Mrs. Bisi Akodu is a partner at Olisa Agbakoba Legal and heads Olisa Agbakoba Legal’s (OAL) Corporate Commercial and Public Sector Group. In this interview, she spoke about problems affecting the growth of Nigerian businesses.
Q: To what extent do you think that access to good financing has affected Nigerian Businesses?
A: Every business whether it is a private business concern or a multi-national conglomerate requires finance for it to thrive and be competitive. In global economies, we have what you call small and medium sized businesses that represent the engine room of the economy because of their proliferation and the impact they have on the GDP of individual economies. These small businesses are referred to as small and medium enterprises (SMEs) and are represented in all sectors of the economy be it manufacturing, agriculture, trade and commerce, shipping and maritime services, hairdressing and so on and so forth.
It should be noted that despite the number of SMEs in Nigeria, they have not contributed significantly to the growth of the economy and this can be attributed to poor access to credit. SMEs have various needs and for this reason cannot be stereotyped in terms of finance requirements. SMEs require finance for various purposes but majorly to purchase or lease assets, for working capital and for expansion. There are three major problems that affect the growth of Nigerian businesses and these are: access to finance, macroeconomic conditions and poor infrastructure.
Access to finance is key to the growth of our SME class in Nigeria, although many government initiatives have been developed to provide solutions to this problem it persists. Now, let us consider the finance options open to SMEs. Banks are the traditional lending source for small businesses however, we know that banks only give short term funds by way of over draft facilities or short-term loans.
SMEs often do not have ‘bankable’ projects so in practice you would find that on approaching the bank for finance the SME would have to comply with the bank’s terms and conditions contained in its offer letter requiring substantial collateral as a prerequisite for granting the loan. In practical terms, many small businesses would be unable to fulfill the bank’s conditions so you find that a good business idea is starved of start-up funds or an existing business is prevented from carrying on businesses and folds up. To compound this situation if the bank is prepared to risk lending to the SME the interest rates are so prohibitive that often the business collapses and the borrowers of funds default in their payment to the bank. Therefore, to answer your question yes adequate financing has affected Nigerian businesses.
Q: Do issues around access to finance also affect firms that are publicly quoted
A: Let me first start by saying that a firm in the strict sense is not a limited liability company as it does not have a share capital. It is only public limited liability companies in Nigeria that can list their shares on the stock exchange and become quoted. I stated earlier that all businesses require finance at various stages for different reasons. Now, a private company’s source of finance is usually by way of debt or equity meaning loans or investments by shareholders.
Quoted companies generally have a wider range of funding sources than unquoted companies. A public quotation on a stock market increases a company’s external and internal profile. It can enhance the view that investors, shareholders and other stakeholders have of the company, its ambitions and the way in which it meets its obligations and adheres to regulatory requirements. Quoted companies can raise funds from the capital market by way of a public offering, rights issue or bond issue. The opportunities for fund raising for quoted companies are therefore many.
Q: Would you say Nigerian banks are just paying lip service to financing SMEs
A: The Central Bank of Nigeria (CBN) regulates Nigerian banks and lays down monetary policy guidelines for the banks to follow. Over the years there have been various CBN initiatives to find a solution to financing SMEs. Recall the Small and Medium Industries Equity Investment Scheme (SMIEIS) was a voluntary initiative of the Banker’s Committee which required all licensed banks to set aside 10 percent of their profit before tax (PBT) for equity investment in SMEs. The SMIEIS was thwarted by underlying issues related to cash flow, investment structuring, monitoring, liquidity and exit strategies. It was a very good plan but it did not work.
Again in 2013 the CBN launched the Micro, Small and Medium Enterprise development Fund (MSMEDF) with seed capital of N220 billion to bridge the huge financing gap in the MSME sub-sector. Under the terms of the scheme educational certificates which may include: SSCE, National Diploma, National Certificate of Education, National Business and Technical Examination Board would be taken as collateral for loans. Personally, I do not quite understand how this works in terms of collateral. The best that can happen is that the borrower would forfeit the certificate in case of default! The Bank of Industry recently launched the Small and Medium Enterprise Directorate, which was established to drive National Enterprise Development Programme (NEDEP). BOI is working vigorously towards ensuring that MSMEs account for at least 30 per cent of BOI’s risk assets by 2019 with a single digit ratio of non-performing loans to total loans. Other banks too have laudable programmes for SMEs so based on this I do not believe that the banks are paying lip service to funding SMEs. You must understand that the banks are constantly under pressure to ensure that risk assets perform, therefore most banks see lending to SMEs as risky business. The perception is that Nigerian banks are reluctant to lend to SMEs due to the amount of non-performing loans on their balance sheets and credit risk issues. The fall in oil prices has impacted negatively on the balance sheets of Nigerian banks as they have been exposed to high numbers of Non Performing Loans (NPLs) mainly in the oil and gas sector but also other sectors represented by small businesses. Therefore, you see the banks are tackling a host of challenges such as liquidity issues, non-performing loans, and foreign exchange trading restrictions that has made it difficult for them to perform their traditional lending role.
Q: Do you think that Crowdfunding, which is a contemporary approach to financing has a role to play in all this? And how does Crowdfunding work
A: I will answer the second part of your question first. The continued global financial depression has made funding businesses more acute. With this trend, it has been more and more difficult for small businesses to access credit or finance through traditional means: banks, private equity, angel finance etc. Crowdfunding is a way in which individuals, organisations and businesses can raise money through an online portal called a Crowdfunding platform to finance or re-finance their activities.
Some financial gurus will argue that Crowdfunding is not new that it is simply an approach to raising capital by appealing to a large group of people (the crowd) for small individual contributions of money. On this premise, you can say that Crowdfunding has existed in various forms as a legitimate fund raising model.
However, what is new is that an increasing number of entrepreneurs are looking at Crowdfunding to raise seed and early stage investment capital. There are three main Crowdfunding models: donation Crowdfunding used by individuals to raise finance for promotions, charities and the arts, loan-based Crowdfunding often called peer to peer (P2P) lending where individuals or businesses raise money by way of loans and pay the lenders interest in return and investment-based Crowdfunding where investors can invest in early stage unlisted companies in return for shares.
We see that the world has gone cyber, take internet commerce as an example of the enormity of online trading opportunities. Several years ago, most of us would have been reluctant to shop on line, now we find it not only stress free but also exciting. The internet enables us to interact socially and provides a source of information. Crowdfunding provides an efficient way to raise funds and has been done with more cost effectiveness than raising funds through banks or venture capital etc. Crowdfunding could prove to be a good model for funding Nigerian businesses.
Q: How would you describe its adoption in Nigeria and what legal structure do you think should be put in place by government to encourage its adoption in Nigeria
A: Crowdfunding per se has not been adopted as a finance model in Nigeria. Nigerian law is prescriptive of how companies can raise capital for their businesses. The main legislation on this topic is the Investment and Securities Act, 2007 that generally prohibits private companies offering their securities to the public, again the Securities and Exchange Commission (SEC) has developed rules and regulations how companies can raise finance through the issue of securities. SEC as the regulator of Nigeria’s capital market was established pursuant to the ISA, which grants the Commission general and specific rule making authority.
However, the Commission in exercising this authority has adopted a consultative procedure whereby inputs and comments are obtained from persons subject to its jurisdiction. Similarly, the Companies and Allied Matters Act, 2004 governing the formation and regulations of businesses and companies in Nigeria contains restrictions in terms of dealings with shares and debt securities. A holistic review of these laws would be required to provide legal and regulatory framework for Crowdfunding. Definitely, we need to establish legal and regulatory framework that will accommodate not only Crowdfunding but also other methods of financing such as factoring and invoice discounting.
Unlike in the UK where the Financial Conduct Authority regulates both loan based and Investment based Crowdfunding. Loan-based Crowdefunding in Nigeria will fall under CBN regulation whereas Investment based Crowdfunding will fall under SEC regulation, though there could be an overlap depending on the structure of the transaction. In comparison with western jurisdictions and the US, Nigeria’s financial services sector is still developing. In the United Kingdom financial services are regulated by the Prudential Regulation Authority whereas the Financial Conduct Authority (FCA) is responsible for general financial regulation and operates independently of the UK government.
The FCA regulates financial firms providing services to consumers and maintains the integrity of the UK’s financial markets. The FCA regulates both loan based and investment based Crowdfunding in the UK and this has instilled confidence in investors to partake in Crowdfunding. It is important to the growth of the economy that the development of Nigeria’s financial sector is taken as a top priority for government. A lot of work has been done under the CBN’s Financial Sector Strategy 2020 (FSS 2020) in pursuit of financial sector reform. In fact, Dr. Olisa Agbakoba as chair of the Legal Implementation Committee of FSS 2020 proposed some quick win bills that are yet to be passed by the National Assembly.
These bills when passed will add enormous value to financial services in Nigeria. Such Bills include, the Financial Sector Bill, Consumer Credit Bill, E-transaction Bill, Credit Reporting and Information Exchange Bill, Insolvency/Bankruptcy Bill, Alternative Dispute Resolution Bill and so many more that will provide the legal framework for a vibrant financial sector in Nigeria. It is only with the enabling framework that innovative financing models like Crowdfunding can work.
Q: Do you think that Crowdfunding platforms are safe for businesses and would-be investors alike
A: I do not have readily available statistics to state categorically that CFPs are a hundred percent safe or cannot be hacked into. There are a lot of considerations that need to be dealt with by the parties to Crowdfunding. Although Crowdfunding can be less rigorous than traditional fundraising it still requires a good deal of financial and legal advice. From the legal perspective, there are issues of intellectual property rights, tax considerations, regulation, due diligence requirements, contracts, legal structures and a host of legislation.
The fact that it is an online platform does not mean that it should be used for illegal purposes such as money laundering etc. It will be the duty of the CFP to ensure that the platform is designed to specification and all licenses are obtained and updated. The issuer company seeking to raise finance must also ensure that information being passed on to the crowd is true and not misleading. Investors must be conscious of the risks involved. In many jurisdictions there is a cap on the amount an investor can actually invest in any given Crowdfunding round. It is important to have some form of regulation in place as this will ensure investor confidence and monitor the use of the platforms.
Q: How do you think the Crowdfunding model could be effectively regulated?
Financial regulatory policies should be of interest to any government because companies, firms, consumers, and governments fund many of their activities through banks and securities markets. Furthermore, financial instability can damage the broader economy. Financial regulation is intended to protect borrowers and investors that participate in financial markets and mitigate financial instability. It is important that there should be regulation for Crowdfunding in Nigeria as in other jurisdiction, but there should not be over regulation.
In the UK the FCA developed new rules for Crowdfunding in 2014 and will conduct a post-implementation of the new rules this year 2016. In the United States Congress has passed an amendment to the SEC laws to provide for investment based Crowdfunding by way of the JOBS Act. You can see the spontaneity in passing key legislation in the UK and US, it is hoped that Nigeria’s National Assembly can see the importance of prioritising legislation for the financial sector. SEC as a member of the International Organization of Securities Commissions (IOSC) is collaborating with the Ontario Stock Exchange to develop the framework for Crowdfunding in Nigeria. I see great potential in Crowdfundingas an alternative to bank financing for Nigerian businesses.