Why SMEs Struggle to Access Bank Loans -Deji Peters, CBAN Actn Chairman

Earlier this year, PwC published its MSME Survey Report which, among other things, revealed that bank loans do not constitute the main funding option for Nigerian Micro, Small, and Medium Enterprises. Instead, they rely on their savings whilst borrowing money from friends and relatives.

The report also disclosed the reason why this is the case –which is the fact that small businesses find it difficult to access bank loans in Nigeria.

The truth is that uneasy access to credit facilities has long been a major militating factor facing Nigerian MSMEs. But here’s an important question to consider –do MSMEs actually know the right things to do in order to have easier access to loans? Well, probably not.

In this exclusive interview, the Acting Chief Executive Officer of FirstCentral Credit Bureau tells us why some SMEs struggle to access loans and how to avoid the struggle. Enjoy the read.

BEA: May we meet you?

Oladimeji Olamide Peters: My name is Oladimeji Olamide Peters, the Acting MD/CEO of FirstCentral Credit Bureau, one of the three Credit Bureaus in Nigeria. I am also the current Chairman of the Credit Bureau Association of Nigeria.

BEA: Do tell us about credit bureaus in Nigeria; how many do we have and how do they function?

Oladimeji Olamide Peters:  A credit bureau is an agency that collects and maintains individual credit information and sells it to lenders, creditors, and consumers in the form of a credit report. The bureau compiles information on individuals and business entities regarding their credits, repayment, etc. and then creates a comprehensive credit record that may be made available to lending institutions and other users. There are three Credit Bureaus in Nigeria – FirstCentral Credit Bureau, CRC Credit Bureau and CreditRegistry.

BEA: In what ways do Nigerian credit bureaus determine a person’s and business’ credit-worthiness/eligibility to access loans?

Oladimeji Olamide Peters: A person’s/business’ credit-worthiness/eligibility to access loans is measured by the review of certain parameters, some of which are the credit activities, current credit status and payment pattern of a person over a period of their loan tenure. The financial part of the credit report contains details like the opening balance, current balance, installments, repayment frequencies and how a person has performed over time. The measurement of these parameters is used as the basis of assessment of a person/business and their credit-worthiness. Other KYC issues like address changes, phone number changes and employment history changes also help lenders to identify and assess an individual better and take a decision.

BEA: Do credit bureaus primarily serve the creditors, the borrowers, or both?

Oladimeji Olamide Peters: Credit Bureaus serve both Creditors and Borrowers. They serve Creditors by providing information they require to objectively make a loan decision when approached by borrowers and also serve Borrowers by making available upon request their Credit Reports for their own self-assessment and to put their credit records in order before they approach any financial institutions for loans.

BEA: In what ways do credit bureaus serve borrowers?

Oladimeji Olamide Peters: Credit Bureaus serve borrowers by providing them their Credit Reports. It is a report generated by the Credit Bureau which contains demographic and credit information on an individual including:

• Name
• Address/Contact details
• Other identifying information unique to the individual – e.g. National Identity Number, BVN, date of birth etc.
• Credit Score
• Type of Credit account(s)
• Terms of credit including original debt and balance outstanding
• Credit payment profile
• Other public records

Credit Bureaus also provide Credit Scores. A credit score is a three-digit numerical value representing a borrower’s credit worthiness based upon statistical analysis of the data found on the credit reports. A low score indicates high risk and a high score indicates low risk.

BEA: Some Nigerian SMEs have complained about their inability to access bank loans; what do you think could be responsible for this?

Oladimeji Olamide Peters: Before financial institutions give loans/credit facilities to MSMEs, they assess their financial behavior, performance and the credit history of those who have taken loans previously. This will help them make an informed decision. For those who have not taken loans from a bank previously but have a bank account could have issues that would be detrimental to their ability to obtain loans when the need arises.

There are cases where people have negative balances on their accounts without their knowledge. It could just be a small bank charge – SMS notification charge, Cheque Book charge, Stamp duty charges etc., which has accumulated interest over time. About 12% – 14% of the loans in Nigeria are from overdrafts and those overdrafts will continue to be a substantial amount of the credit portfolio and this information will inevitably be reflected in a credit report as a debt owed to the bank. Thus in the eyes of the lender, a debt is owed and this disqualifies a prospective borrower.

This is why it is advisable for SMEs to request for a credit report to run a check on themselves and put their records in order before approaching a financial institution for credits.

Another factor is many MSMEs are not in the habit of proper accounting or book-keeping as such cannot objectively track their revenue, expenses, cashflow, inventory, profits/losses. This loophole has crippled the ability of many SMEs to obtain a loan from a bank as they have little or no information to convince the lender they are qualified to receive a loan.

BEA: How can credit bureaus help SMEs to access loans from banks and fintechs?

Oladimeji Olamide Peters: Credit Bureaus can assist SMEs by providing them with credit information they need to better position themselves and utilize “reputational collateral” which is to show evidence that qualifies them to access loans from banks and fintechs.

BEA: What advice would you give to SMEs on how best to position themselves in order to access loans?

Oladimeji Olamide Peters: SMEs are advised to request for their Credit Reports from any of the three Credit Bureaus in Nigeria to conduct their own assessment. They are also advised to engage in proper accounting or book-keeping with the use of simple accounting tools or engage the services of a business advisory company.

BEA: Based on current economic realities, do you think banks are willing to lend?

Oladimeji Olamide Peters: The willingness of banks to lend depends on the bank and the bank’s risk appetite. Some banks are giving more loans now than they did before while others are reducing the amount of loan disbursements.

BEA: Are the conditions for lending now more stringent?

Oladimeji Olamide Peters: The lending space has evolved over time and due to several factors. Currently, there are more innovation/competition and with these more lending flexibility.

BEA: Between bank loans and loans from fintechs, which would you recommend to SMEs and why?

Oladimeji Olamide Peters: Banks and Fintechs both have suitable loan packages for SMEs so I would say the customers should always go where the interest rates are most favorable.

BEA: Any last comments/advice?

Oladimeji Olamide Peters: SMEs are encouraged to get their free credit report from any of the three Credit Bureaus. You can do so by visiting any of the websites stated below:

1. FirstCentral Credit Bureau – firstcentralcreditbureau.com
2. CRC Credit Bureau – crccreditbureau.com
3. CreditRegistry – creditregistry.ng

For more information about the Credit Bureau Association of Nigeria and our programmes for the rest of the year, please feel free to send an email to info@cban.ng.