Innovations Needed In Lending for SMEs.

Good day. It is my pleasure to be invited to deliver my perspective on this topic. I will not attempt to pretend to be an expert in either lending or finance or sme financing in such an august assembly. So I will rather chronicle for you my experience in the last four years as I tried to nurture an SME as I believe it best exposes the areas begging for digital innovation to help SMEs. Remember MSME at more than 30m in number is the dominant economic players in our country.

A bit of background here. I stepped down from being CEO of CWG Plc , a listed IT company on Dec 31st 2018 after surviving a bruising 3 year tenure fighting against an incredibly challenging macro economic environment as well as the usual corporate challenges. I am glad that in the end, CWG survived and the seeds we sowed in that challenging time did germinate and mature and has kept CWG Plc alive and thriving. My foray into the SME world started thereafter.

One of my flagship SME is a family owned company called Ziemozi Interactive Limited which was incorporated in the middle of 2019 and started operations the following year as a ticket vendor for LBSL , one of the BRT operators. This was a high volume extremely low margin business. Turnover were regularly in the N100m per month ballpark at N20m per week run rate with gross margin of about 2%. It didn’t take long for us to realize ( together with pressure from LBSL ) that we needed additional financing to be able to maintain our run rate. Where to go?

Straight away to our bankers for an over draft facility of course. Even though we had to provide additional collateral and meet other tough conditions, we got an ODF from our bank which greatly smoothed our operations. It did help that from beginning we had engaged an accountant and had audited accounts when required and we already had a 6 month history with the bank so our turnover was already known to the bank. Still, it was a pleasure dealing with our bank then. We also got a 24% discounted interest rate which came down later to 14% at some point. The only snag was that every 60days, the OD was reset and renewed forcing us of course to sometimes find additional financing to cover short falls but for more than a year we were quiet happy with the arrangement.

Eventually we had to leave the BRT ticket vending due to ethical reasons and also due to changes in the contractual arrangements that made the business uneconomic for us. At this point we decided to pivot into operating our own technology enabled bus service. We’ve spent more than 2 years in R&D and pilots. And we were now looking to expand this business after our successful pilots. Note that we are not looking to build a startup or a unicorn just a successful SME. Our objective is to expand this business. We have evolved processes and piloted technologies and had reasonable data about the risks and rewards. So we needed finance to expand it.

The first contention was what finance options are available? You would think that there will be a huge amount of options available but the question is who knows what these options are. The default ones are obviously some kind of term loans or asset finance. We have spent roughly a year talking to different consultants and banks and financing agencies to see what is available and what is feasible. No one agency of FinTech is available to provide financial advice to an SME. With the rise of chatGPT and other AI, this should be a no brainer.

In the absence of easily available financial advice, and not having the wherewithal to employ financial analysts, SMES are typically at the wrong end of the stick as they frequently use the wrong instrument to meet their financing needs which lead to increased default rates. There is also a remarkable lack of creativity in the instruments available with just minor variation in interest rates. So missing too and begging for innovation is the instruments of lending that are easily understandable to SMEs. Where is the BPNL for SMEs? Where are the corporate credit cards for SMEs?

One of the SMEs in our office complex struggled so hard to design a scheme to make solar power available to a large number of users. But he is an engineer and this came down to a financing problem. Till today he is still struggling with finding a model that could have mass market appeal. In the alternative he is also selling pop corn and lately fruit juice.

Even when we narrowed down to the instruments we could think of, the next problem was who is offering these instruments and what are the terms, conditions and preconditions. Once again we were back to another long scouring of internet, direct communications and also trusted referrals. This discovery process burns up significant energy and distracts the ongoing operations of SMEs already fighting to stay afloat. This is an area begging again for innovation. We need an Amazon.com of financial solutions to aid discovery of both financing instruments as well as financial providers for SMEs. I would like a service that will allow these providers to pitch for my business rather than me pitching them. Most SMEs don’t know that BOI has a leasing arm or that DBN offers discounted loans or that Sterling Bank has an Islamic banking non interest loan offering. Out of 30m MSMEs what is the number that have accessed these offerings? Less than 30k has accessed DBN loans at the last count.

Having gone to some length to identify possible instruments and possible providers, we now have to actually apply and access the financing. As the CEO of CWG Plc , it was left to my Finance Director and his team to prepare the documentations and engage with the providers and I could concentrate on building the business. As an SME founder, I am also the finance director and lead technology developer and lead business developer amongst other roles. So when you receive the preconditions for applying for the instruments, your first reaction is what the hell?

As a matter of fact you will find the form and some of these requirements to be inapplicable to your business and you wonder if you will ever be qualified. Who comes up with these forms? And then there is our bank who are proactive enough to inform me that the interest rate is 30% and not whatever DBN says it is. DBN said it is lending at 9%. Filling out these forms and providing these documents for an SME is a nightmare. There has been some innovation in personal loans with some loans being available to you for the asking. There are preciously little of these for the SME. Why can’t I apply for a N60m loan with a properly guided application process with some AI analysis that can give me an offer in 24hr? This is a gaping hole. Yes, you could get a few hundred thousand on your personal account but how will that make any change to your business really?

We understand that lending to MSMEs is very risky business in our environment. The default de-risking of this has been not to provide the lending at all or make the process harder than the proverbial camel passing through the hole of the needle. I think this is bullheaded really and calls for significant process and knowledge innovation. For instance, I understand that companies like OPay offer high priced personal loans and uses the high price to de-risk. How about providing a platform and process support for the SMEs and capturing the funds as they happen and taking repayments as part of the transactions.

A long time ago I remember old STB solving the bad loan problem from Nnewi traders by consigning their goods to the bank and sending someone to sit in the warehouse until the goods are sold off. Our zBus urban transport management system is designed to be able to take a portion of collected fares to pay for loans automatically and in real time with total visibility to the financing provider. We think that financing providers need to build such systems and be in a position to have real time view of the businesses they are financing. This of course does require more specialization in specific verticals.

The biggest shocker for any SME is the sheer cost of the financing. As our bank proactively informed us, we should be looking at 30+% interest even though DBN says it should be in single digit. This is actually much lower than what SMEs borrow from money lenders and MFBs who charge as high as 5% per month. These pricing are typically one size fits all and has little to do with your business or your credit worthiness. In fact it seems not to have anything to do with the source of the financing for the bank. The only thing that seems to matter is whether you are a big company. It won’t change because your cashflow is good. This is curious. Insurance companies are using AI to make premiums reflective of your propensity to get into accidents. Why are the lending to SMEs not priced differentially depending on both macro economic factors as well as company specific parameters? Of course, because our own SME is female led we did benefit from our bank’s promotion for female led companies. But in the aggregate, there are little differential pricing. Even intervention from government and other multilateral agencies are provided at the same one size fits all price.

We need innovation that can deliver lower costs or translate intervention funds to lower costs or provide differential pricing that factors in macro economic environment, sector specific and company specific parameters. Better pricing typically is the summation of all the other innovations we have discussed so far — from innovative design of the instruments of lending, innovative discovery of providers and services, innovative de-risking of the business and innovative collection of repayments based on more integration into the SME business.

To summarize from our little experience, we need innovation in

1. Financial advisory services ( where are the AI advisors?)
2. Design of the lending instruments ( BPNL for SMEs, Corporate creditcards for SMEs, …)
3. Discovery services ( Amazon.com of financial services )
4. Innovative de-risking of lending to SMEs( crowd funding?, tighter integration and oversight of the SME business?, Securitisation of loans)
5. Finding a way to reduce the cost of lending ( crowd funding?, proper channeling of govt interventions (intervention platforms) )
6. Innovation around making the process of applying for these loans faster and more seamless.
7. Innovation around pricing — the one interest rate fits all model is frankly ridiculous.

I am quite sure there are other areas where digital innovation will make funding for MSMEs more accessible and more affordable. Remember that there are 30m MSMEs in Nigeria. Agberos take home close to N170m per day in Lagos alone. It is a segment too big to ignore.

We at Ziemozi Interactive will be happy to partner with anyone innovating in these spaces even as we continue to seek financing for our own expansion.

Thank you.