Shortage of long-term finance hampers growth in Nigeria, others, says W’Bank

A NEW World Bank report has revealed that shortage of long-term financing since the 2008 global financial crisis has choked investment-backed growth of companies in developing countries and hampered ability of credit-worthy families to borrow for education and housing needs.

According to the report, the use of long-term financing by small and medium enterprises in developing countries fell by almost half since the 2008 credit crunch, leading to concerns among international policymakers.

According to the report, in Nigeria, it is difficult for companies in the real sector– manufacturing and production–to access the needed fund for operations, even at higher costs, leading to various intervention programmes by government agencies, in the absence of banks’ capacity to shoulder big ticket funding. Coupled with assessed infrastructure challenges, the available long-term finance has been put at rates that make the expected returns to investment almost unattractive, stoking failures and worsening unemployment situation as well as standard of living.

At the global level, this shortage of long-term financing also means that despite appeals by the Group of Twenty (G-20) and other key international groups, developing countries are struggling to mobilise the billions of dollars in financing they need to build badly-needed infrastructure in order to grow their national and regional economies.

According to the new report, Global Financial Development Report 2015-2016: Long-term Financing, extending the maturity structure of finance is considered to be at the core of sustainable financial development. Securing long-term financing, defined as investment funding that matures in a year or more, depends on the same fundamentals essential to tackling the current volatility in global capital markets.

The global bank noted that policy makers need to focus on institutional reforms, such as promoting macroeconomic stability, establishing a regulated and legally enforceable banking and investment system that protects creditors and borrowers, and setting a framework for capital markets and institutional investors.

The World Bank Group President, Jim Yong Kim, says: “It would be a challenge to achieve high and sustainable rates of economic growth if countries fail to invest in schools, roads, power generation, electricity distribution, railways and other modes of transport, and communications. Private sector construction of plants and investment in machinery and equipment are also important. Without long-term financing, households face great hurdles to raising income over their lives – for example by investing in housing or education – and may not benefit from higher long-term returns on their savings.”

The bank noted that long-term finance has a fundamental role to play in generating higher growth and welfare, as without it, firms struggle to expand, households under-invest in their health and education, and economies miss out on critical infrastructure investments.

The Global Financial Development Report 2015 identifies the levers available to policy makers to promote greater access. It builds on the two previous global financial development reports to provide a nuanced, practical, and evidence-based approach to financial sector policy. “The challenges of extending the maturity structure of finance are often considered to be at the core of effective, sustainable financial development. Sustainably extending long-term finance may contribute to the objectives of higher growth and welfare, shared prosperity and stability in two ways,” a statement on the bank’s web site noted.

According to the Group, by reducing rollover risks for borrowers, thereby lengthening the horizon of investments; and by increasing the availability of long-term financial instruments, households are allowed to address their lifecycle challenges.

Unlocking resources and connecting development assistance to infrastructure, industry and other essential investments to attain the Sustainable Development Goals (SDGs) by 2030, has at several global fora, been described as impossible in the absence of long term financing.

“The use of long-term finance is typically more limited in developing countries, particularly for smaller firms.  For example, the median long-term debt to asset ratio for a small firm in a developing country is only 1.4 per cent, whereas its high income country counterparts uses more than five times as much long-term finance at 7.3 per cent.

“Firms in high-income countries report financing almost 40 per cent of their fixed assets externally, whereas this figure is barely 20 per cent in low-income countries,” a World Bank report noted.