SMEs with healthy business profiles suffer from lack of access to credit globally. In emerging markets such as Nigeria, the issue of SME finance has for decades been a source of complaint in the business community as well as a headache for policymakers. One option currently discussed is the development of leasing for SMEs’ productive assets.
An important stakeholder interested in this debate is DEG Invest, the development finance arm of the German bank KfW. With assets worth EUR 4.6 billion and co-financing operations afforded to more than 1300 companies in 120 countries, DEG Invest is well aware of business and finance opportunities in the West African market. Keen to investigate the potential for leasing, DEG Invest contracted Global South Group, given its presence and intelligence in the Nigerian market, to conduct a study on the potential for financing of Nigerian companies offering leasing solutions for productive assets catering to SMEs.
After extensive field research in Lagos and other major economic centres in the Nigerian market, GSG findings show that, while leasing can be a cost effective alternative for SMEs to finance their productive assets, the enabling environment remains highly unfavourable toward the SME profile. This is due to a lack of credit assessment facilities, collateral registration and a centralised identity registry which undermines banks’ ability to gauge risk.
In addition, Nigeria’s bigger companies and fixed financial assets offer attractive, lower-risk investment options that tend to overshadow an SME sector characterised by a lack of formal financial administration, business planning and hierarchy. Similarly, independent leasing companies are ill prepared to assess SME risk because of poor IT infrastructure, scant training and a highly uncertain and insufficient legal and regulatory framework. Specific capacity building measures, such as IT software subsidies for leasing companies and market access techniques and business counselling for SMEs, are in high demand.
For foreign investors, the Nigerian leasing sector presents a number of challenges. Very few local leasing companies match foreign direct investors’ (FDIs’) capitalisation requirements, for example. And the relatively few institutions that are well capitalised, such as commercial banks, tend to use their capital to support corporate clients offering higher and steadier margins than SMEs.
Global South Group’s large sample of SME and leasing company responses nevertheless enabled to make a number of recommendations for DEG Invest’s potential interventions in the identified sector.