit risks, so we engage them. If you look at the difficulty of that segment accessing funds, not only about the pricing, but also stability and availability of the funds is key. If you talk to most MSME operators, they will you tell you give me the money let me even see the money first. So, we work to encourage these financial institutions to lend to them and in encouraging them to lend to them, you must realise that they take credit risk and this should be priced appropriately. However, in the long-run, the strategy of DBN is how to see the continuous provision of the funding and be able to keep the pricing lower and on a sustainable basis. But the key thing for us is sustainability not just intervention once and then you run out funds and not be able to continue to lend on the long run.

If you look around, it is the sustainable financing of that sector that has brought down interest rate and pricing because once the funding is there, you create competition even among the financial institutions. So, without being prompted, if you have option, you go to bank A and if it is charging you rate that is high, you can switch to another bank and this will bring down the pricing on the long run. However, if you look at the MSME segment very well, pricing alone is just one cost. There are so many other factors that affect their eventual cost. If you look at the study that has been done over time in terms what is key that affect MSMEs most, you will find out that the cost of funding is almost about the fifth item. There are so many issues that need to be dealt with for them to be able to breakthrough, even if you give them loan at one per cent there are so many other factors that affect them. For instance, infrastructure and others, are things that are being dealt with at the macro level. We should be not fixated on the issue of pricing because it is just one key. If you look at hierarchy of issues affecting that segment, pricing will be about number five. A lot of them will tell you that availability is not even there. Two, most of them will tell you give me the money, I know how to price my products in such a way that I will still make my money.

So, pricing is key and very important but that is not the only factor affecting overall operations in the sector. From experience, commercial banks are set up for business, right? but they also know that as long there is competition, free market bring competition. And what determines which bank you go to is the one that gives you the best pricing. So, as long as we going to create competition in the market and availability, then be assured there will be more sustainable pricing at affordable rates. Commercial banks are not set up to fleece their customers and of course if they run customers out of business, they will not be there to do operate tomorrow. So, it is the pricing of whatever risk they are taking that will determine their eventual rate. DBN does not have any fear that the PFIs would want to take advantage of MSMEs because it is just that we provide an intervention fund and we give it out at particular rates. However, we engaging with the financial institutions in terms of sustainable pricing.

But there is the fear that there could still be people who borrow these funds and divert the loan for political purpose?

I can assure that the way DBN operate, we are a wholesale financial institution. I can assure you that no microfinance bank or commercial bank will want to take credit risk for any political borrowers whom people think may come in to hijack the system. Secondly, we ought to get to see who the end borrowers are. We also do monitoring and evaluation. We still go beyond to see if the money is being utilised as stated by the borrowers. So, I can assure that the fact these financial institutions do their analyses and assessments, we still do our part to ensure that the PFIs do not accommodate political borrowers.

Talking about guarantees, why do you have to float a separate company for this. How much loan have you given out so far, what has been the spread and what are you projecting this year?

You know, the business of providing guarantee is different from lending. This is the first time we want to set up such a company in Nigeria, a wholly credit guarantee company whose job will be to provide guarantee. You have some in Africa but in Nigeria we don't have any. Now, being a subsidiary also ring fences it from what DBN will do. We can go on with our lending activities and also provide guarantees. For example, when financial institutions say their need is not funding but they want you to share with them, you have to have a specialised institution that can dissect that situation properly based on the risks involved. That is why a subsidiary is being set basically for that. It is going to be fully owned by DBN so that its objectives too are aligned with DBN's overall objectives. That is one.

As you know DBN formally commenced lending operations in October 2017, to its first two PFIs, which were microfinance banks. But with a strong on-boarding exercise it carried out within the year, the bank currently has a total of 29 PFIs which include commercial banks at various stages of engagement.

Our total disbursement in the first year was N31.364 billion, thus exceeding our year end projection of N30 billion. Total number of end borrowers stood at 35, 000 which also exceeded our year-end target of 20,000 MSMEs. Women accounted for 73 per cent of the end-borrowers of the DBN loans and they received 27 per cent of the total amounts disbursed.

In terms of how much we projected to do this year, we are hoping to do up to N70 billion. In terms of geographical spread, from what we found out, all the six geo-political zones have benefitted. The beauty of our model, because we use financial institutions as intermediaries, they have locations all over the country. But in terms of coverage, some areas are higher. From the first one year, we have seen that all parts of the country are being covered. We are building capacity. For DBN, what we are beginning to do is first access to credit. For example, for start-ups, how do you fund start-ups? They don't have a track record. So, we are building capacity to learn how to be able to encourage the PFIs begin to lend to start-ups on cash-flow basis and on alternative collateral they can take if there are challenges for MSMEs. That is the area of intervention we want to do in terms of capacity and you know that commercial banks already have several strategies to deal with lending. But were also telling them to go beyond the traditional lending and how to provide that services to MSME.

In your areas of intervention, energy is not included. Also, how are you monitoring to ensure the risks are brought to lowest level?

As I mentioned before, it is not that the energy sector is excluded. The financial institutions bring the request to us, we do not dictate to them which sectors to lend to. What we have reported to you is what they have brought so far. As we go on, those who are in the energy sector will come and out of 35,000 beneficiaries, about 80 per cent of them are micro. As more of them come, those who are comfortable to work in the energy, I am sure we will see them. So, the energy sector was not excluded. We are not sector specific. As long as you have the potential to create employment, potential to empower and contribute to development and growth, DBN will fund you. We also know that some sectors have more growth potential. So as we go along, we encourage such sectors. In terms of monitoring, our model is that, we just give the money to the PFIs. What we do if they bring their transactions, we know who the borrowers are, we have their details, who they are and what they do upfront. So by the time we give the money to financial institutions and they on lend and we go again to monitor. We go directly to the institutions. Before they give the money out we have a service level agreement (SLA) with them and know when the money gets to the borrowers. So, once they get the money, we know when they will disburse. Therefore, the fear of holding funds before they are disbursed will be mitigated because we already know before it gets there and when it gets there, we do our evaluation to find out the purpose for which the funds were taken and it is it really used and if it is really making those impact. The impact will be felt in years to come but we start our evaluation immediately to put discipline to it. Funding from DBN has a purpose and that purpose must be there. We are strictly following that. We have done only one year, but even at that we have started our monitoring and evaluation. Beyond DBN itself, there is an independent consultant handling this and part of what they do is go out and find out from the borrowers how has the money you got impacted livelihood. And some of those findings will help us to fine tune what we are doing to ensure that there are no gaps.

How do you make sure that bank does not charge exorbitant rates?

Well, there is not cap on the interest rates that financial institutions give. But we have a visibility of the rates. Even without any caps, we see banks lend to some companies at 13 per cent. We have seen some lending at 16 per cent and some 18 per cent.

Is there provision for lending to associations such as cooperative societies?

For now, for you to be a PFI, you must be licenced by the Central Bank of Nigeria (CBN) and I don't think cooperative societies have such registrations to access our funding directly. But as the business unfolds, there is the likelihood that we will expand, based on experience. But for now, the associations and cooperatives have to come through other financial institutions to be able to access the loans. Some of the loans we see through micro finance banks are associations. They come together and the banks do group lending to them.

What about partnership with some foundations? Are you looking at putting funds together to assist some sectors in those areas and can venture capital firms access your funds?

In terms of partnership, it is good a point. But funding to the MSME sector is a different thing. DBN is not providing equity but some of them need to have equity, some of them need to have some angel investors coming into them. Foundations such as Tony Elumelu Foundation among others, can provide seed capital for them to start. But most businesses will also need debt component and the DBN loan will come in form of debt component. So, the advantage of the DBN loan is that it will provide longer tenor which is almost equity because you are going to have it for about 10 years. And in some cases when you have a moratorium of 18 months, effectively you have 12 years' tenor money. This is as close to tier-2 capital. So in working with these institutions we are going to see ones that have been provided seed capitals that they have started their business with but now need to expand their business or in addition to the little capital they have, they want to need to take debt to be able to take it to the next level. That is where the DBN funding will come in. In terms of data, we are going to carry out studies, for instance, the monitoring and evaluation we are doing, the information from there will be shared. We are going to carry out specific studies in that segment. Beyond that, we are going to work with other partners, both local and international to help provide data. The idea is to provide enough information to financial institutions to encourage them to be able to lend to the sector.

What are the challenges and what is the level of non-performing loan(NPL)?

Talking about NPL, we have a zero-NPL because of our model. The NPL will come if the PFIs themselves fail or fail in their obligations. And given our strong criteria to be able to access our funds, so far we have not seen any NPL. The challenges in start-ups and wholesale institutions are obvious and we need partners. So engaging with partners to buy into what we are doing is one of the challenges. Some partners may not believe. The interesting thing is that now that lending has begun and they are seeing, we are getting more enquiries. The second challenge is the expectations on pricing. The single digit rate has been on their minds for some time when they see an institution like this, they expect that come through. Of course, pricing is key in terms of affordability, but accessibility and tenor are equally good and that is the strong point of the DBN. We were established to give long tenured loan. We have to let people know that pricing is not all and that is an initial challenge that we working on. The awareness itself about wholesale lending.

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