Charting the Course in Crisis: Development Experts explore ‘COVID-Proof’ Financing Options for Growth

As the COVID-19 pandemic continues to create new challenges for societies and economies on an almost unprecedented scale, the knock-on effects of the virus appear to be seemingly endless.

Financial Institutions are at the front-line of economic disruption. Suddenly they are having to deal with issues that simply weren’t on the horizon a few weeks ago. They are being almost overwhelmed with inquiries and applications for support from both personal and corporate customers.

With so many business sectors severely challenged – and in some cases facing a complete suspension of business – the demand for business loans and financing is immense, particularly for Small Medium Enterprises (SMEs).

Governments around the world have launched significant support packages for small and medium-sized businesses, often guaranteeing all or most of the credit is made available.

Small and medium-sized enterprises (SMEs) contribute substantially to the global economy. They now make up 90%of businesses and 50% of employment worldwide. In emerging markets, SMEs are propelling development by introducing new products, processes, and competition. Although it is difficult to gather and track data about informal companies in emerging economies, SMEs that are registered add as much as 40% to national income (GDP) and provide 80% of the jobs.

Despite their valuable contributions to the global economy and emerging markets, young companies are facing many challenges. The current COVID-19 pandemic is only fueling one of the primary difficulties for SMEs – a lack of access to credit. Nearly 70% of small companies already lack access to credit, which has created a finance gap of $5 trillionin emerging markets, compared to the $4.2 trillion in lending.

This lack of resources exists worldwide, with the most substantial finance gapin the East Asia and Pacific region, followed by Latin America and the Caribbean. SMEs in Nigeria and emerging markets need alternative methods to secure the financing necessary to sustain their businesses in the post-pandemic era.

In furtherance of the foregoing, the Development Bank of Nigeria (DBN), as part of it’s Webinar series, hosted an interactive and well-attended webinar on Saturday, May 9, 2020, at 2 pm (WAT) on ‘ ALTERNATIVE FINANCING OPTIONS FOR SUSTAINABLE GROWTH POST COVID-19 LOCKDOWN’.

On the list of exceptional panel of discussants were Mr Andrew Alli (Immediate past President & Chief Executive Officer, Africa Finance Corporation), Mrs. Toyin Sanni (Chief Executive Officer, Emerging Africa Capital), Mr. George Ogbonnaya (Group Head, Business Banking, FCMB), Sa’adiya Aliyu Aminu (Managing Director, Urban Shelter) and Prof. Joseph Nnanna (Chief Economist, Development Bank of Nigeria), as the moderator.

In his opening remarks, Prof. Joseph Nnanna (Chief Economist, Development Bank of Nigeria), laid some background highlighting the global impact of the pandemic, key financing gaps and the role of Development Bank of Nigeria as the primary development finance institution – wholly owned impact Guarantee company focused on addressing major financing gaps facing the MSMEs in Nigeria.

The first speaker, Mr Andrew Alli (Immediate past President & Chief Executive Officer, Africa Finance Corporation), provided some insights into the impact of the pandemic and the massive global shock as a result of full-scale disruption on both the demand and supply chains. As a result, Governments in emerging countries, especially in Africa are facing lots of problems, which is further magnified due to huge dependence on foreign currency (FX).

On the impact of the pandemic on private business, he stated that the key sectors worse hit are Hospitality, Entertainment, Tourism and Transportation. And as a result, would require a huge capital injection to re-start businesses in these sectors, post-pandemic.

He also stated that after the wave of infections, bank loans rates went upwards, capital to the banks took a downward dive and bank lending also assumed a downward trend; with the SMEs being the worst hit.

He suggested the following as part of the recipes for the survival of MSMEs through the initial crisis period: Adequate liquidity, Access to credit lines and new Equity injection.

He opined however that for long term sustainability, only businesses (MSMEs) that are quick to innovate and adapt to the following changes would be ‘COVID-Proof’: rationalize costs and stabilize the business, reconsider services and prepare for growth – well positioned to take advantage of opportunities.

In conclusion, he affirmed that crisis provides both opportunities and threats. The differentiation, however, lies in the ability of the SMEs to continue to accelerate to shape the business in the long term to take advantage of the opportunities.

The second speaker, Mrs. Toyin Sanni (Chief Executive Officer, Emerging Africa Capital), gave a vivid illustration of the impact of the pandemic on the entire economic value chain.

She provided a bit of background on Emerging Africa Capital as a sector agnostic company with a clientele base in Government, Banks, SMEs, etc.

Her message to SME businesses was very clear: In order to remain ‘COVID-proof’ in the future, businesses must review, redesign and re-invent current business models by innovating and adopting digital models.

She also affirmed that in this new dawn, fund providers will be very selective and particular about their investment decisions. And the likely businesses to win will be those built a strong brand with the ability to differentiate, with the right Governance structure based on a strong digital model.

On her part, the third speaker, Sa’adiya Aliyu Aminu (Managing Director, Urban Shelter), while corroborating with the submissions of the previous speakers, averred that digital lending fintechs offer convenient alternatives, with faster digital applications and real-time review processes. Some of the key takeaway from her submissions include:

• Prompt assessment of credit risk and provision of faster funding remains a challenge
• The need for the use of alternative data to determine credit risk.
• Peer-to-peer (P2P) lending as a common financing option for SMEs
• Crowdfunding is another popular option for micro, small, and medium enterprises to get funding.
• Investment in cutting-edge technology like Artificial intelligence (AI) for alternative data analysis on a real-time basis.
• Invoice financing as another option that gives SMEs quick access to cash
• Bank-Fintech partnerships as a necessity – need for banks to digitize their services.

The fourth speaker, Mr. George Ogbonnaya (Group Head, Business Banking, FCMB), gave an assessment of post-pandemic outlook and impact to include: Low capacity utilization and need for new markets/channels, Lots of SMEs will run out of the reserve,

Disruption in the supply chain, Demand for Local alternatives, New players in your space,

Need for rapid innovation and quick adoption to new normal and Disruption to normal ways of working – Homes becoming a hub for living, businesses, etc.

He also highlighted the Government and regulatory responses to include:

Reduction of Interest rate on all applicable CBN intervention funds, New N100B Health sector intervention Fund, New N50B SME fund disbursed via NIRSAL Microfinance Bank, Up to N3.6trillion liquidity injections through the banking sector via the various intervention funds & policies and the continuous enforcement of CBN policy on LDR –which will keep deposit rate low and increase appetite for lending.

He further highlighted the different financing sources for businesses to include:

Equity: Personal Savings, Retained earnings, Venture Capital, Angel Investor, Crowdfunding

Grants: Grants windows – Health, Education & Digital channels are new and will be hot; Result Based Financing – common where execution capabilities are in doubt and Reward-Based Crowdfunding – great for community businesses or businesses serving closed neighbourhood or providing a solution for common good

Debt: Bank Loan, Leasing, Venture debt & bridge finance, Suppliers credit, Platforms & Securitization

Enabling Tools: Matching Funding, Guarantees

He gave a graphic and compelling case on financing and underlying business vs underwriting model and the need for finding the right alignment for appropriate funding hinged on the key tripods: Accessibility, Affordability and Purpose.

He concluded by highlighting some of the innovative approaches to unlock funding for MSMEs as follows:

• Align your purpose with “the” strategic direction and brighten your chance of accessing funding – Intervention funding, Grants, Loan, etc.
• A blend of the bank loan (intervention fund inclusive) and De-risking tools e.g. risk-sharing guarantees, insurance.
• Data-driven lending platforms & Digital ecosystems with embedded securitization tools that delivers access to market and/or provide liquidity to members –shorten cash conversion cycles, prepayments, short term loan, merchant loan, etc.
• Venture debt – with over $1b venture capital investments in start-ups in Nigeria just last year, Covid-19 will likely delay the next round of fundraising making venture lending imperative.
• Reward-based and pure equity crowdfunding will grow and offers an alternative to the low-interest regime for individual investors.

A number of vital questions were raised during the Q&A session which was anchored by Prof. Joseph Nnanna.

In conclusion, the following submissions were made:

Innovative solutions hold the key to more opportunities in the post-pandemic era.

There will be huge investment opportunities for businesses in the thriving sectors like Agriculture, Healthcare, Logistics, Telemedicine, and Telecommunications.

Equity investors with the right firepower will invest, but generally, they will be wary and selective in their options which may include a review of valuations.

Disruption in the traditional Education model to a digital model.

SMEs would need a lot more creativity, innovation and resilience to take advantage of the opportunities provided by the pandemic.

The combined synergy of banks and fintech will provide faster financial options that are flexible to a small business’ most immediate needs.

Crowdfunding holds a lot of promise as an alternative funding option, especially in the real estate sector. The necessary regulations and guidelines on the appropriate pricing/funding mix are being firmed up by the Securities and Exchange Commission (SEC).

Strong Government leadership will be required in the ‘new’ uncertain world – How MSMEs survive will largely be in their ability to adapt.

The webinar was well attended with participants drawn from different sectors including, policymakers, entrepreneurs, financial institutions, academics and other critical stakeholders across the globe.