Key Points
- In response to rising inflation, the CBN raised the monetary policy rate (MPR) by 600 basis points from 11.5% to 17.5% in the last 13 months.
- Rising interest rate affects MSMEs’ access to finance to scale, improve productivity, and create jobs.
- According to estimates by the International Finance Corporation, Nigerian MSMEs need about N13 trillion to bridge the financing gap.
- LSETF’s interest rate for MSMEs’ loans is not influenced by the MPR.
- LSETF offers a single-digit interest rate of 9% on loans to MSMEs . Harness our ongoing loan opportunity for businesses in Lagos East Senatorial District via this link.
A key theme that shaped the domestic economic landscape in the previous year was the hawkish policy posture of the Central Bank of Nigeria. In a bid to address the persistent inflationary trend to engender price stability, the apex bank raised the monetary policy rate (MPR) by 500 basis points from 11.5% to 16.5% in 2022.
This trend will likely persist till the first half of 2023 as the CBN raised the anchor interest rate further to 17.5% in January 2023 even as structural factors, such as high energy costs, foreign exchange scarcity and supply chain bottleneck, have not abated.
The MPR is an indicator of importance to businesses, investors, financial institutions, and policymakers. It is the rate at which the apex bank lends to commercial banks. Other interest rates – commercial banks’ lending rates and yields on government securities, such as bonds and treasury bills, are tied to the MPR. For instance, any change in the MPR would impact lending rates on bank loans. It is important to highlight that prior to the interest rate hike saga, the cost of borrowing was high, with the interest rate charged on SME loans as high as 25-27% in most commercial banks. This has been made worse by the tightening policy disposition of the CBN.
Increasing interest rates as a response to high inflation is a common monetary policy instrument used by central banks to tame inflation. The rationale is that by raising interest rates, borrowing becomes costlier for businesses and investors, resulting in declined aggregate demand and ultimately slowing down inflation.
As CBN raises the MPR, commercial banks respond by increasing the lending rates on existing loan facilities to customers. This would see SMEs obligated to banks expend more to serve their loan obligations to banks. This is because bank lending rates are highly responsive to changes in the MPR. Higher loan repayment for MSMEs in the current high-interest rate environment would materially impact business performance as funds meant to be invested in operations are used to service loan obligations. This creates a nightmarish situation for small businesses, given the escalating operational costs. This makes profitability a tall order for small businesses.
A recent news report by BusinessDay highlighted how interest rate hikes have made it increasingly difficult for small businesses to repay their loan obligations. Here’s the excerpt from the report SMEs squeezed as banks revise interest on loans - Businessday NG
“Loan default among small businesses is rising as banks adjust their loan interest to as high as 30-35% in line with MPR. How can a business survive with a 30% interest rate” Association of Small Business Owners (ASBON)”
Opportunities with LSETF
Presently, the business environment is witnessing volatility in interest rates. Access to bank loans and repayment of existing ones are problematic for small businesses. However, the Lagos State Employment Trust Fund (LSETF) is always ready to serve the business community by ensuring entrepreneurs and business owners have access to affordable credit.
We recognize MSMEs as the most important business component of any economy, and with adequate support given to them, the current high unemployment situation can be driven down to the barest minimum. We strongly believe the notion that if 1 million MSMEs are adequately supported, at least a million jobs can be created.
Our interest rate is single digit at 9 percent. More importantly, interest on our credit facility is below market interest rates and not responsive to changes in MPR. Since inception, we have disbursed more than N9.6 billion in loans to over 14, 000 MSMEs in Lagos State. Our loan facility is open to MSMEs operating in Lagos State across various sectors, from trade, manufacturing, construction, financial services and creative, to mention a few. We have been able to facilitate the creation of over 110, 000 direct and indirect jobs through our loan interventions. MSMEs can benefit from one of our loan offerings, which is currently open to MSMEs in Lagos East Senatorial District.
Concluding Thoughts
Stimulating financial support for MSMEs is critical for improvement in productivity and expansion. Access to finance is often cited as a major constraint small businesses face. The Fund is committed to bridging the MSME financing gap, estimated at N13 trillion by International Finance in 2022, and ensuring small businesses have access to affordable credit.
