Finance

 

From the tech startups in Yaba to the artisan workshops in Aba, Nigerian President Bola Tinubu’s proposed the National Credit Guarantee System (NCGS) could prove a game changer for an economy whose engine is oiled by its small businesses.

Limited access to credit has held back millions of small businesses in Nigeria, often allowing their enormous potential to go to waste.

Nigeria’s challenging business environment deters banks from lending to businesses without collateral, which many entrepreneurs cannot provide. Meanwhile, informal lenders, though not demanding collateral, impose exorbitant interest rates that stifle growth.

To address the funding gap for the micro, small and medium enterprises (MSMEs), which the African Development Bank estimates at $160 billion, Tinubu announced the creation of an NCGC during his New Year address on the 1st of January.

The NCGC would act as a guarantor, helping businesses and even individuals secure loans from banks by providing the collateral they lack.

Economists at the International Finance Corporation (IFC) believe that bridging even a fraction of the credit gap for Nigerian MSMEs through a national credit guarantee system could unlock massive economic potential, creating jobs, increasing productivity, and driving innovation.

What is a National Credit Guarantee System (NCGS)?

At its core, the National Credit Guarantee System serves as a co-signer for loans, providing partial guarantees to lenders in case borrowers default.

It’s not a handout but a handshake, a signal to financial institutions that the government stands behind its MSMEs.

This model has proven its mettle in countries like South Korea, Malaysia, and Chile, where credit guarantees have transformed access to finance into an economic growth engine.

In South Korea, the Korea Credit Guarantee Fund (KODIT) became the secret sauce behind the rise of global giants like Samsung and LG. By guaranteeing loans to high-potential businesses, it created an environment where ideas could flourish and risk was no longer a four-letter word. Similarly, Malaysia’s Credit Guarantee Corporation (CGC) has backed over $20 billion in loans, boosting GDP and creating thousands of jobs.

The little-known Story of Samsung

South Korea’s meteoric rise from a war-torn nation to a global economic powerhouse is one of the greatest success stories of modern times.

Today, the East Asian country is known for its cutting-edge technology, dynamic industries, and multinational conglomerates, including Samsung and LG.

But behind this dazzling transformation lies a lesser-known hero-the Korea Credit Guarantee Fund (KODIT). This national financial institution played a pivotal role in shaping South Korea’s corporate giants and laying the foundation for its economic miracle.

Let’s take Samsung. Samsung, which means ‘three stars’ in Korean, began in 1938 as a modest trading company dealing in dried-fish, noodles, and groceries.

Founder Lee Byung-chul envisioned a business that could adapt and evolve, and by the 1960s, Samsung was venturing into textiles and insurance. But it was during the 1970s and 80s, when South Korea launched its ambitious export-led industrialisation drive, that Samsung pivoted to electronics, a move that would forever change its destiny.

In the early days of this transition, Samsung needed substantial financial backing to enter the high-risk, capital-intensive semiconductor market. KODIT stepped in, offering critical credit guarantees that de-risked bank loans and attracted additional private investment. This financial lifeline allowed Samsung to invest in research, facilities, and talent during a period the domestic banking sector was reluctant to support such bold ventures.

The gamble paid off. Today, Samsung is a global leader in semiconductors, smartphones, and consumer electronics, with annual revenues exceeding $200 billion.

“There are multiple gains from a credit guarantee scheme for a country like Nigeria where banks prefer to lend to less risky firms than small businesses with no proven track record,” Dennis Abariba, a Lagos-based small business owner, said.

“Imagine what my business could do with more capital that can be unlocked from a credit guarantee scheme?” Abariba, who sells used electronic gadgets and employs four people, said.

How the NCGC will work

The company, which is expected to start operations before the end of the second quarter, is a partnership among government institutions such as the Bank of Industry, Nigerian Consumer Credit Corporation, the Nigerian Sovereign Investment Agency, and Ministry of Finance Incorporated, the private sector, and multilateral institutions.

The NCGC won’t hand out loans directly. Instead, it will vouch for MSMEs, ensuring banks are confident enough to lend. With financial experts at the helm, the NCGC will evaluate businesses, confirm their loan eligibility, and issue guarantees. In return, businesses will pay a premium based on their loan size.

In a September 2024 proposal seeking the creation of the NCGC, the National Institute of Credit Administration (NICA), recommended initial government funding of between N1 trillion – N2 trillion, with the possibility of securing international support as the scheme grows.

The NCGC plans to shoulder most of the risk in the event of a default, offering a 100 percent loan guarantee to attract banks. Quick claim settlements will build trust, while clear guidelines will outline when and how guarantees can be invoked.

“MSMEs are left out of the financial infrastructure of the economy and if we continue to do that, we are not going to be able to grow wealth and create jobs,” Chris Onalo, a professor of credit management and CEO of NICA, said.

“What we have currently are sector-focused credit schemes but we are now looking at a holistic kind of scheme that is extremely big in size, capital base and attractive to lenders,” Onalo said.

“Banks are under regulation, which insists that they can’t lend without collateral, but several MSMEs don’t have reliable collateral which is why a national credit guarantee corporation will be transformational like it was in countries like South Korea and China,” Onalo added.

Lessons from NIRSAL & ABP

The challenges faced by sector-specific credit initiatives, such as NIRSAL and the Anchor Borrowers’ Scheme for agriculture, cast a shadow over the potential success of the Credit Guarantee Corporation, despite its focus on loan guarantees rather than direct disbursement.

The Nigeria Incentive-Based Risk Management System for Agricultural Lending (NIRSAL)—a bold initiative designed to transform agricultural financing and unleash the sector’s potential – has grappled with loan defaults that have knocked the very lending confidence it sought to build in the banks.

Over 62 percent of the loans issued by NIRSAL Microfinance Bank and the Central Bank of Nigeria (CBN) under the COVID-19 targeted credit facility (TCF) remained unpaid as of September 30, 2023.

The Anchor Borrowers’ Programme is another financing initiative targeted at farmers, but according to the International Monetary Fund (IMF), only 24 percent of loans disbursed under the scheme have been repaid. The Central Bank of Nigeria (CBN) claims that 52.39 percent of loans have been repaid.

To prevent the credit guarantee scheme from facing the same challenges as NIRSAL and the Anchor Borrowers’ Programme, the government must establish a robust credit infrastructure, including streamlining the national identity database system, according to Basil Abia, a policy analyst and co-founder of the data insights firm, Veriv Africa.

“The national identity database system shows 130 million Nigerians recorded, but we still have a gap of 70-100 million Nigerians and we need to fix that,” Abia said.

“There’s also a need for a functional credit bureau ecosystem that includes the private and public credit bureau companies so that there can be insightful credit analysis. If you don’t streamline the identity database, it will be difficult to locate defaulters and we could end up with the default rate of NIRSAL,” Abia said.

Countries like Japan and Germany have implemented digital platforms to track the utilisation and repayment of guaranteed loans, ensuring accountability and minimising defaults. Nigeria could learn from these examples, integrating best practices to build a robust and trustworthy system.

Numbers speak louder than words

The correlation between credit access and economic growth isn’t just theory—it’s a reality backed by hard data. In Malaysia, MSMEs account for 38 percent of the gross domestic product (GDP) and 65 percent of employment, thanks in part to the CGC’s strategic interventions. South Korea’s KODIT has directly supported 1.2 million MSMEs since its inception, helping them become pillars of the economy.

MSMEs also form the backbone of the Nigerian economy, contributing nearly 50 percent to GDP while accounting for 90 percent of employment, according to the National Bureau of Statistics (NBS), a feat they have achieved with limited access to credit and without the help of a national credit guarantee scheme.

Jobs, Growth, and More

The beauty of the National Credit Guarantee System is its multiplier effect. When SMEs thrive, they hire more workers, who in turn spend their wages in the economy, creating a virtuous cycle of growth.

For instance, the establishment of a credit guarantee system in Chile led to the creation of 60,000 new jobs within five years.

In Nigeria, where youth unemployment is nearly 50 percent, using the old NBS methodology, this could be a game-changer.

A carpenter in Abuja could hire more apprentices. A tech startup in Lagos could launch its first product. A fashion designer in Kano could expand her brand to international markets—all because they had access to the credit they needed.

In an effort to transition the economy from a cash-based system to a robust credit-driven culture, Tinubu had also launched the Nigerian Consumer Credit Corporation eight months ago to enhance access to credit to employed Nigerians.

BusinessDay