As part of efforts to stimulate job creation, economic growth and productivity, the Central Bank of Nigeria (the CBN) recently established a N300 billion Real Sector Support Facility (the Facility). The Facility will provide access to loans of up to N 10 billion to manufacturers and small and medium scale enterprises (SMEs) seeking funding to start or expand their businesses.

The aim of the Facility is to ensure that SMEs in the manufacturing, agricultural value chain and services sub-sectors of the Nigerian economy can access working capital or long term loans for the acquisition of plant and machinery to accelerate their development or expansion. The Facility will provide input for the Nigerian industrial sector on a sustainable basis, which will, in turn, lead to an increase in the diversification of the Nigerian revenue base, a rise in employment, and a boost in foreign exchange earnings.

The Guidelines published by the CBN pursuant to the establishment of the Facility set out the criteria for eligibility to participate in the Facility, the modalities and tenor of the Facility and the responsibilities of stakeholders – the Central Bank of Nigeria, Participating Financial Institutions and the Borrower. This article provides a summary of the key provisions of the Guidelines.

Eligibility Criteria

To be eligible to participate in the Facility, the Borrower, the Lender and project must meet laid out criteria.
The Borrower must be:
a.  an SME and/or a Manufacturer;
b.  a wholly owned Nigerian private limited company registered under the Companies and Allied Matters Act or a legal business operated as a sole proprietorship; and
c.  a member of the relevant Organised Private Sector Associations, such as the Manufacturers Association of Nigeria or the Nigerian Association of Chambers of Commerce, Industries, Mines and Agriculture.

The Guidelines define a Manufacturer as an entity which does not operate in the financial services industry and is involved in the production and processing of tangible goods, or the fabrication and/or deployment of plant, machinery or equipment to deliver goods or provide infrastructure to facilitate economic activity in the real sector. A Manufacturer can also be an SME which is defined as an entity with an asset base, excluding land, of between N5million and N500million, and a labour force of between 11 and 300 workers. The wide definition of Manufacturer leaves it open to larger enterprises to participate in the Facility.

The Lenders permitted to participate in the Facility include Deposit Money Banks and Development Finance Institutions.

The Facility is available for new, start-up or expansion projects in the non-primary production part of the agriculture value chain, the services industry particularly in healthcare, education and hospitality, and the manufacturing sub-sector.

Modalities and Tenor

Under the Facility, the minimum loan amount is N500 million. However, a single obligor can borrow up to N10 billion. Any amount exceeding N10 billion requires the special approval of CBN Management.

Loans approved under the Facility will have an all-in interest rate of 9 percent per annum payable on a quarterly basis. Therefore the CBN shall disburse the Facility to Lenders at a 3 percent interest rate. Lenders shall have a 6 percent spread, which is lower, by 2.8 percent, than the typical spread[1].
Where the Borrower is seeking working capital, the loans will have a tenor of 1 year but may be rolled over for up to 3 years. Otherwise, subject to the complexity of the project, the loans under the Facility shall have a maximum tenor of 15 years and the tenor of each project must be determined in light of its cash flow and life of the underlying collateral.

The Guidelines provide that repayments under the Facility will be amortized. However, Borrowers may obtain from a 1 year moratorium on repayments.

Procedure for Obtaining Loans under the Facility

The Lenders approve and forward requests for the Facility to the CBN for its approval. Each request must be accompanied by certain documents set out in the Guidelines, including the project’s business plan which must state specifically the financing plan, economic benefits and environmental impact of the project. Upon approval, a loan agreement will be executed by the CBN and the Lender for each individual loan.

Prior to disbursement, the Lender must deposit with the CBN, securities with a market value of not less than 120% of the specified loan amount. Examples of acceptable securities include Nigerian Treasury Bills, FGN Bonds, other Bonds backed by a Federal Government guarantee and any other securities acceptable to the CBN. Presumably, the securities to be deposited with the CBN would be derived from the Lender’s liquid assets, which would make the requirement to deposit securities worth at least 120% of the market value of the loans quite onerous. Perhaps it was to offset this burden on the Lenders that under the Guidelines, the CBN directed that disbursements under the Facility benefit from a preferential prudential treatment.

Therefore, during the tenor of the loan, the amount disbursed shall be treated as a Term Loan which will not form part of the Lender’s deposit liabilities for the purpose of liquidity and cash reserves ratio computations and will not be subject to premium charges of the Nigerian Deposit Insurance Corporation. Furthermore, the securities deposited will continue to count as part of the Lender’s liquid assets for the purpose of its liquidity ratio computation. Given the lower spread available under this Facility, it remains to be seen if this special prudential treatment will suffice to incentivise Deposit Money Banks and Development Finance Institutions to participate in the Facility.

Conclusion

The CBN is taking steady strides towards the development of the Nigerian economy by reducing Nigeria’s dependence on oil revenues and improving access to finance by SMEs in particular.

In 2010, the CBN approved the establishment of a N200 billion intervention fund to refinance and restructure banks’ portfolios of existing loans to Nigerian SMEs and manufacturers. That year it also implemented a N200 billion SME Credit Guarantee Scheme. In 2014, the CBN established a N220 billion development initiative designed to assist micro organizations and SMEs, especially those operated by women in need of working capital up to N10 million.

Now, it has gone a laudable step further by establishing the Facility which is anticipated, will go a long way in stimulating large-scale economic growth. However, the requirement for Lenders to deposit with the CBN securities worth 120% of the market value of the loans to be disbursed may make participation in the Facility commercially unattractive, given the lower spread available to the Lenders. Therefore, this requirement should be reconsidered.
The Guidelines for the Facility can be accessed here.

[1] According to the World Bank, the interest rate spread of loans in Nigeria, as at 2013, was 8.8 percent. See http://data.worldbank.org/indicator/FR.INR.LNDP/countries.