Development Bank of Nigeria will struggle to finance SMEs, says CEO of Paga

21st April 2017 Jack Aldane

The newly-formed Development Bank of Nigeria could fall short of its goal of financing small enterprises if it insists entrepreneurs put up collateral for loans or allows structural inefficiencies to slow processes, participants at the 2017 World Bank Spring Meetings told Development Finance.

Speaking before an audience on the success of Nigeria’s financial services platform Paga, Tayo Oviosu, Paga’s founder and CEO, said such limitations mean development banks are “rarely” chosen by Nigerian entrepreneurs seeking financing for their new businesses.

Paga, which began in 2009, now serves more than 6 million Nigerians through SMS accounts and agent-staffed kiosks. The platform lured starting capital from investors including microfinance investment firm Goodwell West Africa and private equity firm Adlevo Capital, as well as two notable angel investors, Jim O’Neill and Tim Draper.

“I’m not as hopeful about the new bank. I just don’t think it’s going to affect the start-up ecosystem at all, because I just don’t think they’re going to be able to lend or provide the capital to start-ups,” Oviosu said.

He added: “The problem we have institutionally is that for the banks and the government, they talk about lending and providing finance to SMEs, but at the end of the day they’re always asking for collateral.”

The Development Bank of Nigeria, which recently appointed Tony Okpanachi from Ecobank as its CEO, was co-initiated by the World Bank and several development finance institutions with the aim of targeting commercial and microfinance institutions supporting micro firms and SMEs, and in particular agribusinesses.

The World Bank underscores the fact that as recently as 2014, only 9.5 percent of SMEs in Nigeria were found to have loans on their books.

Melissa Cooks, founder and managing director of Africa Sunrise Partners, told Development Finance that SMEs in Nigeria still struggle with what she describes as a “lack of power, poor infrastructure, costly logistics, corruption, and bureaucracy”. Adding to the burden, she said, is scarce and costly finance.

“If the bank can on-lend longer-term, cheaper funds to microfinance institutions in the way that has succeeded in Kenya and elsewhere, this might ease the finance burden for Nigerian firms. Equity Bank in Kenya and dfcu Bank in Uganda are good examples of how this can succeed,” she said.

“In my view, the DBN should also emphasise financial education, business balance sheet management and other capacity-building in order to improve the chances for success of Nigerian SMEs.”

Paga concluded by commenting: “I think what we need to do is encourage venture capitalists. If there’s a place to invest today, where you want to make real great returns, I think its Nigeria.”

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