‘Risk assessment is determined by lender’
DBN interventions across sectors, especially IT, Education
We’re not set up specifically to intervene in any particular sector. IT is one area that that we will intervene, remember we are a wholesale lender, we encourage the participating financial institutions to onlend to al sector.
We’re not excluding any sector that has growth or job creation potential. IT/Telecom is an area we also encourage them to go into.
Education – so far what we’ve seen DBN funds have been used for expansion. We’re encouraging more longer tenure funding so that is the key differentiating factor of DBN, so that they have enough time to stabilise their business and begin to repay.
In the education sector, what we’ve seen is one or two of them taking DBN loan to build hostel, classrooms, and laboratory. So it’s more infrastructure driven is not for working capital.
Possibility of single-digit lending
I made allusion to the fact that financial stability is one of the key things DBN has to ensure.
In doing that in our pricing model, we also put that into consideration. We are not an intervention fund; this is the funding of financial institutions to provide longer tenure.
So the risk of the borrower lies with the partner finance institution (PFI). The PFIs also price the risk appropriately to determine what rate.
But in our engagement with them, we influence to some extent how this rate goes, but remember they are the ones taking the credit risk, so we engage them.
If you look at in the past the difficulty of that segment assessing fund, it’s not only about the pricing but accessibility and availability is key. If you talk to most MSMEs, they prefer to have the money.
We want to encourage the PFIs to lend to them taking into consideration the credit risks to price it appropriately.
In the long run, the strategy of DBN is to say, as we continue to provide this funding, you will get the pricing lower, but on a sustainable basis the key thing for is, sustainability in the long run, not just intervention once ad then run out of funds and not able to continue.
Anywhere in the world, it is sustainable financing of a segment that has brought down interests rates and pricing, because one the funding is there you create competition even among the PFIs, so without being prompted.
For instance, if you go to Bank A, and it is charging you X rate, which is high, and Bank B is charging lower, of course that competition itself will bring down the pricing, which in the long run will become more sustainable.
Un-competitiveness of MSMEs products due to high interest rate
If you look at the economy, the macro indices also determine pricing.
Even the small businesses do their pricing based on the macro-economic variables, so lending and pricing of the loan is just one segment of it. There are so many other factors that affect their eventual cost (inflation, dearth of infrastructure).
A study has been done over time, in terms of lending, although pricing is key, but what affects them most, you find that pricing is about the fifth item.
There are many other issues that have to be dealt with for them to be able to break even. You can even give out the loan to them at five per cent, but these other factors could still affect their pricing, for example, infrastructure, which are being dealt with at the macro-level. We should not be fixated only of the issue of pricing.
Availability is key, because a lot of them will tell you that the funds are not even there. Also, the MSMEs will prefer to have the money, Ï know how to price my product in such a way that I will still make mu money.”
Checking political borrowers
DBN is a wholesale development finance institution (DFI), and the way we operate, we do not lend to individuals but to PFIs. No commercial bank, no microfinance bank (MFB) will want to take a credit risk for political borrowing.
Secondly, we also get to see who the end borrowers are, what the projects are for, because we also do monitoring and evaluation after the money is lent to see where the funds are going.
The fact that the PFIs do all their credit assessment will not make them want to lend for political grounds.
In terms of regulatory capital, we are at N100billion, but in terms of total capital available to us is about $1.3billion, which gives us the capacity to be able to do what we are doing.
Establishment of Credit Guarantee subsidiary
The business of providing guarantee is different from lending. This is the first time it is happening, and we want to set up in Nigeria the only credit guarantee company, whose job will be to provide guarantees.
There are many guarantee banks in the world, but in Nigeria there is none, and we want to provide that.
Being a subsidiary also reflects from what DBN is all about, so that we can go on with our lending ability, but also provide guarantees.
For instance, where DFIs say their needs are not funded, you have to have a specialised institution that can dissect that for funding and assess it appropriately.
That’s why a subsidiary is being set up, strictly to focus on that. But it will be completely owed by DBN so that its objective is aligned to DBN’s overall objective.
Capital lending for the year
We project to do about N70billion.
DBN loans – they are provided for longer tenure, which is like equity because if you debt of almost 10 years and in some cases, give you moratorium of 18 months, so effectively, almost 12 year tenure money, it’s almost close to Tier 2 capital.
In working with these DFIs, we’re going to see seed capital but now need to expand the business or in addition to the little capital they need to take more to be able to able to take it to the next level, that’s where DBN funding will come in.
Competition with CBN National Finance Bank
If you look at the needs of this sector (MSMEs), they need over N1.3trillion for specific need, but if you extend it further, it’s almost N2trillion. But the funding in the market; all the intervention funds put together cannot even scratch the surface.
If you don’t have enough funding in the market, how do you strongly begin to dictate what will be?
Availability has to be a combination of borrowing from funds that are at that rate, usually by way of intervention funds and other commercial lending. So you do a blend to be able to get off.
The CBN’s bank will of course help, but cannot provide all the funding need.
Anywhere in the world, its multiple sources of funds that determine the rates eventually. These intervention funds are to encourage that segment to stimulate certain areas.
Beyond these interventions, you also need to have other sources of funds to complement that, to make availability rich.
So the need of that segment is too much for one intervention; the more the merrier. The ultimate objective is to provide many alternative sources to the sector to be able to access the funds.
Again, if you look at the total funds in the system, how much of that is in development finance? A lot are in the commercial banks, so there will be commercial lending, and the combination of these will ultimately make the price affordable.
Is DBN Model bullet-proof?
Our model is not bullet proof; because it’s wholesale money, and there also risks attached. So if any of the PFI’s go down, automatically we have a problem.
Wholesale lending model helps you to leverage on the network of the retailers so you don’t begin to create your own network.
The resources that would have been used to create own network, you will now use to provide more access or funds.
In terms of direct risk it’s on PFIs. If the PFI is witnessing high NPLs in a particular sector, indirectly it will also affect our own performance and the ability to meet our obligations to other sectors, so it’s not bullet proof.
No comments yet