Non-interest financing, impetus to revitalization of Nigerian economy

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By Mustapha Sumaila
Abuja, July 23, 2020 The COVID-19 pandemic has had far-reaching consequences beyond the health challenge posed worldwide. It is having significant adverse effects on global social and economic activities.

Countries with multiple sources of income have been badly hit by the economic crisis caused by coronavirus pandemic let alone nations with mono-economy.

The lockdown imposed by countries across the world had affected movement of people, goods and services thereby putting world at a standstill, hence causing global economic crisis.

COVID-19 is widely acclaimed to have led to unprecedented disruptions in global supply chains, sharp reduction in the global prices of commodities, including crude oil, and turmoil in global financial markets.

Nigeria is not in isolation as it is also affected being one of the countries which largely depend on sale of crude oil as major source of revenue.

After slipping into recession in 2016, growth in Nigeria’s Gross Domestic Product (GDP) returned and the economy began showing signs of recovery but the pandemic came to slow down the gains.

As Nigeria is still largely dependent on oil, the current crash in oil prices occasioned by the global COVID-19 lockdown has caused hardship for the people.

In view of this challenges, the Central Bank of Nigeria (CBN) has embarked several interventions to save the economy from imminent collapse occassioned by the negative impact of the pandemic.

Chief among these interventions was the recent introduction of non-interest guidelines meant to provide facilities without interests to boost critical sectors like Agriculture, MSMEs and Information Communication Technology (ICT) and so on.

The CBN said that the initiative is for Non-Interest Financial Institutions under its Agri-Business, Small and Medium Enterprise Investment Scheme (AGSMEIS), Micro, Small and Medium Enterprises Development Fund (MSMEDF) and Accelerated Agricultural Development Scheme (AADS).

According to the guidelines by the apex bank, the framework will integrate non-interest window in all its intervention programmes aimed at supporting businesses and households that have been impacted negatively by the corona virus.

The bank said under its Agri-Business, Small and Medium Enterprises Investment Scheme (AGSMEIS) for Non-Interest Financial Institutions (NIFIs), there will be creation of a Fund to be known as ‘AGSMEIS Non-Interest Fund’ to be domiciled in a dedicated account with the CBN.

The guidelines stipulated that each Non-Interest Deposit Bank full-fledged or window is to set aside five per cent of its profit after tax annually as contribution to the Fund.

The bank added that each Non-Interest Deposit Bank is also to transfer its contribution to the CBN not later than 10 working days after the Annual General Meeting (AGM) of the participating bank.

The eligible activities under the Scheme are businesses across the agricultural value chain, covering production, inputs supply, storage, processing, logistics and marketing as well as MSMEs.

Others are the real sectors including manufacturing, mining and petrochemicals; MSMEs in the service sector including ICT and the creative industry as well as other activities as the CBN may determine from time to time.

According to the guidelines, financing under the Scheme will be for start-ups, business expansion or revival of ailing companies and shall be in compliance with provisions of BOFIA (1991) as amended and the principles underpinning operations of NIFIs.

The MSMEDF for NIFIs guidelines are aimed at channeling low return funds to the MSME sub-sector of the Nigerian economy through participating Financial Institutions (PFIs) to enhance access by MSMEs to financial services.

Similarly, the non-interest guidelines for the AADS are aimed at engaging a minimum of 370,000 youths in agricultural production across the country between now and 2023, in order to reduce unemployment among the youths in the country.

Commenting on this development, economic experts have lauded the apex bank for what they described as a robust package of non-interest guidelines to boost the nation’s economy.

Prof. Uche Uwaleke, a Professor of Finance and Capital Markets at the Nasarawa State University, Keffi, said the CBN’s move on non-interest financing is worthy of commendation.

Uwaleke noted that the recent non-interest interventions in the agric value chain, textiles, healthcare, creative industries as well as SMEs was a right step in the right direction.

Mr Tope Fasua, an economist, said this initiative was part of the very necessary interventions that CBN and the government at large should undertake, adding that the step taken so far was in order.

Fasua said the focus on Agriculture in the guidelines was very encouraging as it might save Nigeria from the predicted impending food shortage caused by disruptions in the agric value chain around the world.

He added that interventions at this moment was desirable because “we are technically in a war situation. I support the use of this initiative in boosting other existing credit schemes but I urge for tight structuring so that most of the funds are repaid.

“Depending on the manner the loans are structured, this will be a great boost to the economy. However, there is a need for caution. Very few businesses are doing well today and a lot of the loans being released by government face jeopardy.

“Interest based banking come with some sort of disinterest from the lender and puts pressure on the borrower to repay from whichever source. Non interest banking may actually result in more defaults as it is based on profit sharing,” Fasua cautioned.

Similarly, Mr Promise Amahah, the National Coordinator of the Nigerian Young Farmers Network (NYFN), noted that if properly implemented and monitored, the initiative could provide the much needed traction that the economy badly needed, especially in a technical recession.

Amahah further stated that the target on areas of comparative advantage across participating states would also serve as a catalyst in achieving tangible results.

He added that the age demography (18-35) is strategic in reaching vulnerable groups and MSME’s who are the engine for economic growth and development.

“You cannot overemphasize the positive impact of non-interest financing on small businesses. Every enterprise at its onset, before standing firm on its feet, needs borrowing.

“In an economy where the interest rate is high, small and medium enterprises find it difficult to borrow and repay loans.

“The non-interest financing is a critical inducement that will boost SME’s growth and development and in turn boost the economy because SME’s are core in the real Sector. It will aid expansion and expedite industrialization.

“On the plan to engage 370,000 youth in agriculture, it is far from being sufficient but surely will provide hope and succor.

“With an unemployment rate at about 33:3 per cent, 370,000 youths is a far cry in a population experiencing severe demographic bulge with youth constituting over 60 per cent of a population estimated to be over 200 million.

“It is a much needed drop of water into the ocean of unemployment. The key advantage is the ripple effect of the intervention and its potential to create many more direct and indirect jobs” Amahah said.

Another economist, Dr Arome Salifu, said the move by CBN was proactive and strategic, particularly in reducing mass youth unemployment, poverty and dependency in the country.

Salifu, who is also a Founding Executive Director, Africa Youth Growth Foundation (AYGF), stated that a non-interest financing was needed this time considering increasing youth population that were unemployed and delinquencies in the country.

He added that the CBN initiatives, no doubt, would help accelerate and mitigate the socioeconomic impact of COVID-19 on the youth in particular and the economy in general.

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