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Government Lending to African Businessmen: Inept Incentives

Published online by Cambridge University Press:  11 November 2008

Sayre P. Schatz
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Extract

Since programmes of government lending to African businessmen are widely relied upon as a means of stimulating economic development, some analysis of their efficacy is clearly needed. Peter Marris's article ‘Lending Money’ made an interesting contribution along these lines;1 but it was undermined by a fundamental flaw in his delineation of the problem. The present article has two fundamental purposes. First, it presents what the writer believes to be a more adequate analysis of the basic predicament of lending agencies in Africa. Secondly, it attempts to show that the nature of the problem calls for changes in the usual approaches not only to (a) lending programmes, but also to (b) the family of programmes to aid indigenous business (of which loans schemes are one member), and beyond that to (c) the still broader issue of policies to accelerate the growth of the directly productive sectors of the economy.

Type
Article
Information
The Journal of Modern African Studies , Volume 6 , Issue 4 , December 1968 , pp. 519 - 529
Copyright
Copyright © Cambridge University Press 1968

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References

Page 519 note 1 The Journal of Modern African Studies (Cambridge), V, 2, 1967.Google Scholar

Page 520 note 1 For a contrary view, see the forthcoming book by George Bosa, of the research department of the Bank of Uganda. See also Nafziger, E. Wayne, ‘Inter-regional Economic Relations in the Nigerian Footwear Industry’, in The Journal of Modern African Studies, VI, 4, pp. 531–542,Google Scholar below, and the appendix to the unpublished Ph.D. dissertation on which his article is based (University of Illinois, 1967).

Page 520 note 2 See Schatz, Sayre p., Development Bank Lending in Naigeria: the Federal Loans Board (London, 1964),Google Scholar which analyses applications initially submitted between 1956 and 1963. There was no shortage of funds during this period; and the operations of the Board were non-political (on this latter point, see pp. 37–9).

Page 521 note 1 Western Region Development Board, First Annual Report, 1949/50 (Ibadan, 1950), p. 5.Google Scholar (Cf. the first annual reports of the Northern and Eastern Region Development Boards for 1949–1950.)

Page 521 note 2 Ibid.1950/51, pp. 3–4.

Page 521 note 3 Harris, John R. also found that a shortage of capital funds was not an important obstacle to Nigerian indigenous business expansion; ‘Industrial Entrepreneurship in Nigeria’ (unpublished Ph.D. dissertation, Northwestern University, 08 1967), ch. 8.Google Scholar

Page 521 note 4 Thomas, Henry B., ‘African Entrepreneurs in Industrial Pursuits’, in Hausman, Warren H. (ed.), Managing Economic Development in Africa (Cambridge, Mass., 1963), p. 103.Google Scholar Cf. Nyhart's conclusion after investigating the two major government-backed agencies financing individual Africans: ‘Both have more money available than they are able to place in sound loans or investments.’ Nyhart, J. D., ‘The Uganda Development Corporation and the Promotion of Entrepreneurship’; E.A.I.S.R. conference paper, Makerere University College, 1959.Google Scholar

Page 521 note 5 ‘The Role of Banks in Emerging Africa’, in Africa Report (Washington), XI, 5, 05 1966,Google Scholar reprinted from The Economist (London).

Page 521 note 6 Brooks, James R. and Ladd, William C., A Liberian Bank for Industrial Development and Investment, a report prepared for the International Co-operation Administration (Washington, 1960), p. 10.Google Scholar

Page 521 note 7 Philip E. Beach, ‘Industrial Development Banks: operating practices’, in Hausman, op. cit. pp. 114–16.

Page 522 note 1 Pearson, D. S., ‘African Advancement in Commerce and Industry’, in The Journal of Modern African Studies, III, 2 (08 1967), p. 247.Google Scholar

Page 522 note 2 Hanson, A. H., Public Enterprise and Economic Development (London, 1959), p. 37,Google Scholar quoting a United Nations conference report.

Page 522 note 3 Quoted in Africa Report, XI, 5.

Page 522 note 4 Staley, Eugene, ‘Development of Small Industry Programmes’, in Winsemius, A. and Pincus, J. A. (eds.), Methods of Industrial Development: with special reference to less developed areas (Paris, 1962), p. 222—Staley's italics.Google Scholar

Page 522 note 5 AID, U.S., ‘Memo to Area and Technical Officers of A.F.E.’ (Washington), 01 1962, p. 1.Google Scholar

Page 522 note 6 Hirschman, Albert O., Journeys Towards Progress: studies of economic policy-making in Latin America (New York, 1963), p. 69.Google Scholar See also AID, U.S., Report of the Cento Conference on Industrial Development Banking (Washington, 1961), p. 70,Google Scholar on the Industrial Development Bank of Turkey.

Page 522 note 7 Hanson, op. cit. pp. 36–8.

Page 522 note 8 Nevin, Edward, Capital Funds in Underdeveloped Countries: the role of financial institutions (London, 1961), p. 74.Google Scholar See also Schatz, Sayre p., ‘The Capital Shortage Illusion’, in Oxford Economic Papers (Oxford), 07 1965.Google Scholar

Page 523 note 1 The cost calculations presented in this paragraph (including the method of eliminating ‘illegitimate costs’) are completely explained in Schatz, Sayre p., Economics, Politics and Administration in Government Lending: the Regional Loans Boards of Nigeria (Oxford University Press, forthcoming), ch. 7.Google Scholar

Page 523 note 2 The Loans Boards themselves carry out the following operations: preliminary examination of the application; possibly instructions to the applicant on additional information required, and/or a preliminary interview with him; examination of the corrected application and transmission to the appropriate Ministry for a ‘viability investigation’; preparation of a summary when each appraisal has been completed; one or more meetings of the decision-making body; preparation of a written offer to approved applicants, stipulating the loan conditions, and then of an agreement specifying the exact terms; valuation of the security, which may require visits to distant property; final processing of the approved loan in conjunction with the Ministry of Finance. The ‘viability investigation’ may include: discussions with the applicant, both at the Ministry and at his place of business, and with potential overseas suppliers of equipment, spare parts, etc.; preparation of independent projections (a) of the demand for the product, and (b) of costs, possibly in very great detail.

Page 523 note 3 The median loan made by Nigerian Loans Boards was definitely below £2,000; the nature of the data prevents a more exact calculation.

Page 524 note 1 For example, Nyhart recommends the extensive supervision of borrowers and other costly follow-up procedures. He alludes in passing to the cost of such procedures (in one large development bank, ‘the head of the follow-up section estimated he would have to triple his personnel’ even to do a much less thorough job than Nyhart feels is necessary), but there is no indication that the high costs entered in any way into his judgement of the desirability of such a programme. Nyhart also recommends a loan appraisal procedure which would require 46 high-level professional man-days, plus all the necessary supporting labour at lower levels, for each full project evaluation—a cost burden simply beyond question for most African countries. Nyhart, J. D., ‘Towards Professionalism in Development Banking’; working paper, Alfred Sloan School of Management, Massachusetts Institute of Technology, 1964, pp. 57–26.Google Scholar See also Onyemelukwe, C. C., Problems of Industrial Planning and Management in Nigeria (London, 1966), pp. 238–9,Google Scholar who also suggests some other improvements in the loan machinery.

Page 524 note 1 Schatz, , Development Bank Lending, pp. 86–8.Google Scholar

Page 525 note 1 Schatz, Economies, Polities and Administration, ch. 7.

Page 525 note 2 My information on the low profits of African entrepreneurs is corroborated by Peter Kilby, ‘Measures to Promote the Development of Indigenous Industry: a report to the Federal Ministry of Commerce and Industry and the Western Nigerian Ministry of Trade and Industry’ (Lagos, U. S. AID, 1962), p. 6. See also Harris, op. cit. and Nafziger, op. cit.

Page 525 note 3 Schatz, , Development Bank Lending, p. 85.Google Scholar

Page 527 note 1 The Nigerian cost equation mentioned earlier indicates a declining cost–benefit ratio as the size of the loan increases, although the ratio is always substantial. While it costs the Government £1,275 on the average for each successful £500 loan it makes, the average cost of a successful £50,000 loan is £34,175.

Page 528 note 1 See, for example, Schatz, Sayre P., ‘Aiding Nigerian Business: the Yaba Industrial Estate’, in Nigerian Journal of Economic and Social Studies (Ibadan), 07 1964.Google Scholar The author is at present engaged in analysing his material on other aid-to-business programmes in Nigeria.

Page 528 note 2 Investment in infrastructure is subject to similar abuses.

Page 529 note 1 A case can still be made for certain business-assistance progranunes, such as tariff protection, subsidies based on output, and some tax relief measures, which entail substantial costs only to the extent that they produce results.