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Ogunnusi: Most Banks Don’t Know How To Deal With SMEs

By Eric Eghaghe

Six months after it commenced operations, Group Head, SMEs, Heritage Bank Limited, Mr. Bayo Ogunnusi, told Obinna Chima that the financial institution was able to penetrate the industry through an innovative approach for funding small and medium scale enterprisesSix months into the operations of Heritage Bank, what will you say are the unique selling points of the bank and what are the challenges you have to contend with in the industry?

The unique selling point of Heritage Bank is that innovative approach in financing SMEs that we introduced which is the Paris Club for small and medium scale enterprises (SMEs). It is the first of its kind in this country; no bank has done that. This is a system where we partner some organisations to finance SMEs without collateral, through an investment protection fund.

Now, what are the challenges? In this part of the world when you are selling a new product, it is always difficult to convince Nigerians. So that is part of the challenges we are facing but gradually we are overcoming that, people are now seeing the results, even our customers that have benefitted from the scheme are now giving referrals and we hope that in the next few months all other banks can identify these opportunities so that we can all do it together for SMEs in the country to grow astronomically. Heritage Bank alone cannot fund all the SMEs in Nigeria.There has been a renewed focus towards banks' support for SMEs since the CBN increased the Cash Reserve Requirement (CRR) for public sector funds to 50 per cent, do you think that is the way to go?

We all know that in the banking sector, a lot of focus used to be on the corporates and commercial customers and only few banks had been focusing on SMEs. As it is now, the CRR for public sector funds has been increased to 50 per cent and what that means is that a lot of banks now need to focus on SMEs. However, understanding how to deal with SMEs, funding SMEs and knowing how to deal with them, are all different things. So, a lot of banks don't know how to deal with SMEs.

But in Heritage Bank, we have the expertise, knowledge and we know the way SMEs operate. Presently, in Nigeria, SMEs contribute about 47 per cent to the Gross Domestic Product (GDP). In China it is about 62 per cent, Egypt about 80 per cent. Supporting SMEs is the way to go, there are 17 million micro, small and medium scale enterprises (MSMEs) in Nigeria and the number is growing by the day. A lot of people are losing their jobs and are setting up their own businesses. But the challenges of power, infrastructure and funding have always been problems. Fortunately, the federal government is trying to help solve the challenge of epileptic power supply and in a few years' time, that challenge would be solved and factors of production would favour SMEs and anybody that wants to invest in this country should focus on SMEs because in the next 10 years, revenue from that sector will be the mainstay for the economy.But despite efforts by your bank and other banks in the country, as well as various schemes by the government, the unemployment rate in the country is still very high and a lot of SMEs still complain about access to finance. What is responsible for that?

I can tell you that laziness is responsible for that. Everybody wants to work and earn salary, but if you check properly, we all have passion and talents that are good enough to start businesses. What we are doing in Heritage Bank is to tackle unemployment. If I fund an SME, I help you grow your business. So if I can fund 1,000 SMEs and if each of them employs additional 20 workers, that is 20,000. That is the way we are going to solve the problem. What was obtainable ab initio was that banks were afraid of funding SMEs because of lack of structure.

Don't you think that why we have high level of exposure in the sector is because these facilities are mostly given to SMEs at high cost?

What we have also done in Heritage Bank was to look at the high cost of doing business for SMEs. Most times it is not the interest rate, even though that is also high, the cost of doing business in this part of the world is very high. What we also did at Heritage Bank that is novel is that we try to work with SMEs in group of members. If you come to us as a group of SMEs, the interest rate can be renegotiated. Interest rate is also a function of the risk that you perceive. When a bank perceives that a business has high risk, it puts a premium on the loan.

So what is the thinking behind your Investment Protection Fund for SMEs?

The major reason why banks are not funding SMEs is because of risk. They believe that funding SMEs involves a lot of risks because if you give them money, they might not understand how to run the business they want to go into. So, what the banks do is to ask for collateral. But what we have done is to bring up an innovative idea of how to finance SMEs without collateral.

We are partnering some organisations like RSL Derivatives and what we are doing is to identify the SMEs. We offer advisory services to them, we help them structure their business and also with their cash flows. There is also a club called the Paris Club SMEs that was set up by Heritage Bank and RSL Derivatives. Now, if you qualify, you are given a certificate of membership and with that, you can approach Heritage Bank and we finance your business.

Now, once we finance your business, it doesn't end there, we are going to be working with you, there are advisors that are going to be checking on your business on a weekly basis. So, it is not going to be business as usual, where people get loans from a bank and do whatever they like. We are going to work with you. Now, if we give a customer a N20 million facility, we withhold 10 per cent which is put in an investment protection fund that is insured by Leadway Insurance Plc and managed by Stanbic IBTC nominees.

This 10 per cent investment protection fund is like the collateral. For RSL Derivatives, their job is to ensure that the customers are fit to take monies from the bank, to monitor their performance on a monthly basis and give us the report and also recover bad loans.

However, our objective is to grow the business and not just to fund it.Of course, a lot of people walk into banks and say they want money and by the time you get their business, you find out that they are not doing anything. Some people come with fraudulent mindset and that is why we visit the customers, diagnose the issues they have before we know prescribe solution to them.What are the major sectors you are focusing on?

The 10 sectors that we have identified are like a guide to us because by the time you concentrate on some sectors, you may send the wrong signal. We are a bank that supports SMEs, so anybody that is operating an SME in whatever sector can come into Heritage Bank. As it is, it is not about the sector, it is about the operator. Somebody can be selling recharge card on the road today and in five years time, he becomes a major dealer to MTN if properly mentored, structured and properly developed.

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