Pennee: Is it good business to lend to Nigerian SMEs?

According to Pennee, access to funding seems to be the most difficult of running a small and medium-scale enterprise (SME) in Nigeria, even when the funds are available the interest rates are usually high.

“There are a lot of opportunities on the continent [Africa] but capital is very difficult to come by.” — Tony Elumelu

For instance, Microfinance Banks reportedly charge as high as 75% per annum on loans, and digital lenders’ interests can be over 30% per month—then we have predatory lenders that sometimes out of desperation these entrepreneurs go to take loans from them since most commercial banks shy away from retail lending.

As of 2020, Nigeria’s Small and Medium Enterprises Development Agency estimated that there are approximately 39.6 million SMEs in Nigeria with a population of 200 million. Compared to other countries with higher populations, such as the United States with 30 million SMEs, India with 42 million SMEs, China with 38 million SMEs, and Indonesia with 64 million SMEs, it is clear that Nigeria and Africa have significantly more entrepreneurs than these other regions.

Over 95% of SMEs claim they need less than 350,000 ($745) in annual credit. However, with all the credit providers springing up there’s still just an approximated 2-5% penetration.

Although the Central Bank of Nigeria (CBN) has ventured into retail lending to cushion the lack of credit, experts have argued that the intervention funds are fuelling inflation in Nigeria. “Engaging in retail lending is not the function of the CBN,” Chris Enyinnaya, a Fellow of Chartered Institute of Bankers, argues.

SMEs loan repayment rate in Nigeria

Aside from the CBN, digital lenders like Pennee and Payhippo are providing loans for SMEs in the country. As of February, Payhippo disbursed over $10 million in loans to Nigerian companies. 97% of all money disbursed over the past two years was collected,” according to Zach Bijesse, co-founder of Payhippo. “The lowest [repayment] months were when covid was starting in early 2020: Our collection rate dipped to 93% in March 2020.”

Disclosure: This article was inspired by Zach’s story about Payhippo. We tried reaching the team but we learnt that Payhippo is on a media break, as of the time of this report. So, we spoke with other experts in Nigeria’s SMEs lending space. 

“It is good business to lend to SMEs, mostly because many lenders are not enthusiastic about lending to small businesses but they are several of them in the country,” Mejero Emmanuella, CEO of Pennee said. Lending will likely be seen as bad business by the lender when the debtors either fail to pay within the loan tenure without proper communication with the lender.

So far, Pennee has recorded a 98.7% repayment rate since its launch in 2019—this is slightly higher than Payhippo’s.

Loan tenure is the duration within which the loan is supposed to be paid off. It is the time that the loan will last until it is fully paid off with regular payments.

According to Mejero, “We think about repayment before giving out money to businesses. Also, repayment is most about the character to who you are lending. For Pennee, we use direct financing to determine who is serious with their businesses—someone cannot take money from us and put it into unproductive activities.”

The company also provides mentorship to SMEs within their portfolio. Recently, Pennee deployed 25% of its $2.7 million in credit financing to its first small business accelerator cohort.

To ensure a seamless loan repayment process, Yemisi Isidi, co-founder of Triift Africa said that SMEs should “be forthcoming with clear communication.”

“This helps us manage expectations and provide better support and advice on how to unlock new revenue opportunities within your business niche, position your business better or even optimise your processes for efficiency. Things can go differently than planned, but by communicating, you provide ample room for adjustments to payment plans,” she added.

“At Triift Africa, we think of ourselves as long-term growth partners for businesses. For us, ambition actually counts. We know that great businesses and their brilliant plans may not survive the harsh business realities and the quickly evolving climes that they are operating in. So, we are always thinking about how we can support businesses through these challenges.”

What SMEs should consider before taking loans

In approaching credit providers, it is important to have an existent business with good books. Mejero told that “it is hard for anyone to risk providing loans to you if you are unable to detail your track record, so businesses should pay attention to bookkeeping.

  • Be conscious of the lenders’ terms: You cannot spend all the money you make on repaying loans, so you need to pay attention to the interest rates, reducing balance and the early/late payment fees.
  • Good behaviour: It is really important to keep good behaviour when you are approaching lenders. Repayment is most about the character of who you are lending to than their capacity. Lending is a relationship of trust!
  • Avoid predatory lenders: SMEs should avoid the bad actors, and one way to do that is to not think of credit when there is an emergency. As you are setting up your business, think about who your credit providers should be.
  • Keep up with your credit report: When you are dealing with standard financial institutions, if you have pending debts other institutions will not lend money to you. Always ensure you clear up any debt!

Businesses that access loans/credit facilities from us [at Triift Africa] are businesses that typically have skin in their own business. This could be your own personal investment as a founder, a clear effort or a plan you have to build something profitable. — Yemisi Isidi.

In addition, Isidi said that “having the right business and legal framework/structures can make it easy for you to access credit facilities from us. For example, If your business is not registered, or the founder doesn’t have clear boundaries like a business account or even the transparency to separate personal from business expenses, that can quickly become a barrier to accessing credit.”

“Also, demonstrating strong community ties, especially your relationship with business communities can make it easier for a business to access loans. This could include who is willing to refer you, other loans that you have collected and if you have paid back and your customer experience. Your business relationships to a large extent define your credibility.”

“You need to demonstrate a strong understanding of the problem your business is solving, how it plays in the market, potential risks and how to mitigate them. This is very important to know when collecting a loan so you are very clear about the problem you will be solving with the loan and how to pay back,” she added.

We look forward to hearing more from Pennee at Africa Money and DeFi Summit next week

The Africa Money & DeFi Summit will connect African fintech, payments & crypto leaders, global platforms and thought leaders on the new opportunities in Decentralized Finance (DeFi) in Accra Ghana on September 27th & 28th 2022. An array of keynotes, panels and breakout sessions will deliver key insights and offer opportunities to connect, network and do business across the African fintech and DeFi landscapes.  Register today

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