National Small and Medium Scale Enterprises Credit Guarantee Fund

Establishment of SMEs guarantee credit funded by the government and other donor agencies that charges 3% interest or less to take care of administrative costs. Funds are disbursed by banks and are accessible only as peer group, while purchases of equipment are done on behalf of SMEs by the banks.

About You

Organization: Obafemi Awolowo University, Nigeria more ↓↑ hide↑ hide

About You

First Name

Lawrence

Last Name

Obokoh

Website

Your Organization

Obafemi Awolowo University, Nigeria

Country

Nigeria

About Your Organization

Organization Name

Obafemi Awolowo University, Nigeria

Organization Website

Organization Phone

Organization Address

Organization Country

n/a

Organization Type

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Your solution

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Name Your solution

National Small and Medium Scale Enterprises Credit Guarantee Fund

Describe Your Solution

Establishment of SMEs guarantee credit funded by the government and other donor agencies that charges 3% interest or less to take care of administrative costs. Funds are disbursed by banks and are accessible only as peer group, while purchases of equipment are done on behalf of SMEs by the banks.

Country your work focuses on

Nigeria

If multiple countries, please list them here. If your solution targets an entire region, please select it below

Africa

Region(s) your solution focuses on:

Africa.

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

$ 1-5 million

Number of employees in your target firms

25-49, 50-74, 75-99, 100-150.

Average number of employees of your target firm

50

Specify the size, average and range of expected loans or investments in each target firm

Less than one million expected to be used to finance working capital and purchase of new equipment or the replacement of existing ones.

What stage is your solution in?

Idea phase

Innovation

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What makes your innovative solution unique?

The uniqueness of the innovation lies in the peer pressure of SMEs coming together as a group/cluster to access credits. The credit scheme shall be a revolving loan system whereby potential SMEs have to save with the disbursing agencies. For instance a group of 12 SMEs applies for loans. The total loan application of the 12 SMEs are considered as a package which is disbursed in block of 4 at a time. This means the first 4 of 12 are granted credit while the next 4 (8 of 12) are only granted theirs when the first 4 have commenced repayment of their loans.The remaining 4 (12 of 12) gets theirs almost when the first 4 have finished repaying their loans. The groups encourages and see to it that members repay their loans which in turn guarantees less default due to misappropriation of funds by members.
The purchase of necessary equipment on behalf of the SMEs involved ensures that the right equipment is purchased because the disbursing agency employs technical experts that would help to evaluate and inspect the equipment. The purchase of equipment on behalf of SMEs by the disbursing agency also ensures that funds are not misappropriated if they are released for purchase of new or replacement of equipment. The agencies also give SMEs training and professional advice.

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Research has shown that SMEs are more sensitive to interest rate shock because their returns on investment are negatively affected by high interest rates and that they strive better when interest rates are less than 9%. The scheme will be guaranteed by the government in partnership with donor agencies regulated by the Central bank of Nigeria which will charges 3% interest rate or less. This indicates that the scheme is not for profit purpose, but 3% interest rate charged is to meet administrative costs in the disbursement of the loans. The cheap cost of funds will reduce SMEs operating costs, improve their profitability and enhance their ability to repay their loans. The 3% interest rate is contrary to the current commercial interest rates which has stood at above 10% average and has impeded the ability of SMEs to repay their loans due to increased burden of their operating costs.
The cheap cost of finance would make it easy for SMEs to repay their loans which would in turn attract more donors funding and other private finance to support the scheme.

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), Lack of financing to women entrepreneurs.

If you checked any of these barriers, describe how your solution addresses them

a) Asymmetry of information: It will in solving information asymmetry since in an national SME credit guarantee fund which will be publicized through the newspapers and the established branches of the disbursing agencies.
b) Informality: The peer group system will help break any informality that makes procurement of loans difficult for SMEs.
c) Lack of collateral: The problem of collateral would be solved since members of the group would pool their resources together and act as guarantors for each other in order to secure the group loans.
d) Lack of financial capacity: SMEs financial base is small when they stand alone and this has been their disadvantage in securing formal loans. When resources are pooled together by group of SMEs, funding agencies are more encouraged to fund SMEs projects because there is more prospect of loan repayment due to improved financial capacity of the group.
e) Lack of SME access to skills / knowledge / markets: SMEs coming together as a group to pool their resources together in order to secure loans make them have access to different skills within the group and share knowledge otherwise would not have been possible if they were to apply for loans individually. Since they operate as a group/cluster, they are able to trade with each other and access a common and larger market.
f) Unavailability of financial products tailored to SME needs: The scheme is an answer tailored to meet SMEs cheap financial cost because of the 3% or less interest rate charged on loans. It evident from research that SMEs returns on investment is very sensitive to high interest rates which affect their long term survival. This innovative package will be the needed financial product tailored to help solve SMEs problem of access to finance in Nigeria.
g) Lack of institutional capacity of financial intermediaries: The capacity of financial intermediaries would be enhanced since the funds would be guaranteed by the government in partnership with donor agencies. If there is a default due to economic circumstances beyond any of the SMEs, the financial intermediaries are able to get their funds back from the government and are able to continue in providing loans to potential investors.
h) High transaction costs for financial intermediaries to serve SMEs: The high financial costs of serving SMEs is great reduced since the SMEs group/cluster to do the initial screening exercise to drop those SMEs likely to default in their loan repayment. The cost of intermediaries chasing individual SMEs is eliminated since they will be dealing with democratically elected leaders within the SMEs group/cluster.
i) Lack of competition / incentives for financial intermediaries to serve SMEs: The number of intermediaries willing to grant loans to SMEs will greatly increase if the government is able to guarantee their funds against bad debt. The increase in the number of intermediaries will create the necessary competition and willingness to serve SMEs.
j) Underdeveloped local capital markets (term local currency funding, exit options for SME equity): The scheme would make it unnecessary for SMEs to approach the capital market for funds since they will be able to source for both long term and short term funds for their operations from the scheme.
k) General barriers to SME development related to investment climate: Having access to cheap source of fund gives SMEs some form of leverage in terms of their total operating costs. Since they are able to trade with each other, SMEs will be able to eliminate/reduce competition from large scale

Impact

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Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

The solution is an improved modified method used by People’s Bank of Nigeria in the 1990s in Nigeria to grant loans to small scale traders. A low interest specialized bank tailored to meet the cheap credit needs of SMEs is very important as research as shown that interest rates above 9% makes it impossible for businesses to survive and meet their loan repayment obligation (Stiglitz, 2002, Agrawal, 2004). This scheme would impact positively on the financial performance of SMEs since high interest rates in Nigeria negatively affect the return on investment (ROI) of SMEs (Obokoh, 2009). It was demonstrated in the study that high interest rates affected the ROI of all the SMEs that participated in the study with the ones with debt obligation worse hit by financial charges. So a low interest rate credits tailored towards SMEs would improve the survival chances of SMEs especially those in their early stage.
Currently, the microfinance scheme just introduced by the CBN, involves a lot of paper work. This problem will be reduced if not eliminated by the group’s application method because each group is able to fine tune the requirements for the loans application before they approach the disbursing agency for the funds. This method reduces the administrative cost of monitoring creditors after the loans must have been granted as members do the monitoring to ensure repayment of the loans by members.

How many firms do you expect to reach?

As many SMEs that exhibit positive growth potentials and who are within cluster/peer group that are able to monitor member’s efforts towards the repayment of their credits. The scheme is a national low credit scheme and would be able to accommodate as many SMEs that are able to meet the criteria for credits.

What is the volume of private SME finance you aim to catalyze?

The scheme would be able to catalyze large volume of private SMEs finance because they are expected to deposit the proceeds of their sales/save the banks. The deposits would in turn earn interest rates on the amount deposited. The disbursing agencies would help to mobilize funds for investment

What time frame will be required to reach these targets?

The time frame for this proposal should be flexible to accommodate new start-up SMEs that may require some period of moratorium to commence loan repayment. Some SMEs may require the credit for working capital which gives them a different time frame.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

The success of the proposal is predicated on getting government to guarantee the funds and securing private funding from Non-Governmental Organizations (NGO). In addition, there must favourable economic environment in terms of provision of infrastructure by the government because the loans should be for working capital or purchase of manufacturing equipment and not for the self-provision of power for their operation.

This Entry is about (Issues)

Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact

The social impact of the innovation is to increase the number of SMEs that are able to access cheap credit. This would help generate employment and availability of goods and services supplied by SMEs. According to CBN (2005) report, 6,498 SMEs covered in the study employ little over one million of the total estimated 18.5 million available work force. The report also indicate that the total micro credit facilities is about 0.2 percent of GDP which is less than one percent of total credit to the economy.
The proposal will help mobilize saving for investment purpose since the proposal is a revolving loan scheme. Increase in the number of potential entrepreneurs with access to cheap source of finance will help reduce poverty. In other words, it make cheap financial services accessible to a large segment of the potentially productive SMEs which otherwise would no access to cheap financial services.

Sustainability

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List all the funding sources that are required for the sustainability of this solution

The government, commercial banks, NGO and deposits from participating SMEs

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The proposal can graduate from dependence on public finance if well managed because loans are based on revolving system with interest. Borrowers are expected/ encouraged to save with the scheme to enable the creation of money. The scheme would be a means of mobilizing funds for future investment. The time frame for it to be able to sustain itself is estimated to be in the neighborhood of five to ten years.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The proposed scheme would be able to survive it potential largest funding source by securing and sourcing for deposits and seeking equity financing from the public. Presently the CBN has mandated commercial banks to contribute 10% of their profit to the Small and Medium Enterprises Equity
Investment Scheme (SMEEIS) fund. This fund would help sustain the scheme if the major source of funding is withdrawn.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

The government in partnership with commercial banks, donor agencies and NGOs is critical to success and sustainability of the innovation.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The non-financial issues that may threaten the sustainability of the proposed solution are infrastructure and poor power supply. This is because the profits or gains from cheap source of funds would be negatively affected if SMEs embark on self provision of power and other infrastructures such as portable drinking water and roads to their factory locations.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

The proposal is national low credit scheme that will help small businesses grow to their highest potential irrespective of sector. It will also cut across all geographical zones to benefit SMEs in the rural areas.

202 weeks ago Akan Odu said: Dear Lawrence, I am glad to see that your mind is working more than that of an entrepreneur, this solution is mind blasting for an Sme ... about this Competition Entry. - read more >
203 weeks ago Bahiyah Yasmeen Robinson said: This is a great idea, however, I am wondering what type of progress you have made to create or initiate partnerships with the public ... about this Competition Entry. - read more >
203 weeks ago Lawrence Obokoh updated this Competition Entry.
203 weeks ago Lawrence Obokoh submitted this idea.