THE CBN’s CREATIVE INDUSTRY FINANCING INITIATIVE: The Banking Sector Does Not Yet Understand The Nigerian Entertainment Business

It has been recently reported that the Bankers Committee has decided that the Central Bank of Nigeria (CBN) will offer support to the Nigerian creative industries. This support, referred to as the Creative Industries Financing Initiative (CIFI), is aimed at providing concessionary financing to eligible businesses within the entertainment and information technology sectors through the commercial banks.

This initiative compliments the Federal Government policy of intervention in the creative industries by providing funding support to same. Prior initiatives have been implemented through the Bank of Industry — such as the Fashion Fund and NollyFund programmes - with an aggregate value of N3b. The CIFI programme is to the tune N200b, putting into perspective the potentially far reaching effects it could have on output and consumption of Nigerian creative products/services domestically, continentally and globally.

This initiative is therefore very much welcome as it is widely agreed that funding continues to be one of the key factors hindering the next wave of growth of creative industries in Nigeria. Til date, businesses in these sectors — and their impressive successes — have been primarily funded through informal channels and structures, which has meant minimal accountability and transparency with respect to business practices, record-keeping, contractual agreements and enforcement of legal/contractual rights. Additionally, the type of assets that are commonly held by creative industry businesses do not meet the usual collateral requirements associated with commercial loans.

The continued decline of the availability of financial resources from these informal channels has created a funding gap for creative industry businesses. This gap also comes at a time when said businesses are having to reposition themselves and adapt their models to the new digital economy; a digital economy that will increasingly demand international best practices and standards from Nigerian businesses due to its global nature.

The domestic investment community, which includes the banking sector, has struggled to find the best means of making entry into the creative industries despite being well aware of the tremendous potential value in the market. We have witnessed numerous success stories resulting in huge returns on investments made in certain segments of the creative industries with more occurring on a continual basis. These mouth-watering prospects have understandably attracted the attention of the banking sector; a banking sector that is currently eager to diversify loan portfolios to increasingly include loans for new, growing sectors of the economy.

However, despite the banking sector’s keen interest, the earlier-mentioned lack of transparency, coupled with a lack of verifiable market data, in some of these sectors has made it difficult for significant new investment to be injected. This information deficit has also prevented potential investors from being able to adequately assess the risks of creative industry businesses. As such, institutional investment (be it debt or equity) has been minimal and predominantly concentrated on a few high profile businesses in very limited areas of the value chain.

Financing from the CBN, such as the CIFI, gives the banking sector a lower-risk means of making inroads into these industries as well as the ability to gather more real data about the market and its business dynamics. Equally, the CIFI also giving viable businesses within the target sectors access to concessionary finance — without the usual collateral requirements — which puts less pressure on their operations and should therefore encourage more innovative/creative business ideas and models. It is, thus. important to applaud the CBN and Bankers Committee for making this commitment.

From a press release issued by the CBN, as well as subsequent statements from the BC, the key features of loans disbursed under the CIFI are as follows:

Term — loans periods will be for a duration ranging from 3–10 years depending on the segment in which the loan applicant operates. There are no details as to whether there is any moratorium period attached to loans. These terms are extremely favourable on the whole.

Interest Rate — interest on loans is 9% per year. This is extremely favourable as average interest rates on commercial loans from banks can be as much as 24%. Also, press statements indicate that this figure is inclusive of all fees — which can be as much as 3% — indicating that the loans may actually be cheaper than the headline interest rate.

Loan Amount — this varies with each segment ranging from N3m — N500m as follows:

• Software Engineering Student Loan — up to N3m
• Movie Production — up to N30m
• Movie Distribution — up to N500m
• Music — unknown
• IT — unknown
• Fashion — unknown

There is no mention (in any of the press statements regarding the CIFI) of any collateral requirement to obtain a loan under the initiative. All that is required is for applicants to have a business in the target sectors and present a viable business plan/proposal for how the loan is to be used.

This would indicate that possibly no collateral is required, although more realistically it is likely that some form of security would be still be required but with assets other than real estate being accepted; such as guarantees, equity, moveable property, liens on stock-of-trade or equipment and, above all, intellectual property — the primary asset-class that underpins the creative industries.

It can also be seen that no information is provided as to the loan amounts available to business in the music, IT and fashions sectors however based on the above categorisations (as well as practical commercial realities related to each aforementioned segment) loans would presumably be up to N50m for fashion businesses, N150m for music, and 250m for IT (possibly more depending on whether it is software, network, or infrastructure related IT).

Despite its admirable objectives, from details so far provided, some aspects of the CIFI seemingly still indicate the banking sector’s continued lack of understanding of the fundamentals of the value chain in the creative industries, and the business models that underpin each segment.

The key issue with the CIFI relates to the categorisations of the eligible purposes for the loans for each sector. Funding is available to music related businesses for “training fees, equipment fees and rental/service fees” whilst IT and fashion related businesses can apply for funding to cover ‘rental/service fees’ alone. No information is provided as to what specific aspects of movie production or distribution that loans for these sectors can be used for, thus meaning it can be inferred that loans can be put to any use (related to the business) in these segments.

So, for example, content producers can apply for loans to acquire content (as opposed to having to produce same themselves), or possibly even to cover overheads or consolidate existing debts. The point is that it is strange that these two segments — namely movie production and distribution — seem to have more flexibility as to what loans can be used for compared to the other sectors.

In general these usage criteria are extremely vague and seem to show a lack of understanding of how some of these sectors function. For example, one wonders the purpose of providing funding for ‘equipment fees’ for music businesses when renting/hiring equipment is, for the most part, no longer common practice. The technological revolution has liberalised access to such ‘equipment’ by reducing its cost of ownership. Almost all content producers in the music business now own their own production/recording equipment thereby removing the prior demand for standalone music studios which were rented by music companies for those purposes.

It can of course be argued that the equipment rental business is still a major part of the live music sector value chain — and as such, funding for music business to cover costs related to same are of value. Such a claim however — even if true — would not account for the fact that live performance venues and event centres are increasingly being purpose built and already coming equipped with state-of-the-art sound and lighting equipment as part of their standard service packages. The CIFI therefore seems to be providing financing for a declining — if not already non-existent — music value chain, which defeats the purpose of the what is otherwise a well-intentioned initiative.

Furthermore, the lack of clarity as to the maximum amounts available to the fashion, IT and music sectors also supports the assertion that the banking sector does not fully understand the fundamentals of businesses in these industries — particularly in terms of the costs involved in running same, and therefore left this question open for interpretation. This may be to the advantage of potential applicants as the lack of specification regarding the range of funding available to these areas can be reasonably inferred to mean that — for businesses with the right models in these segments — available funding could possibly be up to N500m or more, notwithstanding the earlier-suggested amounts.

In conclusion, the CIFI is a laudable initiative. In addition to providing the biggest funding opportunities to entertainment businesses til date, it also importantly provides an opportunities to the banking sector. Opportunities to test the waters and gather more real data in these growing sectors to enable banks get a better understanding of the underlying risks and business models in same.

This may prove to be even more important to the creative industries than any funding obtained through the CIFI, as the experience gained by the banks through loans issued under this initiative could be the catalyst to stimulate the private sector investment required to carry Nigerian creative industries to a new threshold of success.