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We shall stimulate competition to moderate lending rates – DBN Boss

The Managing Director, Development Bank  of Nigeria (DBN), Tony Okpanachi, spoke to our Group Business Editor, EMEKA ANAETO, on various issues in development financing in Nigeria now driven by DBN. Excerpts

DEVELOPMENT Bank of Nigeria (DBN), sometime last year, conducted a monitoring and evaluation exercise over its funded businesses. What were the findings?

Well, as part of the findings from our M&E exercise (Monitoring & Evaluation), there where instances the end-borrowers appeared not to benefit from our key distinguishing features of the DBN loans which is longer tenure. Consider this example, an end-borrower would request for five years tenure to their respective Participating Financial Institution (PFI). However, in some instances the PFI would communicate three years to the end-borrower.
Secondly, we witnessed issues around pricing. What I mean by that is the overall expectation is that the DBN loans should be single digits. The funding of DBN is a combination of debt and equity. As you know, the debt component must be repaid. Crucially, the macroeconomic environment is not necessarily ripe for that type of pricing to enable the bank ensure sustainability in the long-run.

Macroeconomic environment
In spite of that, we have been engaging the PFI’s to moderate their pricing through moral suasion to pass on favorable rates to the end-borrowers. Nevertheless, we expect the issues around pricing will moderate to some extent as the macroeconomic environment improves on the one hand, and a sense of competition is created by publishing rates offered by the different PFIs on our website.

Thirdly, in some cases we have witnessed that the (PFIs) did not communicate to the end-borrowers that the funds originated from DBN which doesn’t create the awareness the bank needs to penetrate the market effectively. In a nutshell, these were some of the challenges we faced. But in terms of funds utilization, we have seen some of it used for project expansion, while others for working capital and acquisition of new machineries. In fact, one of the end-borrowers in the transportation sector used it to acquire more buses and vehicles.

Specifically, this end-borrower manages the public transportation line for the state. In other words, a public/private partnership arrangement. So, the end-borrower used our funding to get more vehicles to put on the road.

In the end, the objective for the bank is emphasis on longer tenure. Considering the underlying difference between DBN funds and that of commercial banks or should I say PFI’s in general is that commercial banks don’t necessarily have the appetite to give longer tenure while DBN funds specifically aims to provide up to 10 years with a moratorium to enable the MSME’s grow.
Other issues that we experienced were in fact out of the banks control. Consider a typical MSME in the country, even with the right funding in place, these individuals still face the same problems as you and I. What I mean by that is the overall operating environment in terms of infrastructure in the country. Some MSME’s face issues around power supply, while others face issues around poor road network. So, by the time they have factored all these issues and cost of funding, the cost of production is much higher.

So, all these and other experiences we have seen play out in our M&E exercise. To ensure we are playing our part as a development institution, in our own advocacy campaign, we convey these issues of concern to the relevant authorities to let them know that, yes, it is a larger macro issue, but we need to begin to have deliberate efforts to address them.

From what you said, is possible there is a misrepresentation, or a breach of trust in the tripartite arrangement, especially in the case where your facility is for five years tenure, stated somewhere in your documents, but it is delivered to the end borrower at three years. Do you have any redress for this?
Off course we took on the financial institutions on that. I believe the explanations provided to us was that, yes, they have the board approval to provide five years tenure, but they gave the end-borrowers three years so that the borrower does not have a relaxed disposition regarding repayment. Nevertheless, what we as a bank are insisting is that transparency which is part of our core values here at DBN should be conveyed.
Are the PFIs so free in pricing or is the pricing so loose that whatever they give to the end borrower that is it?
No, pricing is not necessarily loose because the PFI’’s do communicate to us the rates they lend at. So, in situations where rates are elevated, we open dialogue with the PFI to look for ways to encourage them to reduce the rates to the end-borrower. Especially, key sectors that we are trying to encourage more funding.
Now, in the long run, we intend on creating competition amongst the on-boarded PFI’s by displaying the rates on our website. In my view, this is a way of ensuring transparency on the one hand, and also allowing competition to aid us in pushing rates down in aggregate terms. In this scenario, any prospective end-borrower will know which bank is offering which rate, and which bank to approach for a loan. That is ultimately what we want to
achieve, by that time, we would have gotten so many more financial institutions on board and then we can say, look, for transparency, everybody should see rates across the various PFI’s and now each prospective end-borrower have multiple options to choose.

Is there a way you track what is known as hidden charges in credit offer letters of banks?
Yes, we see everything. For instance, in the pilot M&E the end-borrowers furnish the offer letter to enable us to validate our baseline information received from the PFI’s. To be sure, we don’t dictate rates to the PFI’s as such, we don’t peg them on rate offerings. However, the issue of transparency cannot be over emphasized hence, our rationale for data validation.

But offer letters don’t say it all?
In recent years, the Central Bank consumer protection department has tidied that up. So, those issues that used to be pervasive in those days are no longer rampant because once a customer reports that there has been a breach or any such thing, the Central Bank, in some instances, asks the bank to refund. So, the consumer protection department has truly stepped up their game in this area. Banks are much more careful because the repercussion of non-compliance is pernicious.

With the N1.3 to N2.3 trillion funding gaps in the Nigerian economy, what do you think is available to fill the gap? 
In Nigeria as a whole, all the funding of the DFI’s (Development Finance Institutions) together, is not up to N1trillion. So, the larger part of the money in terms of deposits are with commercial banks. To fund the MSME segment, you need funding from the commercial banks, Micro Finance Banks, and other intervention funds to name a few to fund various sectors of the economy in order to spur economic growth. Hence, the need for collaboration. Funds from commercial banks are typically higher rates and shorter tenure when compared to the funds from the development banks which are more concessionary in nature or longer tenured. In the end, the different sources of funding are available to meet the different needs of customers operating in different sectors at different points in time. To provide clarity, when a business begins operations the need is different, and as it matures, the need changes as well.

What is DBN’s target share in that credit market?
Ultimately, as we continue to grow, we believe that we should be able to, at least, get between 5 to 10 percent of that segment because we are not deposit takers. But beyond that, our credit guarantees which we are going to provide, and even our long term tenured funds should be a catalyst for more lending from other institutions.

De-risking the segment
Our aim is to be the catalyst for other financial institutions to be encouraged to lend to MSMEs (micro, small and medium enterprises) which in my humble opinion is more than just availing funds. Other mandates of DBN include de-risking the segment as a whole which leaves no doubt in my mind that banks in general will find this segment more attractive. In the end, creating multiple avenues for MSME operators to access funds.

How is DBN funded, that is sources of the funds you are lending and what is the size?
The total commitment we have from our development partners is USD1.3 billion. Our partners that provide debt to the bank include the World Bank, the African Development Bank, the German Development Bank and AFD which is the French development bank.
Meanwhile equity shareholders of the bank include the Federal Government of Nigeria, European Investment Bank, and African Development Bank.

Then going forward, what is the future like at DBN?
The future for DBN is bright! We are currently in our second year of full operations. As we approach our fifth year of operations, that would be considered a critical stage for us because we intend on going out to the market to raise more capital. Our expectations are that we raise more funds from other impact investors and of course, development partners who may be interested. Furthermore, if market conditions permit, we may also raise more funds through issuance of bonds.

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