Legal Security for Credit and Investment in Small and Medium Scale Industries in Nigeria
There is an acknowledgement, worldwide, that the development of any economy is dependent on small and medium scale industries (“SMES”). The advantages of strong SMES include job creation from the grass roots to the urban areas, entrepreneurship with resulting increase in Gross National Product (“GNP”), even distribution of wealth among the populace with resulting economic and physical security in the country, increase in foreign exchange with the exportation of qualitative and competitive products and repatriation of the profits to Nigeria, etc.
In developing countries, the advancement of SMES have been greatly constrained by the non advancement of the economies in these countries and the inability of their Banking sector(s) to extend medium and long term credit facilities to the SMES. This inability and or reluctance by the Banks to extend credit to the SMES have been due largely to the unavailability of credit for long-term investments in these economies and more importantly, for our purpose, the lack of adequate credit collateral/security by the SMES.
The efforts of the Central Bank of Nigeria (“CBN”) and the banking institutions in Nigeria under their umbrella association called the Bankers Committee, to fulfil their statutory and social responsibilities and to also assist in the development of the SMES is commendable. The only concern(s) that have been expressed especially by the SMES through their umbrella association, the National Association of Small and Medium Enterprises (“NASME”) is whether the conditions under which the banking institutions will extend credit facilities to the SMES are favourable and practicable to all the stakeholders concerned?
There is also to this writer the legal question of whether the conditions presently put in place by the Banks and the Bankers Committee to assist the SMES with credit is sufficiently covered by the Law? An attempt will also be made to proffer some suggestions, both legal and practical, on the way forward.
Conditions for the Banks to Participate in the SMES
Some of the conditions under which a majority of the Banks in Nigeria will extend credit facilities to the SMES include:
The Bank is expected, from the guidelines, to exit from the SME investment after three (3) years.
Incentives for Investing in SMES
There is an agreement that all Banks in Nigeria should set aside Ten percent (10%) of their Profit Before Tax for equity investments in the SMES. In return and as incentives for this investment, the following tax reforms and incentives have been proposed:
The Law Regulating a Bank's Investment in an SMES
The Banks and Other Financial Institutions Decrees (“BOFID”), now Acts under the 1999 Constitution, provides in Section 21 that a Bank may acquire shares in small and medium scale industries, agricultural enterprises and venture capital companies
provided that the shareholding by the Bank in any such enterprise or any other business shall not be more than Ten Percent (10%) of the Bank's shareholders fund unimpaired by losses and shall not exceed Forty Percent (40%) of the paid up share capital of the company whose shares are to be acquired.
Section 21(d) of BOFID goes further to provide that the aggregate value of the equity participation of the Bank in an SME should not exceed, in the case of a Commercial Bank, Twenty Percent (20%) of its shareholders fund unimpaired by losses or, in the case of a Merchant Bank, not more than Fifty Percent (50%) of its shareholders fund unimpaired by losses. Of equal interest is Section 21(3) of BOFID, which requires any Bank investing in an SME to notify the Central Bank of Nigeria (“CBN”) within twenty-one days of such an investment. The penalty for a default in not reporting the investment to the CBN is =N=100,000 (One Hundred Thousand Naira) for each day during which the default subsist. See Section 6 of the BOFID (Amendment) Act, 1999.
In protecting their investments in the SMES, the Banks' are requesting for a minimum minority equity participation in the SMES. Unfortunately, this is not a sufficient legal cover because in practice, the enforcement of the rights of a minority shareholder as contained in Part X of the Companies and Allied Matters Act, 1990 (“CAMA”) are slow in execution due to our judicial system of administration. Of interest also will be Section 300 of CAMA, which empowers any aggrieved shareholder to apply for an order from the Federal High Court in the form of an injunction restraining his company from:
CAMA has made some other effort aimed at protecting the investors in a company. Some of these protections include:
The locus classiscus on the above is the decision in Pender v. Lushington  6 CH.D 70.
Successes of the SMES & Recommendations
From available reports, the SMES are adversed to the conditions for the investments by the Banks. As a result, they have not encouraged or allowed equity participation by the Banks in the SMES. The CBN in turn has discovered that the Banks, to take advantage of the incentives offered by the scheme and as a result of the refusal of the SMES to allow them to invest under the above conditions, have established their own SMES, which are nothing but indirect subsidiaries of the Banks. To protect all the stakeholders, it is suggested that the scheme be reviewed and the following alternatives be considered:
DISCLAIMER: This Newsletter is a free educational material, for general information ONLY. Recipients are adviced to seek legal counselling to specific situations when they arise. Comments, criticisms, suggestions, ideas, etc are always welcomed. This Newsletter may be shared with other parties (third parties) provided the author is acknowledged as the originator of the article contained herein and the disclaimer notice is attached.
EHIJEAGBON O. OSEROGHO