Friday, 12 April 2013

Tackling The Challenge Of High Interest Rates To Small Businesses

The economy is set to witness a boom if the planned reduction of interest rates to micro, medium and small scale industries by the Bankers’ Committee is implemented with dispatch.

The pronouncement to lighten the burden attached to lending to these small businesses is no doubt the long awaited elixir in the sector, which industry players believe will boost activity and create the much needed jobs for the economy.

The repositioning of the micro, small and medium scale enterprises in Nigeria by the CBN-led Bankers’ Committee coincides with calls few days ago by the World Bank President, Jim Yong Kim, for a commitment by the international community to end extreme poverty by 2030. Kim was said to have stressed the need to improve the lives of the most vulnerable people living in developing countries in the drive.

To reach that goal, the World Bank boss said the world would have to reduce the number of people living below the poverty line of $1.25 per day to three per cent globally by 2030 and raise the per capita income of the bottom 40 per cent of every developing country. The three per cent target marks a new goal for the World Bank, which did not provide directly comparable numbers for the current rate of extreme poverty.

“The goal would help the World Bank prioritise development projects that have the biggest impact on the poorest and reduce inequality,” Kim said, adding that “now is the time to commit to ending extreme poverty.”

In a speech delivered before meetings of the World Bank and International Monetary Fund (IMF) holding on April 19 and 20 in Washington DC, United States, Kim said “we are at an auspicious moment in history, when the successes of past decades and an increasingly favourable economic outlook combine to give developing countries a chance — for the first time ever — to end extreme poverty within a generation.”

The World Bank’s board will consider a new country strategy for India next week, aimed at reducing poverty by an additional 300 million over the next several years. An estimated 50 million people were lifted out of poverty in India over the past five years.Economists have estimated the poverty rate for the developing world in 2012 at about 19 per cent, representing about 1.1 billion people.

The timing of the package for small business owners in Nigeria too seems right as the planned interest rate reduction follows closely the privatization of the power sector, the deployment of SURE-p fund to deliver infrastructure like god roads, railways amongst other ongoing reform programmes embarked upon by the government. The combination of low interest rate to SMEs, good roads, rail transport and 24 hours power supply will no doubt catapult the economy to new heights.

Explaining the motive behind the planned slashing of interest rates in Abuja on Tuesday, the Central Bank of Nigeria-led Bankers’ Committee said the consensus to bring down interest rates to the micro, medium and small scale industries in the country was based on their conviction that low interest rate will support the real sector and boost economic growth.

Briefing newsmen at the end of the meeting were Managing Director of Citibank Omar Hafiz, Managing Director of Union Bank Emeka Emuwa, Group Managing Director of Diamond Bank Dr. Alex Otti and and CBN Director, Banking Supervision, Mrs Tokunboh Martins.

Otti, who addressed the issue of lowering interest rates, disclosed that although the Monetary Policy Rate remained high at 12 per cent, the banks are strategising on ways to bring down interest rate so that they can begin to support the real sector.

“We have now seen the need for banks to support those sectors that have hitherto not benefitted enough as it will generate employment, help to reduce inflation, reduce social tension and increase productivity generally in the country.

Otti said the bank chief executives discussed on how to reduce interest rates for these sectors of the economy adding that further discussions are on-going on how they can make lending cheaper so that SMEs can be encouraged and productivity in general.

He said, “We held extensive discussions on how banks can begin to support the real sector, the retail sector of the market, the micro, medium and small scale industries. We underscored the need for banks to support those areas of the economy that have hitherto not benefited as much as others sectors for the simple reason that it would help to reduce social tension and by generating a lot of employment and empowering a lot of people in the economy”

When prodded on the modalities the banks would employ to bring down the rates, Otti said the banks would in the next couple of weeks come up with modalities on how to go about it assuring that they were committed to bringing it down.

He said, “ interest rate has to go down for you to support SMEs. We know it is not easy to do that at the moment, but we are willing to do it as a corporate social service. In a couple of weeks we will come up with clear modalities on how that will happen so that the real sector can begin to benefit from these decisions”.

Hafiz disclosed that the committee also looked at structural reforms in the country, with specific reference to power and oil and gas. Which he said were the two important reforms which must be completed because current foreign inflow into the country are in forms of portfolio flows which are short term in nature, which are invested in bonds and stocks market.

“They bring substantial liquidity into the market and their exit can cause real fluctuations in the rates. The structural reforms would ensure that the money that flows into the country are not just short term money or hot money but gradually move towards long term money or FDIs” he said.

CBN director of banking supervision, Tokunboh Martins also said that the apex bank was in the process of initiating the release of lower currency denominations into the system to address the problem of scarcity of lower notes currently facing the country.

Source: Leadership

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