Nigeria Based Banks May Not Be in the Business of Growing the Nigerian Economy
This article was first published on my linked in profile sometimes in 2019
I was reading through an article on Bloomberg earlier, about how Nigeria Liquefied Natural Gas Company (NLNG) is discussing raising some $10 billion in debt and equity to finance its Train 7 which could potentially increase its capacity by 40%. $2 billion (about N700 billion) of this is being expected from top 10 Nigerian banks, Guaranty Trust Bank and Zenith bank inclusive.
NLNG no doubt is a revenue spinner for Nigeria government, given that the company does close to 20% of the world market, estimated to be between $15 billion to $19 billion according to pieces of reports I found on the internet. I could remember also, that dividend payment in 2015 by NLNG was a big life saver for the government at the inception of the Buhari administration.
One of the big issues we have till date with our economy however, is that that largest revenue earnings from the government does not come from the industries that support the economy the most. While Oil and Gas still gives the highest revenue, the sector does so little as the economy’s main stay. Agriculture, IT, Entertainment etc, do so much more in sustaining the economy than the Oil and Gas. This conclusion is drawn by reviewing how well those sectors provide meal tickets for the people in relation to the oil and gas sector. The sector has far less people employed compared to agriculture, IT, entertainment.
If eventually, 10 banks provide N700 billion in financing to NLNG, the money would be providing more jobs for foreign countries than in Nigeria. Firstly, the expansion project will be largely done by expatriates, with components of the projects imported almost 100%. With this, we would have provided meal tickets in other lands. Secondly, our industries are not tooled for LNG as their source of energy, hence NLNG (and Brass LNG) is built for exports, and provide energy sources for other countries. Thirdly, the banks would most likely still source the credit from foreign banks to lend to NLNG at a margin. Interest payments on the loans will therefore still be repatriated.
On the contrary, N700 billion could be disbursed to 700,000 Small and Medium Enterprises (SMEs) at N1 million each or N10 million each to 70,000 SMEs. These SMEs in different sectors, would have been empowered to expand capacity and in turn, be able to provide jobs that will give meal tickets. At loan rates of 20%+, the banks would make much more margins.
What then is the problem? As it were, the banks are not structured to support such critical mass lending which is why small businesses end up with loan sharks that charge 60% per annum and above. The banks would rather do large ticket sizes with fewer entities, because of ease of loan management, than do small ticket sizes that would overwhelm their structures in terms of management. Loan collection in Nigeria is a big headache I agree, but banks are also susceptible to dangers of dying quickly from the hands of large loan tickets going wrong. Smaller sizes could kill too, if not properly managed. There are examples of banks that have died in either circumstances, but there are more banks that have been knocked by large loan tickets going wrong.
The problem remains, however, that if banks keep avoiding small tickets to several businesses, the economy will remain in a slow mode as the banks consider the easier gains than expanding their structure, deepened with knowledge to lend to several small businesses.
The CBN comes in here. Though, there have been a lot of intervention funds and policies, the problem remains that the banks do not posses the structure to drive them. CBN needs to move from the penal regimes to giving incentives to banks that support lending to small businesses. Only when the small businesses have access to financing and are doing well that the economy can witness the growth we desire. It is time CBN changed the narratives, by emphasizing that banks operate as financing institutions and not just margin dealers. The CBN need to encourage them to have specialist desks, with officers trained in the technicalities of businesses, to be able to provide advisory and financing. I know, though, that it is not as simplistic, this article is unfortunately limited in scope, but in further articles, I may consider taking sectors in chunks, to discuss what the banks could do about them. The point today, is that the $2 billion loan could have a lot better effect on the economy if put in sectors that are mainstays of the economy than putting it into NLNG that would only generate revenue that will end up in some fertilizer subsidy, fuel subsidy etc.
Thank you for reading!
