Bank of Industry: Uncrunching Nigeria’s Credit

I stumbled across this checklist of requirements  to get a loan from Nigeria’s Bank of Industry and promptly got into a debate with those who thought it was fairly standard. I found the requirements to be terribly onerous and inimical to the growth of credit in Nigeria.

Recently I had the good fortune to attend a seminar where Adebayo Ogunlesi gave a speech. Never one to pass up an opportunity at cheap, instant fame, I asked him a question about PPPs in Nigeria and his general thoughts on them as a solution to our infrastructural deficit. He answered but then used an illustration to explain how sometimes a seemingly intractable problem has a very simple solution waiting for it.

Not long after his company, Global Infrastructure Partners, bought London City Airport in 2006, they discovered that even though about 70% of the people who used their airports were business travellers who didn’t check in any luggage, they were still managing to lose so many people’s luggage. The guys running the airport in London couldn’t seem to figure out what the problem was, so head office in New York, where Mr Ogunlesi is based, decided to send in some chap to have a look at the problem. 

Now the chap who was sent down had never worked in an airport before. His entire background was in manufacturing factories. Mr Ogunlesi said when the guy got there, the CEO of London City Airport rang him and said something like ‘are you guys nuts? We want to solve a luggage problem and you are sending us a guy who’s never seen an airport before?’. His response was that since it was a problem of getting the bags from the traveller into the plane, he felt that someone with a manufacturing background was pretty much suited to finding the solution.

In a few days the chap had managed to figure out the problem. Apparently London City Airport had 14 departure gates but only 7 luggage transporters meaning one vehicle was being used to move the bags for 2 gates. A new luggage transporter cost about £3000 at the time so they promptly put in an order for 7 new ones and voila, the problem of missing luggage disappeared. Given that GIP paid around £650m to buy the airport in 2006, this is small change indeed especially considering the damage it could have done to their reputation.

 

There’s no doubt that SMEs in Nigeria have a serious funding problem. Microfinance Banks hardly do what they were setup to do and it’s almost impossible to fund any serious business, beyond trading, with a loan from one of our commercial banks at 24% interest rate. There is the perennial complaint about fraud and how people borrow with no intention to pay back the money. The complaints are now getting a bit boring to be honest seeing as people have been defaulting on loans in Nigeria since I was a kid and loan defaulting is not something unique to Nigeria.

As much as I disdain governments (especially the Nigerian variety), there’s a case to be made here for serious government intervention to fire up the economy by boosting credit availability. The Brazilian version of our Bank of Industry, BNDES, is an amazing institution that has been severally described as the ‘lifeblood of the Brazilian economy’. In January and February of this year, it lent the equivalent of $10bn to Brazilian businesses. When the credit crunch happened and Brazilian banks were squeezed, the BNDES simply ramped up it’s lending meaning that Brazilian businesses were never really denied access to credit in that time. 

Now by it’s own admission, the BoI claims to listen to applications from pretty much every size of business in Nigeria with the exception of cottage industries, so perhaps the ‘Industry’ in it’s name is a misnomer of sorts. But no matter, the point of this post is to share my ideas on how I think the requirements for accessing credit especially by small businesses in Nigeria can be made significantly less onerous thus getting the credit flowing and creating the jobs needed to take the initiative from the devil who is currently creating jobs for Nigeria’s idle hands at a record breaking rate.

 

1. First things first, #14 on the current BoI list of requirements will be scrapped. #18 will also be thrown in the bin. As an accountant, one of the first things I was taught was incomplete records. As far as I am concerned you don’t need a set of accounts to determine the credit worthiness of a business. Nigeria being what it is sadly also means that a set of accounts only really tell you what the person wants you to see which is usually nowhere near reality. There really is no point in giving people an incentive to lie by asking them to produce documents that are easily falsified. I will also be willing to grant some kind of tax ‘amnesty’ to people who haven’t paid taxes in the past. Loads of people don’t pay their taxes in Nigeria. My aim will be to get people and businesses to start paying their taxes going forward. #11 is what I find the most irritating on the list really. That too goes in the bin. Do you have landed property in an urban area? Keep it, I don’t want it. 

2. The most important thing I will ask businesses to supply is their business plan projecting a minimum of 3 years into the future. Again this plan will be simplified and everyone will get a fairly simple and straightforward template to work with. Then there will be the application form. This will ask for all your standard personal information as well details of the company. This form will be a maximum of 2 pages and you will also be asked to state how much you want to borrow. 

3. The application form will be free to submit online along with a PDF copy of the business plan you have filled. There will also be an option to make a postal application in the same way that people currently make their visa applications. You submit your forms along with your business plan at a DHL or UPS office and pay something like N5000 to make a postal application. No other method of submitting an application will be allowed. The point of this is to eliminate, as much as possible, any form of human interaction between businesses and staff of BoI. This is probably one of the easiest ways to fight corruption in a country like Nigeria. If you submit online, you get a text message with an application number sent to you with which you can then track your application later. Beyond the application form and the business plan, no other document whatsoever should be included in the submission. 

4. Stay with me, I am not mad. Again I stress, the whole point of all of the above is to as much as possible, avoid putting a Nigerian in a position where he will be tempted to lie to get his application approved. The forms will of course carry a warning that we will carry out verification checks on the information provided and if we find anything to be untrue, the entire application will be thrown in the bin and we wont tell you why especially if we’ve found that you lied somewhere. So instead of overwhelming us with your paperwork, just tell us the incorporation number of your company and we will get all the information we need from the CAC ourselves. Tell us your date of birth and address, we will run a check against what is on the INEC database. Tell us your phone number and we will run a check against what is held by the phone networks as your phone should be registered. On the form we will ask you for your passport number and then run a check with the British High Commission and US Embassy to see if you’ve ever applied for a visa. If you have, then we will crosscheck the information you supplied them with what you are telling us. If we find a lie anywhere, we will politely refuse your application and make sure a record is kept of what you did wrong without informing you….in case you want to try your luck again in future.

5. Again you don’t need to send us your bank statements thank you very much. Save your paper. Just tell us your bank account details, both personal and company, and we will contact your bank asking them to supply us with copies of your bank accounts covering however long we require. 

6. Now here’s where we will earn our money in the BoI. Say you want to borrow N100m from us, once your application has been submitted to us, we will send you a message telling you that if your application is successful, we will lend you the N100m but in tranches to be determined by us. We’ll have our team of credit analysts look over your application and determine how to release the funds to you. A maximum of 40% – 50% of the funds will be released to you in the 1st year. The timing will not follow any set pattern and will vary from company to company…completely determined by us. After the 1st year, you must prepare a set of accounts and pay taxes plus obtain tax clearance before any more funds can be released to you. If you have been paying taxes in the past, hey great! We will forward your name to Abuja for consideration in the next round of national honours. But going forward, you must pay taxes and produce accounts. It gets better, we will have a list of approved accounting firms you must use to draw up your accounts until the day you have paid us back all the money we lent you. These accounting firms will pay us an annual fee to be on the approved list and if we ever discover anything funny they have done, they get kicked off the list immediately. 

7. Once we’ve got all the information on the company and its promoters from all the different sources, a preliminary decision will be made on the application. At this point we then have a meeting to interview the directors/promoters of the company to get a feel of their understanding of the business they want to do and general demeanour. It’s important that a positive decision is reached before there is any form of physical contact between BoI staff and the borrowers. At this stage, there should only be something like a 10% chance of the decision to lend being reversed. 

8. Finally, every month a list of the names of companies, the promoters as well as the amount they have borrowed will be published in the newspapers and will also be available on the BoI website. Our people have a habit of using bank loans to buy Range Rovers and boats, so this should hopefully restrain them and let their neighbours know where their sudden wealth cometh from, if they choose to spend it thus.

That’s it. No requirement to bring ‘landed property in an urban area’. No need to overwhelm us with all sorts of documentation you might have falsified. Just tell us who you are, why you want the money and how you are going to use said money to benefit the Nigerian economy by boosting productivity and creating jobs and we will happily lend you the money.

Let me also say something controversial; for this plan to work, we must make sure that bankers do not come anywhere near it. Bankers think in a certain way and they are conditioned to be risk averse, even more so in a society like Nigeria. But the need to get credit flowing into the economy, is far greater than whatever risk of default there might be out there. BNDES in Brazil has been able to almost crowd out private lending by Brazilian commercial banks, meaning they have had to be competitive with their interest rates or find another way to make their money apart from lending. I think that if the BoI pulls its finger out and does some work, interest rates will come down from what we are currently seeing with the commercial banks. Not everyone will get a loan of course, some people don’t deserve to get N1 in funding. But what cannot be denied is that plenty of good and serious businesses are denied funding in Nigeria today because of a combination of bureaucracy and unrealistic lending requirements.

Please feel free to abuse my ideas. You can abuse me as well. But please don’t abuse my mother 🙂

FF

 

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12 thoughts on “Bank of Industry: Uncrunching Nigeria’s Credit

  1. This is an excellent piece. Almost tempted to send to Madam Oputu so she can make you an Executiv Director straight away.

    We are still a few years away from the information/disclosure needed to make the verification you described here work. Telcos/Embassies etc will not share information today, if they did my life would be much easier.

    Good to see someone thinking in the right direction.

  2. A good write up.

    There may be legal hurdles to jump re: “intrusive” search into people’s INEC and personal bank accts, but contract law may work round that.

    The BOI’s list looks focused on not losing any money. It seems to have been written up by a business insolvency banker rather than a relationship banker. Personally, I was amazed at the BOI requirement’s lack of focus on cashflow based covenants, or even mentioning that the loans would be phased and matching funds (ie debt/equity).

    I almost laughed at the “landed property” in an urban area requirement. What about “agric-businesses” – nos 1 on their priority list.

  3. nice post. Basically there are two big problems with credit in Nigeria. The first like you rightly pointed out is verifiable information. Information is the most critical requirement in reducing the risk of default. And in Nigeria credible information is really difficult to find. Credit bureau’s help fix that problem. I think two were supposed to have been set up But i don’t know. Second thing is that we all know that the cost of doing business in Nigeria is ridiculous. Lenders know this. Businesses know this. Everyone knows this. So unless you have a really really profitable idea …. That being said the BOI could do better. Landed property in an urban area? Who has that?

  4. Main aim: “The Bank primarily assists local and foreign entrepreneurs to establish new industries as well as expand and modernise existing ones”

    But as I understand it from 2001 to 2004, N1.7bn was disbursed, of which only N0.46bn went to small enterprises. The rest went to large enterprises.

    I wonder if the statistics have changed since then.

  5. This is a good piece, but I think you will not put the blame on BOI. The documentation is based on their experience of a typical Nigerian borrower. A typical Nigerian borrower believes the bank’s money is his/her own part of national cake and most times refused to pay it back intentionally. Only if you know how many young bankers have lost their jobs or have thier career tainted due to their customers(borrowers) not paying back, then you will understand.

    This is based on my experience as a commercial/corporate banker with over 7years experience. This individuals affect the prospects of good borrowers to get money as it becomes hard to sieve good people from the crowd and the only way to seive is through documentations.

    While agreeing with you that the documentation requirement is onerous, a lot are still valid. There is a difference between an accountant/accounting and credit analysis/analyst. If you cook your accounts, it will show no matter how smart you are unlless the credit analyst is careless especially where there is huge gap with your accounts statements. Also, BOI cannot ask a bank for your statement without your consent nor can the bank deliver the statement on your behalf, thier is what is called confidentiality in banking. The best that can happen is for BOI to confirm the authenticy and correctness of the statement you submit.

    The solution to this problem is not to put the whole burden on BOI for the process, but to set up units in banks to go through the applications and forward outcome to BOI. This way errors are minimised, value is added, and response is faster. Even in western countries, you need to have one on one interview with borrowers because it might give you some information about the personality, and some other indices about the proposal not contained in the report. Alternatively, BOI can set up small outlets for doing same instead of going through banks.

    T.

  6. Thanks for the comments guys.

    But Toro even with all their documentation, I hear the default rate is still higher than 20%. Something is missing in the link I think.

    You can get the applicant to sign off on disclosures that he accepts that the BoI will contact his bank to request his/her bank statements.
    I think some of these things can work because it’s a government bank….certainly not for a private bank.

  7. That default rate represents the risk factor for lending to Nigerians and that is why the rates in Nigeria are high to cater for things like this (rates for lending to foreign companies are much lower because lending history has shown they perform well above their Nigerian counterparts and they are more financially disciplined) . Even out of the performing loans, some are still sticky. Individuals like this spoil the show for the good one coming behind.

    I totally agree with you on the documentation, but what I am saying is that it will be quite hard to trim to the level you and I want because of the perceived risk typical of an average Nigerian borrower. A default rate above 20% means that BOI is and will continue to make losses thus eroding their capital base and tax payers money unless the trend is reversed. This will definitely impact of the lending capacity of BOI.

    T.

  8. Beautiful thots Feyi. The truth is that Nigerians do borrow money without intent to repay a lot. But, it is not the case most of the times. The economic environment here does not allow merit & genius to grow organically thru our system. Key Agencies like FMBN, BOI, NAPEP, NACRDB etc are preserved on lies. The Administrators are kept in shackles by our demonic Political Behemont. They must oil a system that seem obvious to fail. They are forced to preserve a primitive status quo of grabbing and grabbing. At best, our system promote sychophancy in Public Policy Developments & Implementations indirectly thru concepts (tho not totally condemnable ideas) such as Zoning, Federal Character Principle, Ethnic Balancing etc.
    In truth, many people took loans without ‘Adequate Mental Capacity’ to thrive in our chaos. The Public Service in other countries is the ‘cherished engine room’ on which their society is built. But check the quality of minds in the Nigerian Public Sector. We must learn to do the hard stuff. There are enough avenues to check LIES PEOPLE TELL when they approach Govt for Financial Support for their Enterpreneural Ventures.You hit the bull’s eye. The enabling laws can be established to make the demand for info from all those corporations LEGAL.We must learn to start mining data for Economic and Socio-political Intelligence. How long did it take NASS to pass the Law that backed Jega’s initial adjustment in the Electoral Timetable?
    To progress beyond rhetorics, the KEY Agencies of Govt that are best positioned to be the oiler of our economic growth & advancement must be correctly aligned with current Developmental Thinking across the globe. Supporting MSMEs financially is key to Real Employment Based Economic Growth (as against the paper growth figures released regularly by Sanusi & Aganga). When the system is made so onerous intentionally, it is like a premeditated still birth. We must built a society that will make people proud of their labour, sweats and efforts. We must reverse also the permeating spirit of impunity in the Public Service thru inspiring and transformational Leadership.
    Nice One.

  9. Haba my bros, haba. So in this your proposed method when you find lies, you do not let the people klnow? You keep them in the dark? That simply perpertuates the same fraudulent behavior that is bogging us down, besides do you not think that someone who has furnished you with all that information and his/her money deserves to know why his application was not successful? I think we should look beyond the immediate effects of our actions. While I agree that there should be some recrimination for falsifying information, the approach you have suggested is only towing the line of the deeply corrupt US Embassy system in Nigeria.
    False information while applying for a loan should be prosecuted as a financial crime not a slap on the wrist of NO ANSWER.
    My second commend is about the real focus of economic growth. Giving 100 million naira to a large company versus 100 thousand to a small person…..which one is likely to yield dividends in our Nigerian situation? It is easier to ensure that the small businessman/woman pays taxes than it is for the huge companies, besides 100K can not purchase a 4X4 and these small businesses can have reasonable turnovers in record time. Focusing on them will give a broader base for economic growth and provide productive occupations for the wasting youth out there in Nigeria.
    Economic growth has been and will always be galvanized by people and people are a bottom to top concept, not the other way around.

  10. Brother, you are just so on point!! I can’t dare to take out any point you’ve made so far, this here is the outright solution to the travails of SMEs in great old Nigeria.

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