Boosting Access to Credit by MSMEs: The Role of Credit Bureaus

Friday, June26, 2020 / 4:50 PM / Oladimeji Peters, Chairman, CBAN / Header Image Credit: CBAN

TheMicro, Small and Medium Enterprises (MSMEs) sector in Nigeria accounts forabout 90 million jobs in the economy. However, less than 15 percent of MSMEshave access to finance. Lack of access to financing, most notablyworking-capital financing, has led to the crimping of the sector growth and aloss in latent innovation, creativity and productivity.

TheNigerian Government has demonstrated its commitment to improving the ease ofdoing business and access to credit to consumers and small businesses throughvarious policies and initiatives. These include the promotion of creditreporting infrastructure and collateral registry, enacting enabling laws - including the Credit Reporting Act 2017 and the Secured Transaction in MoveableAssets Act (Collateral Registry Act) 2017, promoting financial inclusion, andadvancing various forms of direct and indirect interventions in loans andgrants to strategic economic agents. The commitment resulted in Nigeria makingthe greatest stride in improving access to getting credit in the World Bank'sease of doing business rankings. The country moved from 32nd position in 2017,to 6th position in 2018.

The interventions and initiatives by thegovernment provided necessary enabling environment, a strong regulatoryframework, that behooved credit granting institutions to do more. Though accessto credit by MSMEs and consumers in Nigeria is still very low. Despite thecountry's huge population of over 190 million people - less than 15 millionpersons/entities have enjoyed at least one form of credit from formal bankinginstitutions. In addition, accordingto a communique given by the Central Bank on Nigeria in January 2020, credit tothe private sector grew from 12.82% in November 2019 to 13.1% in December 2019.

Accessto capital is a major ingredient in growing businesses and economies. Lack ofaccess to finance is a key constraint on the growth of small and mediumenterprises in Sub-Saharan Africa, and an important limitation on employment,economic growth and shared prosperity. The problem of access to credit is arecurring complaint from manufacturers and businessmen. Aside the fact thatinterest charges are high, many small businesses cannot access credit.

Figures released in 2019 by the EnhancingFinancial Innovation and Access (EFInA) revealed that about 36.6 millionNigerian adults, which represents about 36.8 percent of the Nigerian adultpopulation, do not have access to credit, which compares poorly with thehigher rates recorded in a number of other developing countries. Nigerian Banksgenerally seek to lend money and earn the resultant incomes. However, they havebecome extremely careful due in part to the level of defaults beingexperienced. While most banks today will advance credit to blue chip companiesand their employees, the willingness to lend to small businesses is hampered bylack of credible information.

Also,research indicates that lending is higher and credit risk is lower in countrieswhere lenders share information, regardless of the private or public nature ofthe information-sharing mechanism. It is common knowledge in Nigeria that theSmall Medium Enterprises (SMEs) have challenges in obtaining substantial loansfrom some financial institutions mostly as a result of the high interest ratesimposed by the banks as well as the collateral required that most SMEs do notown.

Inmost developed countries, they use credit histories to determine uniqueinterest rates to suit each customer/potential borrower. Credit histories areaccrued based on information on the person's financial responsibility inhandling previous debts, bill payments and public information. Credit bureausin these countries can generate what is known as a Credit Score, a numberbetween 300 to 850 to ascertain the creditworthiness of potential borrowers.Credit histories equip banks with information they need to determine a customer'screditworthiness and charge interest rates based on the individual's riskprofile.

Creditgrowth drives the economic growth of the country. Credit promotes investmentwhich has propelled many economic booms and strengthens entrepreneurship. AsSMEs cover over 75 percent of Nigerian jobs, their ability to raise capital toexpand is crucial for economic growth and development in Nigeria. According to Statista, a leading provider of market andconsumer data in Hamburg, Germany, the value of domestic credit grantedto private sector in Nigeria was about 10.9% of Nigeria's GDP in 2018.

Amore robust solution to this prevalent challenge would be the utilization of CREDITBUREAUS. A credit bureau is an institution that aggregates the informationused to build credit histories, hence they are in fact the most importantplayers in bridging the information gap and solving the asymmetric informationchallenge in the Nigerian credit market. Currently, there are three creditbureaus in the country - CRC Credit Bureau, CreditRegistry and FirstCentralCredit Bureau (Formerly XDS Credit Bureau). Each of the three licensed creditbureaus today has an average repository of about 25 million records of creditdata from institutions across various sectors of the economy including but notlimited to commercial banks, microfinance banks, mortgage banks, retailers,cooperatives, finance companies, leasing companies etc. In view of thisphenomenon, credit bureau coverage remains low in Nigeria at 8 percent comparedwith 64 percent in South Africa, 25 percent in Egypt and 17 percent in Ghana.We need to urgently change the narrative of credit concentration and increaseaccess to credit.

Theproducts and services provided by credit bureaus improves the ability oflenders to evaluate risk and of consumers to obtain credit and other productswith speed and at competitive terms. Credit reporting expands access tofinance, especially for consumers and MSMEs and plays a key role in improvingthe competitiveness and efficiency of credit granting institutions by reducingcredit processing costs and time. The availability of credit informationtherefore implies a more efficient allocation of credit at lower interest ratesaccompanied by higher economic growth and a more diversified credit distribution.

Thecredit bureau infrastructure is also designed to provide support for theintroduction of new products in the financial system such as credit cards,mortgage loans, personal loans, auto loans, working capital for smallbusinesses, etc. This should result in exponential growth in retail lending andsignificantly improve production and consumption, thereby stimulating the growth of the economy. Theinfrastructure is also meant to facilitate credits and post-paid services bynon-financial institutions such as installment rental payment, increasepost-paid services by telecommunications and electricity distribution companiesrather than the current largely pre-paid model, expand credit sales byretailers with confidence, encourage installment payment of school fees andinsurance premiums.

Creditreporting systems are essential to creating sound financial infrastructuresthat facilitate lending and help expand access to credit to a significant shareof individuals, microfinance, and small and medium enterprises. Also, they helpsatisfy lenders' need for accurate, credible information that reduces the riskof lending and the cost of loan losses.

Creditreporting is beneficial to all parties in the credit cycle. It helps lenders tomake informed credit granting decisions such that default rates can reduce,helps individuals/borrowers without collateral to secure credit, leads tobetter payment behaviour on the part of borrowers for fear of being deniedcredit and help borrowers with positive information to get favourable loanconditions. With these in place, the enhancement of financial inclusion whichwould in turn promote the sustenance and growth of MSMEs, would be guaranteed.