CBN rate hike stirs fears of more pain for Nigerian SMEs

ONOME AMUGE & JOY AGWUNOBI

As small and medium-sized enterprises (SMEs)  in Nigeria grapple with rising borrowing costs, the Central Bank of Nigeria (CBN) has dealt them a new blow by raising the Monetary Policy Rate yet again. While the move is aimed at curbing inflation, analysts are concerned that the higher interest rates will make it even more difficult for SMEs to access the credit they need to run their businesses.

Rising from its 294th meeting of the Monetary Policy Committee (MPC), the central bank announced an increment in interest rate benchmark by 200 basis points to a record high 24.75 percent from 22.75 in what is considered one of its most aggressive actions to tame inflation which has been spiralling out of control in recent months.

Olayemi Cardoso, the CBN governor and MPC chairman, explained that the decision to raise the benchmark interest rate is aimed at reducing consumption and slowing economic growth. This, in turn, is expected to bring down inflation, which has been on an upward trend for months and reached a record high of 31.70 percent in February. The CBN hopes that this drastic action will help to stabilise the economy and put it on a path to sustainable growth.

While the CBN’s decision to raise the benchmark interest rate may help to bring inflation under control, it has also raised concerns among analysts about the potential negative impact on SMEs.  This, they argued, is because high interest rates makes it more expensive for businesses to borrow money and can ultimately jeopardise their ability to survive. 

Small and medium-sized enterprises play a crucial role in the economic development of both national and regional economies. They are widely recognised as engines of growth that can drive economic prosperity, particularly in developing and emerging markets like Nigeria. One of the most significant ways in which SMEs contribute to economic well-being is through job creation and poverty alleviation. In addition, SMEs foster innovation and stimulate competition, making them essential to the overall health of the economy.

In a broader perspective, the United Nations Industrial Development Organization (UNIDO) has acknowledged the crucial role of SMEs in the economic integration of developing countries. According to UNIDO,  this integration has been facilitated by factors such as economic liberalisation, deregulation, and democratisation. SMEs have also been shown to be responsible for 90 percent of global businesses, employing between 50 percent and 60 percent of the global working population. UNIDO also reported that SMEs contribute between 50 percent and 60 percent of the total value added to the global economy.

Despite the significant contributions of SMEs in Nigeria, they face numerous challenges, including high interest rates, which make it difficult for them to access financing from banks. The funds required by SMEs are provided by the banking sector at a cost known as interest, which represents the opportunity cost of borrowing or the sacrifice made to obtain the funds. High interest rates make it less attractive for SMEs to borrow money, which in turn makes it more difficult for them to grow and thrive. 

In response to the CBN’s  recent interest rate hike, the National Institute of Credit Administration (NICA) noted that it would be difficult for businesses to break even when taking out loans at high rates. 

Chris Onalo, NICA’s chief executive officer, explained that SMEs face numerous operating costs in addition to the high interest rates, which make it difficult for SMEs to generate enough revenue to repay their loans.

Onalo emphasised the importance of making loans more accessible to SMEs, with lower interest rates and more flexible repayment terms. He argued that this would make it easier for SMEs to be profitable and sustainable.

NICA also stressed that the key to creating an environment that fosters the growth and expansion of SMEs is the provision of loans that are designed to meet the specific needs of businesses.

NICA highlighted the benefits of financial products that are specifically tailored to meet the needs of SMEs. These benefits include encouraging new and existing business owners to start or expand their businesses. NICA noted that businesses in advanced economies often have a competitive edge over those in developing countries due to the availability of loans with much lower interest rates, often in the single digits.

Wilson Erumebor, a senior economist at the Nigerian Economic Summit Group and a senior research fellow at the FATE institute, offered his perspective on the CBN’s decision on interest rates. 

Speaking at a recent webinar hosted by FATE Foundation, themed: “CBN’s MPC Decisions:What it means for SMEs in accessing finance”, Erumebor noted that access to finance remains a major challenge for SMEs in Nigeria, with the country ranking as one of the worst in the world for doing business in terms of access to credit. He further explained that the interest rate hike is likely to exacerbate this challenge, making it even harder for SMEs to access the financing they need to grow.

Erumebor explained that the high interest rates in Nigeria are largely driven by external factors. He pointed out that the actions of major economies, such as the United Kingdom and the United States, can have a significant impact on developing economies like Nigeria. When these economies raise interest rates, they can trigger capital outflows from developing countries. In response, developing countries often raise their own interest rates to try to retain investments and stabilise their economies. 

“From the CBN point of view, part of why prices are  going up is that there is too much money in circulation and one way to curb that is to raise interest rates and to reduce the money supply so that  people can reduce their spending and prices will fall. 

“However, the transmission is not so strong in a country like Nigeria owing to the fact that we have a large informal economy. There’s also a high risk element factored into the maximum lending rate, limited credit database,issues relating to high cost of doing business, limited financial inclusion etc.,” he noted.

The senior economist observed that the economic growth of 2.7 % in 2023 is low. He suggested that the fiscal authority needs to step up to support industries. 

According to him, inflation is not just a Monetary thing as there are also issues relating to infrastructure, power and cost of moving goods from one place to another that needs to be addressed.

The senior economist opined that Nigeria’s economic growth rate of 2.7 per cent as at 2023 is low, and he suggested that the government needs to take a more active role in supporting industries and boosting growth. He noted that inflation is not only a monetary issue, as there are also issues relating to infrastructure, power and transportation costs that need to be addressed.He argued that the government needs to take a holistic approach to addressing these issues in order to stimulate economic growth and improve the business environment for SMEs.

He stated further: “CBN made it clear that they want to prioritise inflation in this regime. The bank needs to know that there are several limitations in addressing inflation. It is not just about monetary factors.  If nothing is done to address the fiscal side in terms of infrastructure, energy and transportation, inflation will keep rising. 

“For how long will CBN continue to chase inflation by increasing interest rates that would be counterproductive? At the lending rate, the CBN must stop lending to the government because it’s a punishment to businesses.”

According to Erumebor, the annual state of entrepreneurship report has consistently highlighted access to finance as a major problem for small businesses. He observed that the two key factors limiting access to finance are the high interest rates for loans and the lack of adequate collateral. As a result, many business owners struggle to access the financing they need, and this is a significant obstacle to their growth and success.

Erumebor noted that the high interest rates charged by commercial banks are a major disincentive for people seeking loans, particularly SMEs. He also pointed out that, while private sector credit has been growing at a faster rate than government credit, this trend has been slowing down in recent years. One of the key challenges he identified is the lack of knowledge and understanding of the SME sector on the part of lenders. 

This has led to a situation where lenders demand excessive collateral and impose a lengthy and difficult loan application process, which discourages SMEs from seeking financing.

Erumebor projected that interest rates are likely to remain high in the medium term and may even go up further. Based on this, he suggested that businesses will need to explore alternative sources of funding;grants,equity, government support schemes and venture capital. He also noted that family and friends and personal savings will continue to be an important source of finance.

“Businesses will need to adjust to a high interest rate environment. Key reforms are also crucial. We need to start recapitalising development finance institutions in Nigeria so they can reach out to more SMEs,” he added.