Bank abuse, entrepreneurs and growth (1)

bank-greeneuropeanjournalTO make progress and have peace, we need economic growth and for jobs to be created. That can hardly happen without innovation and hard-working risk takers who start businesses.

Entrepreneurs, as that tribe is named, often complain that its increase is held back by the problem of access to capital. As a teacher of entrepreneurship, I find that I have to spend most of my time telling entrepreneurs that banks are not enemies armed to frustrate them.

Banks on the other hand are constantly complaining about loans that are not performing. The tendency is to accuse borrowers in general of not being diligent or of being guilty of sharp practices. I have often considered a focus group experiment including bankers and businessmen. From the kind of language a whole classroom full of entrepreneurs I was teaching used on bankers, just last week, I have a feeling the Fire Brigade may be required to be on standby for such a Focus Group session.

In the trading of blames the point still remains that entrepreneurs are needed for significant material progress. They need to work with sources of finance, one of which is the Banking system and that there are a few players who abuse the access to banks and so jeopardise access for honest, diligent entrepreneurs. How to flush out these willful offenders without harming the system has been a matter of some debate.

Among the solutions that have been tried, and is being tried again, is publishing a list of presumed chronic debtors. When it was first done, and at points when the tactic has come up, I have often pointed to it as an iatrogenic policy choice. Such choices are
made when the medicine applied to heal a disease does more harm, to the patient than the disease it aimed to cure. This metaphor from Medicine was more famously deployed by a U.S. Senator who was previously a Harvard Professor and a member of two cabinets in Washington, Daniel Patrick Moynihan.

There are many reasons why such choice is more harmful to the goal of the industry and the economy than what gain may come from making the real targets look bad. It is quite clear to me, and many others, that
even with the best of intentions, regulators and those seeking to get the bad guys, could unwittingly become complicit in the prolonged reign of poverty.

The ironies in the approach include the fact that the real targets do not care about reputation, so the effect of publishing their names is a waste in advertising spend, but the list, as the last time, will include many disputed and out rightly incorrect claims, resulting in many libel
litigations. Yet the courts and the credit bureaus designed to stop the credit-challenged from further access to loans are fully in place. More troubling is that many entrepreneur-wannabes, at a time we are preaching the Gospel of venturing, may be frightened off that track, lest a risk gone south make them object of ridicule.

The current state of frustration by entrepreneurs seeking capital is significantly a part of the last such exercise the frightened lenders of lending lest the cost of risk destroy them, and borrowers from being so reticent as to avoid even borrowing on a modest appetite. No modern economy can be grown at that emotional level of financial system engagement. The view that has been encouraged in the public domain
assumes lending to be risk free and only troubled by dubious conduct.

All ventures involve risk, some more than others. Where the risks are fully disclosed, as gain would have come to both lender and borrower, it is usually that if risk crystalizes in the negative, it could impact the
lenders for ill, but it even wipe out the borrower. The key is how to contain these risks such that overall the banks, entrepreneurs and the system, profit.

Let me draw from practical local and perhaps one or two foreign experiences to illustrate why it is wrong to make out entrepreneurs who come to adversity as criminals, especially because many of the successful corporations in the United States have been in and out of Chapter Eleven bankruptcy.

Nigeria’s journey to the Internet truly provides an example of views on Risk and how they can shape human progress. Twenty-one years ago, I was so ashamed several African countries were on the Internet but Nigeria was not. Our telecommunications monopoly, NITEL, was beset with other problems. Addressing a group of entrepreneurs, I chewed them up on private initiative not circumnavigating the regulatory
minefield to redeem us.

Afterwards one of them came to me and asked if we could partner to make that happen. I was pleased. We spent hours working on strategy, then apportioned work. He would develop the technology feasibility, I the business model, and pulling the investment together.

Then I invited a select group of potential investors to a dinner at All Seasons Restaurant on Victoria Island. Three among them were Managing Directors of Banks. My nervous presentation of the Model indicated we would lease E1 lines from NITEL and pipe our traffic to Pipex; a backbone provider in the UK.

When I was done, one of the Bank MDs, Erastus Akingbola noted that the risk of something NITEL could disrupt by simply pulling off the E1 lines was too high. I could feel the wind going off my sail when another of the Bank MDs, Babatunde Dabiri, responded, acknowledging the risk, but arguing that the risk could be mitigated.

That conversation made the point of our investment strategy which was that such technology investment was not the type you brought traders or money bags to, because their thinking on the risk would go against the mindset that gave them success, if they did not get quick returns.

Having been rescued by Dabiri, we would raise that night, the money that launched Linkserve, and a few months later, Nigeria was on the Internet. But Akingbola’s fear proved real.

At an event in Abuja, then Chief of General Staff (VP) General Oladipo Diya was brought into what was probably the first Cyber Café in Nigeria. The company’s General Manger used photos from that to promote the company. What risk in those Abacha days. Security men quickly took over the company’s premises and NITEL pulled those lines. But, fortunately, as Dabiri suggested, the risk was mitigated and Nigeria’s first Internet Service Provider (ISP) was back up and running. Imagine that the risk was not successfully mitigated and that those men borrowed the monies they invested and lost their entire life’s savings plus a small borrowed portion, because they wanted to make some profit putting Nigeria on the World map, making businesses more efficient through ICT, and opening more businesses to opportunity that would have eluded them.

If you branded those men criminals, exposed what has the sanctity of Doctor-Patient, or Lawyer- client type confidence, in newspapers, would many people who know them take risks that move society out of poverty. What is more likely is that the most gifted retreat into using their talent for safe rent seeking creating the time bomb of unemployment we have.

• To be continued tomorrow.
• Pat Utomi, political Economist, and professor of Entrepreneurship is founder of the Centre for Values in Leadership.

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