We’re Addressing MSMEs’ Financing Nightmare – Okpanachi,
When Mr. Tony Okpanachi was appointed the Managing Director/Chief Executive Officer of Development Bank of Nigeria (DBN) in 2017, his mission was to alleviate the financing constraints faced by Micro, Small and Medium Enterprises (MSMEs) and small corporates in Nigeria.
His job remains to provide financing, partial credit guarantees and technical assistance to eligible financial intermediaries on a market-conforming and fully financially sustainable basis. One year down the line, he has forged on quite steadily. He speaks more about his job and DBN.
Operations so far
You will recall that on November 1, 2017, we started our lending activities with three microfinance institutions. We have made available to them almost N5 billion and this was supposed to be for several Small and Medium Enterprises (SMEs). Since we are a wholesale institution, we work through financial institutions. So when they come with their clients, we make a line available to them and we draw on the line. What is available now to the three microfinance institutions is about N9 billion. So, as they are bringing their clients on board, we sign them on. Beyond that, we have started bringing on board some commercial banks, which you can see on our website. We have also made lines available to them, so as they come, we draw down the line and that’s when we will begin to give actuals. But I’m glad to tell you that we have almost nine currently on our list both of commercial and microfinance banks and between now and the end of June, we expect more commercial banks. So, as the commercial banks come up, knowing they have more of the volumes, we will hear more from them.
European Bank and ISD investments
We have equity shareholders coming in, that is African Development Bank (ADB) and the European Bank. They have invested $50 million and $20 million respectively. So effectively, they are shareholders of DBN. So, the announcement that was made was to effect that they have committed and that they are going into it and looking at the publication from our issuing house, DLM, (Securities and Exchange Commission (SEC) has approved the basis of allotment. So, as we speak effectively, they have funded the investment in DBN. So, they are now shareholders in DBN. The $50 million from ADB and European Bank are already in the system; so now, the bank is owned by the Federal Government, NSIA (National Sovereign Investment Authority), ADB and European Investment Bank (EIB).
PFIs that have signed so far
Wema Bank, Ecobank, Sterling Bank, Diamond Bank, Fidelity Bank, They are among the Primary Finance Institutions (PFIs) or commercial banks we have signed on to work. For the microfinance banks, we have microcredit, infinity, busack. There was an issue with Fortis; I understand they had issues with accessing the fund. We have not disbursed to them yet, I know they are working towards meeting the conditions that will enable them to access the funds. We have not disbursed to them yet.
Meeting set criteria
For us, we receive the exact request; check the tenure and the terms of condition offered before we disburse. So, we disburse for on-lending not for life for them to hold on to. We have a mechanism within our system that ensures that the funds hit the account of the end borrowers within 72 hours. Beyond that, we follow up on them to see the impact made by the borrowing. For example, we check if it had created more employment, has it increased turnover? Has it increased revenue to enable them pay more taxes when necessary? So, we look out for all of these. We don’t just create the lines for the banks alone. Like I said, we made available N5 million so we draw down as they bring the clients. So, it is not just giving the money to the bank alone, we go further than that. We do things differently. We ensure that having made the money available, the banks bring clients.
We do not have uniform interest. No. It actually depends on the risk profile of the institution. It is not flat rate for everybody, as some, based on assessment, may be more risky. Knowing that we take the risk of the financial institutions, we assess them and rate them. So, that brings about the risk premium for each.
The upper limit is tied to the weight we attach to the risk of the rating. There is a minimum criterion you must reach for you come on the DBN rating depending on the institution’s risk profile. For our rating, we have a model which is a bit complicated due to the many factors in our rating. The difference from our rating may not be more than 100-200 basis points depending on the risk profile. The upper limit is a function of the risk premium. For PFIs who are below investment grade, it is 1.5 with reference to the market rate.
We have not started risk sharing, though we have got the regulatory approval to set it up. It is going to be a subsidiary of DBN and we have started working with the World Bank to get the consultant to put the structure in place. It is our projection that towards the end of the year or early next year, the credit guaranty should come on board.
De-risking the industry
That is also ongoing. If you recall, we have a unit with the Ministry called the Project Implementation Unit. The idea is to have different units handling the capacity building issues so that we are not distracted from the core mandate of lending and they have sent out RFPs expression of interest for consultants to come in and the process is ongoing. Then the next stage is to ensure that the consultants are short-listed and we identify which PFIs need this capacity building and allocate consultants to them. In the process of appraising the PFIs, we identify ways we can help some of them that do not meet our criteria. That’s where the technical assistant comes in. For example, if it is lack of a strong SME desk that the problem is, we give assistance. The idea is that even if a firm does not qualify today, we work with them to make them qualify in the near future. The overall objective is to create more access for SMEs.
Raising more funds
We don’t have any reasons for now to go to the market to raise more funds. No. From the funding we have now, we can still move for the next two years. It is in two years’ time we can consider going to the market depending on the market situation. But where we are now and with the unburdening of the PFIs, we are not going to see uptake of the loans. So, it is at that point that we will seek more funds. But I think we have a funding that will take us for one to two years.
What is available to you now?
There are some information that we cannot put out there. But so far, all the development partners we have taken first or second tranche of drawdown and we have been able to meet up. In terms of the amount, I can assure you that we have enough funding now to disburse to customers.
Helping young graduate start-ups
Part of what we are doing differently is that we are ready to fund start-ups. For instance, in capacity building, we are telling financial institutions that once the projects come and they assess them, we are ready to take up the risk with them to give funding for start-ups. Subsequently, we are going to come up with products that we are going to sell through these financial institutions. For such institutions, again, that is down the line. For now, we want the buy-in of the financial institutions themselves. So, we tell them the fund is available for them and we are willing to fund start-ups. We build that confidence in them and subsequently we go out with our products directly to say help us sell these products to these people but that will be in phases. But we are very much available for start-ups. We will also share risk with them and the overall objective is to make funds easier for them to access.
20,000 SMEs target
We are working towards meeting the target. As I said earlier, we are in our first year of operation. Now DBM is a start-up, there is a process of start-up. In the first year, we have done full operations. So, you are going to start the follow up this year; we have full operations in place as well. We were licensed on March 29 last year; we took process of setting up structures that took some time and because we are a wholesale institution, we are going to partner with some financial institutions to bring them onboard before we can now begin to lend to them. I can assure you that we are on course.
So far, the request from PFIs for Micro Small and Medium Enterprises (MSMEs) is beyond 500. But like I told you, as they make requests and meet the conditions, we fund them.
PFIs selling at higher interest rates
Every Development Finance Institution (DFI) is more like a catalyst. You cannot meet all the demands. A typical business outfit comes to a bank; it needs working capital, for instance, which is mostly short tenored like 90 days, six months, etc, and most banks are willing to take those businesses.