Development Finance Institutions (“DFI”) exist traditionally to address market failures and as a complement to government resources and market financing. The dual roles of these institutions involve financing development projects and acting as a facilitator of finance in the broader industrialization and economic development strategies of countries. DFIs’ in addition to their mandates, seek to enable expansion of already existing pro-poor infrastructure and act as catalysts for accelerated industrialization, economic growth and human resource development. (Sanusi, 2012).
Nigeria has seven Development Finance Institutions namely; (i) Bank of Industry (BOI); (ii) Federal Mortgage Bank of Nigeria (FMBN); (iii) Nigerian Export–Import Bank (NEXIM); (iv) Bank of Agriculture (BOA); (v) Infrastructure Bank (formerly Urban Development Bank of Nigeria Plc.; (vi) National Economic Re-construction Fund (NERFUND) and (vii) Development Bank of Nigeria. The DFIs are owned by the CBN and Ministry of Finance (which acts on behalf of the Federal Government) and are to a large extent mandated to provide financial services to sectors and projects that would contribute to the growth of the economy and promote real sector activity. Some of the challenges faced by these institutions include poor corporate governance, low capitalization, inadequate skilled manpower, and poor business models. In order to be repositioned to perform the role envisioned for them, the DFIs need to be granted operational autonomy. (Sanusi, 2012).
In a bid to boost industrialization, reduction of imports and promotion of exports, the Nigerian government has pursued several imports substituting strategies. Key amongst many, was the creation of the Bank of Industry. The Bank of Industry Limited (BOI) is Nigeria’s oldest, largest and most successful development finance institution. It was reconstructed in 2001 out of the Nigerian Industrial Development Bank (NIDB) Limited, which was incorporated in 1964. The bank took off in 1964 with an authorized share capital of 2 million (GBP) with a unique purpose of promoting the industrial sector of the Nigerian economy thereby reducing import into the country. It has a mandate of “providing financial assistance for the establishment of large, medium and small projects as well as the expansion, diversification and modernization of existing enterprises; and rehabilitation of existing ones”.
Import substitution is a strategy to reduce a country’s dependence on foreign markets through the local production of goods, especially basic necessities. Import substitution is not new in Nigeria as past administrations have attempted various import substitution strategies. Some of these include the 1972 Indigenization Decree, which led to the development of the petrochemical plants, the iron, steel, textile, breweries, agriculture and cottage industries, and the establishment of assembly plants that used imported processed materials in the automobile and cement industries. Though these attempts met some degree of success, it is mainly the cement industry that has been able to fully actualize the benefits of import substitution. Nigerian cement companies not only meet local demand for cement, they also export cement to neighboring African countries. (Financial Derivatives April 2016 Monthly Report).
In 2012, the President Goodluck Jonathan administration introduced the Nigeria Industrial Revolution Plan (NIRP) in order to enhance local production of goods. The current President Buhari Administration has repeatedly stated its intention to revolutionize manufacturing and overall infrastructure. The case for import substitution is strong given data from the National Bureau of Statistics (NBS). In 2015, Nigeria spent approximately US$5.245 billion on importing “boiler, machinery, appliances”, US$4.262 billion on “refined mineral products” and over US$2 billion on “vehicles, aircrafts and associated parts”. Data provided by the Petroleum Products Pricing and Regulating Agency (PPPRA), which was validated by the Nigeria Bureau of Statistics (NBS), revealed that between January and December 2018, Nigeria imported a total of 27.63 billion litres of refined petroleum products with a total value of USD 10.2 billion due to the poor state of its refineries. According to the NBS in a report tagged, “Nigerian Ports Statistics, 2012 to 2017,” Nigeria imported a total of 1,216,131 used and new vehicles between 2012 to 2017. Although the NBS did not put a value to the vehicles, estimates corroborated by the Nigerian Vice President in 2018, when he declared the 19th Abuja Motor Fair open, indicated that Nigeria spends over USD 8 billion annually on vehicle importation. Spending such huge amounts on import has led to a dearth in local manufacturing and a steep decline in the foreign exchange earnings conserved. According to Ogbuabor et al (2018) citing (Audi and Mohammed, 2014; Nyor and Chinge, 2014; Mba, 2015)., the benefits of industrialization in employment generation, poverty reduction, improved living standard, improved economic growth and development, balance of payment stability, self-reliance, stimulation of other sectors of the economy, and development of skilled manpower have been well established in literature.
However, access to finance for industrial development has remained a key challenge in Nigeria. The Bank of Industry and other DFIs are seen as a solution to providing finance for companies to produce locally. Previous attempts have been made to empirically examine the implications of DFIs on micro, small medium enterprises. Idowu (2019) investigated the impact of micro credit banks on micro, small and medium-sized enterprises (MSMES) in Nigeria using simple random sample techniques and descriptive statistics which involves simple percentage graphical charts and illustrations. The findings reveal that significant number of the MSMES benefited from DFI loans even though only few of them were able to access the micro credit institutions loans towards promoting their market share, product innovation and the overall competitive advantage. The study also suggests that there should be a recapitalization on developmental financial institutions to enhance growth and expansion in Nigeria.
Ogbuabor et al (2018) in reviewing the quest of industrialization in Nigeria assessed the role of the newly established DFI- Development Bank of Nigeria (DBN). The study identified lack of finance as a key challenge confronting industrialization in Nigeria and argued that the DBN has an important role to play in overcoming this challenge. The research concluded by making key recommendations on what the structure and operations of the Bank should be such as not only supporting MSMEs but also large industrial and economic developmental projects like rail and other transportation projects, pipeline projects, power generation projects, water projects to boost industrialization.
The Brazilian Development Bank (BNDES) has been involved in financing industrialization to such a large degree that since the 1950’s, there has not been a single major undertaking involving Brazilian capital that has come about without the support of the BNDES. The BNDES is the largest supplier of long-term debt and equity financing for public and private enterprise. In 2017, BNDES closed the year with disbursem*nts to the tune of R$70.8billion, with MSMES receiving the largest share of 42% and infrastructure at 38% all to boost industrialization and import substitution. (BNDES Annual Report, 2017).
In India, the Infrastructure Development Finance Company of India (IDFC) entirely owned by the government, has played a pivotal role for industrialization since its establishment over fifteen years ago. The model is such that IDFC borrows money guaranteed by the Government of India from multilateral organizations and lends this to infrastructure projects directly or through refinancing long-term debt. To date, it has helped create more than half of the country’s telecom towers and two-thirds of the wireless subscriber base, financed more than half of the container cargo capacity addition at Indian ports, and created more than half of India’s private sector thermal and large hydro-generation capacity which is the backbone for India’s strides in industrialization (IDFC, 2012).
Post-independence Nigeria has continued to strive for economic development and emancipation. Like most nations in the world, Nigeria has adopted an industrialization agenda to “produce what it consumes”. Despite efforts of successive governments in promoting industrialization, Nigerian reels under heavy imports. In June 2017, following the slippage of the country into a recession, the Central Bank of Nigeria banned access to foreign exchange for the imports of 41 items into the country. These items included amongst others, steel, wood, textiles, ceramics and even toothpicks. The driver of this decision was to promote local production.
Based on the foregoing, it is expedient to ask if the import substitution strategies have achieved the desired results. With the operations of the first Nigerian DFI spanning 5 decades and half, what impetus is required to further drive its contributions to the industrial base of the country? What policy requirements and operational recalibration are required for greater impact such as to cause a paradigm shift in the industrial landscape of the country? Finally, what lessons can be drawn by other African countries from the Nigerian experience ?
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