Lagos Chamber Tasks CBN On High Cost Of Funds  
 

By Toba Agboola

30th June 2009

The Lagos Chamber of Commerce and Industry (LCCI) has urged the new Central Bank Governor, Mr. Sanusi Lamido Sanusi, to urgently and critically examine the problem of high cost of fund in the economy.

According to the chamber, one of the major disconnecting points between the banks and the real economy is the cost of funds.

The LCCI President, Asiwaju Solomon Onafowokan, said a situation in which investors were borrowing at 25-35 per cent interest rate per annum was unbearable and not in the best interest of the economy.

He said: "It does not help the competitiveness of the private sector and the advancement of the economy as a whole. The obvious inevitability of the forces of globalisation is a major issue for domestic investors, especially those in the real sector of the economy."

Onafowokan said the cost and access to credit by the small businesses was a major problem in the economy.

His words: “This group pays as high as 80 to 100 per cent interest rate per annum on loans. Most of the credit they get are from the microfinance banks, finance companies or the informal financial markets. The rates in these outlets are often atrocious.

"Related to the issue of access to credit is the imperative of Credit Guarantee Scheme for the small businesses. The proposal for the introduction of the scheme was put forward about three years ago by the CBN. This is yet to be translated to policy".

The LCCI boss requested the governor to revisit the issue of problem of access to credit by the SMEs, which he said was due partly to the risk associated with them. He said a credit guarantee scheme would mitigate the risk and improve their access to credit.

"A Guarantee Scheme for SMEs would have a moderating effect on the cost of funds to them as the risk premium component of the interest rate would be reduced considerably. Lending intuitions would feel more comfortable lending to small business.

"Needles to say, the SMEs, more than any other economic group, have the capacity to create more jobs, promote equitable income distribution and alleviate poverty. This is a core developmental objective for the CBN," he said.

He said the tenure of funds in the financial system could not support the development of the real sector of the economy.

The LCCI boss added: “Over 90 per cent of funds in the financial system are short term funds with tenure of less than one year. This is not good for the development of the real economy since the banks are principally intermediation institutions. We appreciate the fact that the tenure of funds is a function of the totality of the macroeconomic environment and interplay of many variables in the economy.

"We hope that the CBN, working in concert with the fiscal authorities, would improve on the current tenure of funds in the financial system by enhancing the necessary macroeconomic fundamentals. This is critical for banks to be in a position to finance long tem projects, as against the current practice of concentrating on working capital and short term investments in the economy."

Source: The Nation

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