Why Nigeria Needs a Separate Market for Development Credit 

By Akugbe Michael Ozigbo 

In the first part of this article, I argued that affordable patient capital is the missing bridge between Nigeria’s often-repeated aspiration to move “from consumption to production” and the actual construction of a productive economy.

The central proposition was straightforward. Nigeria must recapitalise, restructure and expand its Development Finance Institutions (DFIs), and build institutions with the financial capacity to provide 10-year, 15-year and even 25-year funding to agriculture, manufacturing, mining, housing, infrastructure and other productive sectors.

But that argument leaves one very important question unanswered: Where will the DFIs themselves obtain affordable funds?

Recapitalisation provides equity and improves borrowing capacity. It does not abolish the cost of money. If a Nigerian DFI goes into the domestic capital market to issue a 10-year or 15-year bond, it must compete for investors’ money against Federal Government securities and other high-yielding instruments. Why would a commercial bank, pension fund, or institutional investor buy a DFI bond yielding substantially below the prevailing market rate when higher returns are available elsewhere?

If the DFI must pay 20 per cent or more to raise money, add administrative expenses, expected credit losses, and a modest margin, it cannot sustainably lend to a manufacturer at 10 or 12 per cent. It may end up lending at 25 per cent or more.

We are then almost back to where we started

The DFI, then exists. The capital has been raised, but the productive enterprise is still confronted with expensive money.

This is the missing section within the missing bridge

Nigeria must, therefore, address not only the availability of development capital but also its price.

The question is whether we should continue to assume that the free market, operating under Nigeria’s present monetary and financial conditions, will spontaneously provide long-term capital to productive enterprises at the rates required to accelerate industrialisation. I do not believe it will.

What I propose is a careful blend of market economics and directed credit policy.

Nigeria should create a distinct Development Credit Market within its wider financial system. Nigeria has done it before.

There is sometimes a tendency to discuss directed credit as though it is alien to Nigerian monetary history. It is not. Nigeria previously used direct monetary policy instruments, including credit ceilings, sectoral allocation of bank credit, and other administrative credit controls before the eventual shift towards a predominantly indirect, market-based monetary management framework.

The CBN’s own historical account records the rationalisation and eventual elimination of credit ceilings as monetary management shifted towards Open Market Operations and other indirect instruments. Banks were not always left entirely free to decide that every naira of credit should flow to whichever activity offered the highest immediate private return.

Agriculture and other preferred sectors received policy attention through credit allocation mechanisms.

The National Housing Fund provides an even more striking precedent. Under the National Housing Fund Act of 1992, commercial and merchant banks were required to invest 10 per cent of their loans and advances in the Fund at an interest rate fixed at one percentage point above the rate payable on current accounts. The Act also prescribed investment requirements for insurance funds in real property development and the Fund.

Whatever one thinks about the design or subsequent implementation of the scheme, the philosophical principle was unmistakable: The state determined that housing was sufficiently important to national development to justify directing part of the financial system’s resources towards it on special terms.

More recently, the CBN has continued to demonstrate that regulatory instruments can influence the direction of bank credit. In 2018, the CBN established the ₦300 billion Real Sector Support Facility through the Differentiated Cash Reserve Requirement mechanism to support large enterprises and real-sector investment. The CBN also used a minimum loan-to-deposit ratio policy from 2019 to push banks towards increased lending.

The principle, therefore, is neither novel nor revolutionary. The real challenge is to design a modern system that avoids the inefficiencies, corruption, and credit misallocation historically associated with crude directed-lending programmes.

The market is doing what markets do. We should first be fair to Nigerian banks. Commercial banks are not development charities. Their directors have fiduciary responsibilities. They take deposits, protect shareholders’ capital, maintain liquidity and capital ratios, manage maturity mismatches, and attempt to earn competitive returns. If a bank can invest in a highly liquid government security yielding an attractive return, why should it voluntarily lock money for 10 or 15 years in a manufacturing project carrying construction, market, management and technology risks?

A bank that consistently ignores risk-adjusted returns in pursuit of vaguely defined national objectives may eventually cease to be a bank.

The problem is, therefore, not that bankers are insufficiently patriotic. The problem is that the incentive architecture of Nigeria’s financial system frequently makes short-term lending, trading, and government securities more attractive than long-term productive finance.

Markets respond to incentives. If Nigeria wants a different allocation of capital, Nigeria must redesign some of those incentives. This does not require abolishing the market. It requires creating a market for development capital.

A National Development Credit Allocation Framework

I propose that the CBN, working with the Federal Ministry of Finance and other appropriate institutions, consider establishing a National Development Credit Allocation Framework. Under this framework, Deposit Money Banks would be required to maintain a modest percentage of their eligible credit and investment portfolios in Approved Development Finance Instruments.

Let us begin, merely for purposes of illustration, with 5 per cent. A bank would be required to ensure that at least 5 per cent of a clearly defined eligible portfolio is invested in qualifying development finance assets. These assets could include investment-grade bonds issued by approved DFIs such as: The Bank of Industry; Development Bank of Nigeria; Nigerian Export-Import Bank; Bank of Agriculture; Federal Mortgage Bank of Nigeria; The Infrastructure Bank; and properly constituted new sector-focused DFIs.

The list of qualifying instruments would be strictly regulated

The CBN would not tell a bank: “Give ₦50 billion to Company A.” Nor should a Minister send a list of politically preferred borrowers to bank managing directors. Instead, the regulation would simply say: A defined percentage of the financial system’s assets must be allocated to qualifying national development instruments. Banks would then choose which approved instruments to purchase.

BOI may issue a manufacturing bond. NEXIM may issue an export finance bond. A new Mining Development Finance Institution may issue a mineral beneficiation bond. FMBN may issue a housing bond. An Agro-Industrial Development Bank may issue a food processing bond.

The banks would decide which bonds to buy based on credit quality, management, financial performance, guarantees, duration and return.

That is the critical difference. Government directs capital towards development. The market allocates that capital among competing qualified development institutions. This is neither pure command economics nor pure laissez-faire. It is a directed market.

The CBN shouldn’t fix one arbitrary interest rate. The temptation will be to announce that all DFI bonds must carry, for example, a 10 per cent coupon. That would be a mistake because not all DFIs present the same risk. Not all bonds have the same maturity. Not all institutions are equally well managed.

A 10-year BOI bond with a strong balance sheet and international credit enhancement cannot automatically be priced identically to a bond from a newly established sector DFI.

Nigeria should instead consider a Development Finance Rate Corridor. Approved DFI instruments could be permitted to price within a defined discount to an appropriate market benchmark. For illustration, suppose the comparable government bond yield is 18 per cent. The policy framework may establish that qualifying development bonds should price within a corridor of, say, five to eight percentage points below the benchmark, depending on tenor, guarantees and credit quality.

The permissible range could therefore be 10 to 13 per cent. The actual price should be discovered competitively.

One institution may issue at 10.5 per cent. Another may clear the market at 12 per cent. A poorly managed DFI may be unable to attract sufficient subscriptions even at the upper end of the corridor. This is desirable. Price discovery should not be abolished. It should operate within a development finance architecture deliberately constructed to produce lower funding costs.

Why would banks buy below-market bonds?

This is the central question. A mandatory allocation alone may work, but a system based entirely on compulsion is likely to produce resistance, avoidance and regulatory arbitrage. The better approach is to combine obligation with economic incentives.

The CBN already uses reserve requirements, liquidity regulation, prudential rules and other instruments as part of monetary and banking management. Its own description of Nigeria’s monetary framework identifies reserve requirements and other regulatory instruments as complements to market-based Open Market Operations.

A qualifying DFI bond could therefore receive preferential regulatory treatment.

For example, subject to careful technical assessment, approved Development Finance Instruments may: count towards the mandatory development credit allocation; receive favourable liquidity treatment; qualify as acceptable collateral at designated CBN facilities;

receive appropriate preferential risk-weight treatment where underlying credit enhancement genuinely justifies it; and, most importantly, attract favourable Cash Reserve Requirement treatment.

This last point deserves careful attention. Banks currently hold significant resources as required reserves with the CBN. Instead of creating a completely new CBN-funded intervention programme, Nigeria could explore mechanisms under which a portion of qualifying investment in approved DFI bonds receives differentiated CRR treatment. The CBN has previously used a Differentiated Cash Reserve Requirement mechanism to support real-sector financing.

The principle can be redesigned

Suppose Bank A has a regulatory development finance allocation obligation of ₦200 billion. It purchases ₦200 billion of 12-year investment-grade DFI bonds yielding 11 per cent. Purely on coupon comparison, the bank may prefer a higher-yielding government security. But suppose the DFI bond: satisfies a regulatory allocation requirement; has a partial guarantee from AfDB or another highly rated institution; is eligible collateral at an approved liquidity facility; and receives favourable CRR treatment then the bank’s economic calculation changes.

It is no longer comparing: 11 per cent DFI bond versus 18 per cent government bond. It is comparing the total risk-adjusted, liquidity-adjusted and regulatory-adjusted returns on both instruments.

The job of good financial regulation is to shape those relative incentives carefully.

From CBN intervention funds to a permanent market, Nigeria has experimented with numerous intervention funds.

Many were well-intentioned.

The problem with intervention funds is that they frequently depend directly on the CBN or government creating a scheme, defining beneficiaries, providing funding and establishing special administrative structures. They can be temporary. They can become politicised. They can blur the boundary between central banking and development banking. They may disappear when policy leadership changes.

The better long-term solution is to build an institutional development credit market.

The CBN should not become the country’s biggest project financier. DFIs should appraise projects. DFIs should make loans. DFIs should manage credit risks. DFIs should pursue recoveries. DFIs should build specialist knowledge of industries.

The CBN’s role should be to help construct the regulatory architecture within which long-term development finance can be mobilised at a sustainable cost.

There is a profound difference between the CBN lending directly or indirectly to hundreds of companies and the CBN establishing rules that allow professionally governed DFIs to raise cheaper long-term capital.

The first creates dependence on interventions. The second creates a market.

Specialisation is critical. The development credit market should reinforce the DFI restructuring proposed in the first part of this article.

Nigeria should avoid creating gigantic development banks expected to understand every productive activity. The credit appraisal skills required to finance a lithium processing plant are different from those required for a 5,000-hectare irrigated agricultural project.

Petrochemicals are different from student housing.

Machine tool production is different from pharmaceutical manufacturing.

Mining requires geological knowledge.

Infrastructure lending requires expertise in concessions, project finance and long-duration cash flows.

Export finance requires knowledge of foreign markets, trade credit and currency risk.

Specialist DFIs can build these capabilities. Under the proposed system, the DFIs would also compete for capital.

Periodically, qualifying DFIs could approach the development bond market. Institutional investors and banks would compare: their non-performing loan ratios; capital adequacy;

management quality; historic recovery rates; sector expertise; credit guarantees; project pipelines; and measurable development impact.

A well-managed DFI should raise capital more cheaply while a badly managed DFI should pay more or be unable to issue. This preserves an essential element of market discipline.

Credit guarantees can compress rates further. Mandatory or incentivised allocations should not carry the entire burden of reducing interest rates. Credit enhancement can substantially change the risk profile of development bonds.

AfDB, Afreximbank, AFC, IFC, the World Bank Group and other development institutions can play important roles here.

Nigeria should seek partial credit guarantees for specific categories of DFI bond issuance. InfraCredit’s domestic credit-enhancement model also demonstrates the importance of guarantees in helping long-term issuers reach institutional capital.

Consider a hypothetical ₦1 trillion, 15-year bond issued by an Agro-Industrial Development Finance Institution. The bond could have several layers of protection: strong DFI equity capital; a diversified underlying loan portfolio; a sovereign or development finance support framework; 20 or 30 per cent partial credit enhancement from a highly rated multilateral institution; and perhaps a first-loss development guarantee facility for specifically eligible projects. The objective is not to guarantee every naira of every loan.

That would create moral hazard. The objective is to absorb defined layers of risk sufficiently to improve the credit quality of the instrument. If the DFI’s cost of funds falls from 18 per cent to 10 or 12 per cent, it may be able to lend at 14 or 16 per cent.

This is still not “cheap money” in the sense of the near-zero interest rates previously enjoyed in some developed economies. But for a Nigerian manufacturer currently facing commercial borrowing costs far above these levels, it could transform project feasibility.

Why productive sectors deserve different treatment The strongest economic argument for a development credit market arises from the difference between private returns and social returns.

Consider a Nigerian machine tools factory. The commercial lender sees a borrower. It assesses cash flow. Collateral. Management. Debt service coverage. Market risk.

These are appropriate considerations but the Nigerian economy sees much more – a successful machinery manufacturer may develop Nigerian engineering skills. It purchases steel and electrical components. It trains technicians. It reduces machinery imports. It provides equipment to other Nigerian factories. It generates taxes. It may eventually export.

Employees acquire industrial knowledge and move through the economy. Suppliers expand. Engineering capabilities deepen. The lender cannot capture all these benefits in its loan interest.

Economists call many of them positive externalities. Where the social return on an investment materially exceeds the return privately captured by the investor and lender, a purely private capital market may systematically underfund the activity. This is one of the fundamental economic arguments for development finance.

It does not justify funding every factory. It however, justifies recognising that the market price of credit may not always produce the socially optimal level of productive investment.

Nigeria should therefore consider explicitly recognising two broad credit markets.

The first is the General Commercial Credit Market. This market would continue to finance: general corporate activities; consumer lending; trade; commercial real estate; working capital; services; and other normal economic activities. Pricing would remain substantially market-determined.

The second would be a Development Credit Market. Access would be limited to clearly defined nationally important productive activities.

Potential eligible sectors may include: agro-processing; food security infrastructure; mineral beneficiation; petrochemicals; fertiliser; pharmaceutical production; machine tools and capital goods; automotive and transport equipment; building materials; export manufacturing; power; industrial infrastructure; comand carefully defined housing categories.

Funding would principally flow through specialised DFIs. The DFIs would raise long-term bonds partly supported by regulated institutional allocations, credit enhancements and appropriate prudential incentives. Their lower cost of funding would be passed through to eligible borrowers under transparent pricing rules. The objective is to create a distinct yield curve for productive development capital.

At present, Nigeria largely attempts to finance radically different economic activities from the same expensive pool of money. A trader importing finished goods for resale and an entrepreneur constructing] a petrochemical plant are both essentially exposed to the same high-interest monetary environment. Yet their capital requirements and economic impacts are fundamentally different. The trader may turn over capital in 90 days.

The petrochemical investor may, however, spend four years building before achieving meaningful revenue. Treating both financing requirements identically is not financial neutrality. It is a structural bias in favour of short-cycle economic activities. In other words, our financial system may unintentionally be reinforcing the very consumption-oriented economic structure we claim we want to change.

But beware of financial repression There are serious risks

Directed credit can become financial repression.

Banks can be forced to fund uneconomic investments.

Depositors and investors can suffer artificially depressed returns.

Politicians can determine beneficiaries.

Companies can disguise trading activities as manufacturing.

Agricultural credit can finance property purchases.

Loans can be repeatedly restructured to hide defaults.

DFIs can become warehouses for politically connected bad loans.

Eventually, taxpayers or inflation may bear the losses. Nigeria has enough experience to know that good policy intentions do not automatically produce good outcomes. This is why I am not proposing a return to crude sectoral credit directives under which every bank is ordered to lend a fixed proportion of its portfolio directly to agriculture or manufacturing.

Commercial banks should not be compelled to originate long-term project loans in industries they do not understand. The mandatory allocation should primarily be to professionally managed development finance instruments not specific projects.

The DFIs should bear responsibility for project appraisal and loan administration. And the system must be protected by exceptional levels of transparency.

Nine safeguards against abuse

First, the initial mandatory allocation should be modest. Perhaps no more than 5 per cent. The percentage can subsequently be reviewed based on economic impact, bank stability and credit performance.

Second, banks should buy instruments, not politically nominated loans. No ministry should allocate borrowers to banks.

Third, eligibility must be based on published sector criteria. A company is not a manufacturer merely because “manufacturing” appears in its incorporation documents.

Fourth, every DFI should have a specialist mandate.

Fifth, development bonds should be independently rated.

Sixth, large underlying projects should undergo independent technical, market and financial appraisal.

Seventh, participating DFIs must publish detailed periodic development-finance performance reports.

These should include:

funds raised; average cost of funds; loans approved; loans disbursed; sector distribution; average lending rates; non-performing loans;

project implementation status; jobs actually created; exports actually generated; import substitution achieved; and amounts recovered.

Eighth, every preferred sector designation should carry a sunset clause. A sector receiving special credit status should be reviewed perhaps every five years.

The objective of development finance should not be to provide permanent cheap money to mature industries.

It should correct financing constraints, build capacity and progressively crowd in commercial capital.

Ninth, DFI management must be held accountable for loan quality.

A DFI should not be celebrated because it “disbursed ₦1 trillion.” Disbursement is not development. The real questions are: What was built? What is producing? How many projects were completed? What export revenue was generated?

How much domestic value was added? How many loans are performing? How much capital has been recycled?

Monetary tightening and productive credit can coexist

Some may argue that creating a lower-cost development credit market would contradict the CBN’s fight against inflation. Not necessarily.

There is an important difference between creating unrestricted liquidity for general consumption and directing long-term credit towards additional productive capacity.

₦100 billion of easily available consumer credit may increase immediate demand for imported cars, electronics and consumer goods.

₦100 billion financing a fertiliser plant, food-processing complex or pharmaceutical factory may initially create demand during construction, but its ultimate purpose is to expand the economy’s supply capacity. The inflationary consequences are not automatically identical. This does not mean all development lending is non-inflationary.

Excessive credit creation can generate inflation regardless of the label attached to it. Projects can fail. Imported machinery can create foreign exchange demand.

Construction can increase near-term demand before new production begins. The volume and timing of the programme must therefore remain consistent with overall monetary stability. But the CBN should distinguish between credit that merely increases purchasing power and credit that expands future productive capacity. A central bank concerned with long-term inflation should also be concerned with supply.

Nigeria cannot solve every inflation problem by permanently suppressing demand while leaving food production, electricity, transport, refining and manufacturing capacity expansion projects underfunded.

The state should direct the river, not every drop of water

The philosophical debate over “free markets” and “government intervention” is often unnecessarily ideological. Nigeria’s practical question is simpler. What financial architecture is most likely to accelerate the growth of productive capacity under our present economic circumstances?

A completely state-controlled credit system is dangerous.

Government is usually poor at selecting individual commercial winners.

Political capture is real.

But it is equally unrealistic to assume that today’s Nigerian financial market, with short-duration liabilities, high risk premiums and highly attractive alternative investments, will on its own provide enough 15-year capital to manufacturers, miners and infrastructure developers at affordable rates.

The solution lies between the extremes. The government should determine broad national productive priorities. The CBN should create the regulatory architecture for development credit while banks and institutional investors allocate a modest share of their portfolios to qualifying instruments.

DFIs should compete for those funds. Professional managers would select projects. Private entrepreneurs should continue to build and operate businesses and markets should test commercial viability.

Transparent performance data should determine which institutions receive more capital. So, the state directs the river but does not decide the destination of every drop of water.

From stabilisation to transformation

Nigeria is presently engaged in the difficult task of macroeconomic stabilisation. But stabilisation is not transformation. A stable currency does not automatically build factories. Higher government revenue does not automatically create industrial capacity.

Positive real interest rates do not manufacture machine tools. Reduced fiscal deficits do not process lithium. Foreign portfolio inflows do not necessarily create export industries.

These may be important parts of macroeconomic management but a productive economy must ultimately be built with actual long-term investment in productive assets.

The first part of this article proposed a re-engineered DFI ecosystem with *US$30–50 billion* in combined equity capital capable, over time, of mobilising *US$100–200 billion* of development finance.

This sequel answers the next question; How can those DFIs raise naira funding at rates that allow them to lend affordably to productive enterprises? My answer is the deliberate creation of a

National Development Credit Market

Require a modest institutional allocation to approved development finance instruments.

Use CBN’s regulatory and reserve tools creatively rather than relying endlessly on direct intervention funds.

Create a development finance rate corridor while retaining competitive price discovery.

Use partial credit guarantees to improve bond quality.

Allow specialised DFIs to compete for capital.

Link cheaper funding strictly to measurable productive outcomes. And subject the entire system to stringent transparency reporting and professional governance.

Nigeria does not need government to replace markets. It needs government to help create the market that Nigeria’s present financial structure has failed to create: a market for affordable, long-term productive capital.

We should stop asking a financial system structured around short-term money to spontaneously finance 20-year industrial transformation. It will not.

We should instead, build the financial architecture required for the economy we say we want.

That is how Nigeria moves beyond the slogan of *”from consumption to production.”*

The first bridge is a strong DFI ecosystem.

The second bridge is ensuring that the DFIs themselves can raise long-term capital cheaply enough to finance production.

Until we build both, the Nigerian entrepreneur will continue to look at the factory he wants to build, calculate the interest cost of borrowing, and return to importing the finished product.

And Nigeria will continue to consume what other nations had the foresight to finance themselves to produce.

• Akugbe Michael Ozigbo is the Managing Director of Paradigm Hostels Ltd, a purpose-built student accommodation PBSA development and management company in Lagos. He can be reached at: ozigbo@paradigmhostelsltd.com