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Considering SME Lending Gap in West Africa

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SME Lending Gap

As with most developing countries, micro, small and medium enterprises (MSMEs) are the backbone of economies in West Africa. They account for the majority of businesses, are important contributors to job creation and have evolved to become key suppliers and service providers.

Despite their importance, access to capital is a key constraint to SMEs realising their full potential. SMEs are less likely to be able to obtain bank loans compared to large firms.

Their sources of financing mostly include internal funds, or cash from friends and family, to launch and initially run their enterprises. This limits their potential to grow and more effectively contribute to economic development, job creation and tax contributions.

In fact, the International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small, and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of global MSME lending.

A review of domestic credit as a percentage of GDP, for instance, helps put this issue of the SME lending gap into perspective. The World Bank estimates that in Nigeria, domestic credit as a percentage of GDP was 12.5% in 2017, 10.2% in 2018, and 11.2% in 2019, with similar figures for Côte d’Ivoire and Ghana. This, compared to Sweden (on average 131%) and the United States of America (on average 190%) for the same period, shows the extent of the gap.

Demand and supply theory helps explain the SME financing gap in West Africa and by extension the globe.

Since financial infrastructure is primarily designed for corporates and high net worth individuals, SMEs are not able to send strong demand signals to commercial capital. “Poor record-keeping, inadequate KYC (know your customer) details, and proximity to financial institutions are common challenges for SMEs in West Africa. This increases the perception of them being at high risk for NPLs (non-performing loans),” says Arnold Kavaarpuo, Country Manager for market-leading financial services technology platform, JUMO in Ghana.

On the supply side, it is often argued that even with the best of intentions, the needs of a large proportion of the market remain unmet by modern economic function. That is, there is a price point in any market where marginal propensity to produce reduces, as cost exceeds any marginal revenues. Some have referred to this as the Pareto principle or market equilibrium.

Attempts to move this curve outward through social impact funding and corporate social investment has improved market development but hasn’t solved the core problem of legacy thinking that is holding back access for a whole new market.

IFC’s global SME Banking Survey in 2019, identified the three biggest challenges accounting for the SME lending gap as credit risk, external environmental risk, and technology adoption. “JUMO has introduced a great potential solution to these problems by utilising mobile money infrastructure. We have developed bespoke digital credit products for both SMEs and individuals. The success is evident: JUMO has served 18.3 million customers across Africa and Asia. In Ghana alone, we have 4.4 million unique customers and 6 out of 10 are MSMEs that are now able to access credit through JUMO’s platform,” says Kavaarpuo.

Through the use of advanced data science and artificial intelligence, JUMO’s information processing engine is able to more accurately predict the risk profiles of SMEs in order to match them to affordable bank capital. “This predictive capability is constantly improving through an increase in the quantity and variety of data available. It also shows SMEs to be a viable market segment for the allocation of bank capital,” he continues.

The SME funding gap requires a multifactor approach from the private sector as well as policymakers. Governments tend to subsidise cash providers but penalise digital financial service distribution and products, which is not tenable for a healthy financial system in the long run. We need to invest in distribution infrastructure to reduce unit economics or cost to serve. Responsibility for development should be shared between government interventions and private sector initiatives. There is also a need to invest in citizen identity and address systems to improve KYC, as well as credit reference bureaus to improve confidence in lending to SMEs.

The artefacts built for notes and coinage financial services need to be revamped for a modern digital financial services architecture. “There should also be a conscious effort to incentivise new players that are taking on unpopular financing segments and trying to bridge the SME funding gap. With the conscious and collaborative design, the SME funding gap can be reduced,” concludes Kavaarpuo.

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How Retirement Can be Enjoyed, Not Endured: The Imperatives!

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Timi Olubiyi retirement

By Timi Olubiyi, PhD

The current landscape of retirement in Nigeria will change in the next couple of years as the ageing workforce is becoming increasingly visible in businesses, government, politics and in sports. Besides, with or without employment retirement phase will surely come for every individual.

However, persistent high rates of unemployment have been a serious concern in the country over the years, without any visible unemployment benefit, insurance or social policy. The reality is that many in this unemployment category will equally be reaching retirement age and will be transiting in a few years.

So, the impact of unemployment should be seen as long term and life-long, because it affects living standards even in retirement when active age and work-life has been passed with no palliatives or supports.

It is not uncommon for employees, politicians, entrepreneurs and the unemployed to live more than 20 years after the retirement age of 60years but the issue is usually the sustainability of wellbeing, livelihood, lifestyle, status, and social demands. The longer the time spent in retirement, the harder it becomes to be certain about the adequacy of resources to keep the livelihood and lifestyle going.

For those that care to know, individuals will need to have enough funds, assets that generate steady income, family support or investments saved to last even beyond 20 years.

Unfortunately, with a recent survey in Lagos State amongst the cluster of entrepreneurs and older adults majority may not have enough to meet and maintain their standard of living particularly livelihood, in an era of uncertainty, increasing inflation and harsh economic environments and much more at retirement.

This piece presents insights from business owners and businesses around Lagos State the economic capital of the country on retirement planning.

A follow-up survey in the Computer Village Ikeja area of the state was carried out, where respondents (entrepreneurs) indicated that they will only be willing to grow and expand their businesses at the expense of retirement planning, how ironic? Few mentioned that the only motivating factor that can increase their confidence in retirement is if their businesses succeed.

One of the key findings in the survey was that only a fraction of businesses are aware of the importance of pension and retirement plans. It was a stiff struggle identifying businesses with adequate arrangements of pension for staff, owner-manager or the business operator.

Even though a retirement plan through pension arrangements can help ensure that business owners and their staff have enough funds to live on in their later years, this all-important scheme is found missing in the majority of small businesses in Lagos State.

Recall small businesses are over 90% of existing businesses in the country and provide significantly for the majority of homes and families in terms of employment, sustainability and livelihood. Many entrepreneurs are so busy growing their businesses that they put off planning for retirement, this growing trend is not only worrisome but disturbing. Surprisingly as important as a retirement plan is, ageing business owners and operators rarely consider it imperative.

The survey further indicated that the majority of the businesses especially the self-employed do not have retirement savings plans, and 40% of business owners in the survey are not confident that they will be able to retire before the age of 65.

Nevertheless, the good news is that those small business owners have more options available to them than traditional 9 am to 5 pm office employees, yet this advantage is not explored. Because it presents an option of flexibility in the date of retirement.

Retirement can either be considered early or later, in some cases business owners might choose not to fully retire. The flexibility gives entrepreneurs the option to determine exactly when to stop working, yet the majority continue to operate without ceasing.

Indeed, according to the survey, 70% of the self-employed and entrepreneurs in computer village do not save regularly for retirement. The reason adjudge to this phenomenon is that they do not receive a steady salary pack, so many of these hardworking individuals forgo retirement plans. The survey further highlights that some of the small business owners have the mind of selling their businesses to fund their retirement and relocate to the village when the time arises.

However, the risk of this option is that entrepreneurs and small business owners can overestimate the value of their businesses and eventually run at a loss. Counting entirely on the sale of the business to fully fund a long retirement is highly risky due to unforeseen circumstances.

The survey also found that many business owners would appreciate guidance when it comes to retirement because they lack knowledge of it. It is important to note that before death, especially under normal conditions in life, there is a phase called old age; a period where entrepreneurs have almost exhausted intellectual values and strength. Consequently, there is a need to prepare for such a phase of life with adequate retirement planning and possibly business succession.

Retiring is a real-life changing phase with far-reaching implications, dreadful stories most entrepreneurs would not want to hear or discuss this reality but unfortunately, there is nothing one can do about it; it is bound to come one day. Business owners cited cost and lack of resources to administer the plan as the leading reasons why they do not have a retirement plan in place.

Please note if you are a small business owner reading this, you are likely busy running your business and have not had the time to research the best retirement option. While retirement may not be on your mind currently as an entrepreneur, the sooner you start planning for this all-important aspect of your business the better. Here are simple steps entrepreneurs and small business owners can take right now to prepare for retirement in my opinion.

A good start is by implementing the 10% rule which is a lot easier than you can comprehend. Achievable by simply setting up an auto-transfer system with your bank, that is automatically transferring 10% of all your earnings out of your business account into your savings account every month. Then you can place the accumulated fund into a low-risk investment at intervals and allow compounding interest to grow your fund.

This applies whether you are an entrepreneur or not. It is a simple trick to grow your wealth and support a retirement plan. Real estate investments can also help give succour in retirement, but professional guidance needs to be sought.

Another approach is to develop an exit strategy in your business, that is, have in mind right now what will happen to it when you retire, when you intend to eventually quit and set up strategies to guarantee retirement income. One other important factor to consider is what will happen to your business when you retire. Will you pass it on to family or sell the company to another business or owner? Will you have someone currently working for you take over?

A simple retirement model can give you a simple leeway, but you have to plan for it and stick to it. Because retirement age varies so drastically, small business owners need to evaluate their lifestyle, savings, and the company’s overall performance to determine an ideal retirement option.

In conclusion, a bit of research, adequate planning, and seeking advice can help with achievable retirement goals. A professional can also help streamline your business and help with the necessary details required to have a comfortable retirement. Good luck!

How may you obtain advice or further information on the article? 

Dr Timi Olubiyi, an Entrepreneurship & Business Management expert with a PhD in Business Administration from Babcock University Nigeria. A prolific investment coach, seasoned scholar, Chartered Member of the Chartered Institute for Securities & Investment (CISI), and Securities & Exchange Commission (SEC) registered capital market operator. He can be reached on the Twitter handle @drtimiolubiyi and via email: drtimiolubiyi@gmail.com, for any questions, reactions, and comments.

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5 Ways to Get Your House Dinner Party Ready

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Dinner Party

If you’re having friends over for drinks or a dinner party, try some of these tips to get your home ready before guests arrive.

Tidy up fast

If guests are simply popping in for drinks or having a quick meal, don’t worry about tidying up every nook and cranny. Just make sure the main areas that they’ll see and be moving around in, like the sitting room, kitchen and bathrooms, for example, are clean and neat. Declutter living spaces like the sitting room. Bookshelves are often the messy-looking clutter culprits, housing all kinds of knick-knacks and photos which somehow found their way to be among the books. Next, turn your attention to any other shelves, windowsills or table tops that need a quick clear out, so that the room feels clean and comfortable.

A time hack if you’ve had little, to no advance notice that guests are unexpectedly about to arrive, is to do a quick whip-around and tidy up by popping anything you don’t want on show into a laundry basket that you can hide in the cupboard. It may not be the most elegant solution, but it’s a fast one!

Sparkly clean 

You may not have noticed the accumulation of kids’ fingerprints on the walls, pet stains on the carpet and stubborn grimy marks in the oven. Now that you’re looking at your house through a guest’s eyes, the need to freshen things up suddenly takes top priority. Start off by making sure the area outside your front door is tidy and clean. Next, dust off all hanging lights, like pendants and chandeliers, and wipe light switches clean. In the kitchen, stack groceries neatly inside cupboards and wipe your oven interior down, just in case guests decide to come through to the kitchen to offer a helping hand.

If you really can’t afford any time to do these chores, be thankful that you live in the digital age. Save yourself major stress by hiring an efficient, trustworthy cleaner from SweepSouth Connect to get the house sparkly clean, or help with time-intensive things like windows, cabinets, the fridge and oven.

Decor hacks 

Try these quick decorating tips to create a dinner-party feel fast:

Your entrance area: Set the mood for guests as they walk in by placing a scented candle close to your front door. If you have a console table, turn it into the star of the show with a quick, but stunning display of different sized glass vases filled with flowers. For a party feel, lay a row of sparkly fairy lights on top for instant night-time glitz. 

Sitting room: Dress up your home with faux fur cushions and sumptuous fabric throws over the backs of couches. Next, find a corner where you can create a statement, and put a cake stand on top of a small table, adorned with tea-light candles and dainty flowers. 

Gorgeous little touches

Try these style ideas for instant effect:

  • Style your table in a flash. Raid your garden for some green foliage, slip it into napkin rings with crisp white serviettes, and put a name place card on top – easy!

  • Crafty? Place flowers on your table that you’ve given a light spray of craft glue to, then dip these into glitter.

  • Tie sprigs of greenery to the backs of chairs with a pretty ribbon. 

Time for treats

Easy entertaining tips for added glamour: 

  • Welcome hungry guests by readying a plate of little snacks on a console table as they arrive.

  • Serve your drinks from a silver or golden tray for a smart, glamorous touch. Tie coloured ribbons to the bottom of Champagne flutes – it will help guests keep track of their glasses.

  • Who doesn’t love an easy-to-create cheeseboard? Laying out the ingredients is simple and you can buy them ahead to store in the fridge for days. Wow guests with a variety of at least three different cheeses. A safe choice would be a rich blue cheese, a hard cheese (like an aged Gouda) and a creamy Brie or Camembert. Where there’s space on the board, pop in crackers, grapes, and nuts, and you have a cheese board that’s all-out fantastic.

Remember that a warm welcome and loving atmosphere will trump all else. Regardless of how prepared you are, or how much you have to offer guests, just put on a great playlist to set the mood, then relax and relish the evening.

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Diversifying into Foreign Assets – All You Need to Know

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Diversifying into Foreign Assets

By FBNQuest

Many Nigerian investors may think that investing in a foreign currency asset is an exotic venture for ultra-high-net-worth investors. On the contrary, diversifying into foreign currency assets may be easier than you think and offers both short-term and long-term benefits.

Over the past few years, a growing number of savvy investors are putting their money into vehicles that offer exposure to low-risk dollar assets. This allows them to better manage the currency risk associated with a volatile exchange rate. They are doing this by investing in instruments like Eurobonds.

Eurobonds are debt instruments that are denominated in a currency, such as the US dollar, other than the home currency of the country or market in which it is issued. Nigeria’s federal government and several companies have issued Eurobonds that are currently traded on international financial markets.

Though the Eurobond market was previously dominated by investors from large banks and financial institutions, it has now become more accessible to everyone. Individuals are able to invest in Eurobonds directly or indirectly by investing in mutual funds created for this purpose.

Among the main benefits of investing in Eurobonds is the diversification of your investment portfolio. It is never a good idea to put all your eggs in one basket, it is better to spread your investments across several asset classes or issuers.

In addition to the returns that you could potentially make from the investment, you also benefit from the protection against a possible depreciation of the naira relative to the US dollar. If the naira depreciates against the dollar, then the return that you make on your investment in a Eurobond actually increases in naira terms.

Investing in a Eurobond is a relatively medium-risk investment option for those seeking exposure to assets denominated in foreign currency. Eurobonds offer fixed coupons or interest payments. The return on the investment is, therefore, more predictable. What you can make from a Eurobond also beats the interest that you will earn in most dollar domiciliary accounts in Nigeria.

Consider the FBN Dollar Fund offered by FBNQuest. It is a medium to a long-term investment fund that provides income and capital appreciation by investing in US dollar-denominated instruments issued by the Nigerian government and reputable corporate institutions. It is well suited for and adaptable to any investor type. The Fund offers attractive returns, safety, and liquidity to investors.

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