Small and medium sized enterprises (SMEs) & commercial banks in need of a relationship upgrading

 Financing SMEs: Partner or competitor?

Commercial banks in Nigeria have consistently been under pressure from business owners and the Central Bank to increase lending to Small and Medium Enterprises (SMEs). As though to lead by example, the apex bank has over the years, introduced pockets of funds targeted at SMEs. Bank of Industry (BOI), Bank of Agriculture (BOA) and the Nigeria Export Promotion Council (NEPC) have joined in the rally to finance SMEs. It is worth mentioning that earlier intervention funds ignored the many years’ experience of the commercial banks in credit assessments and the valuable investments in loan monitoring and collections. While commercial banks now play more significant roles in intervention financing, the earlier gap had signalled a disconnect in partnership because it gave the impression that the apex bank may have taken advantage of its means to offer lower borrowing rates to compete with commercial banks. For example, more recently, the apex bank offered treasury bills at above 13% and FGN bonds even higher, making it near impossible for commercial banks to retain tenured deposits.

 

With no one to rise to their defence, commercial banks have maintained their argument that many SMEs are not eligible for financing either because they are not registered, do not keep proper accounting records, lack collateral coverage or frequently change trading locations because they do not own their business premises. While this may be less of a problem in developed societies where a forwarding address system is possible, poor or no house numbering has been an “elephant in the room”. In India and Pakistan, commercial banks have resulted to outsourcing delivery of bank debit cards to the homes of new customers as part of the home validation process and Know Your Customer (KYC).

 

While government intervention funds have been relevant, their impact has been minimal on the economy. Let me quickly add that I appreciate the disparity in view about measurements and impacts but would like to share the measurement model of Ketley, a South African analyst who in 2014 attempted to compare the impact of government intervention in Nigeria with South Africa. How could he possibly do this? My worries were firstly, there are no known or agreed international standards of comparison, and secondly, government intervention and focus varied widely. For example, intervention financing may not be a priority in South Africa as much as it is in Nigeria. But, Ketley had it all figured out. He used a simple summation of total intervention funds disbursed by governments against their GDP per capital before estimating total intervention funds to SMEs by the Nigerian government in 2012 as $4.69Bn and that of South Africa’s as $1.42Bn.

 

The “need” and the “real need” of SMEs

 

A number of surveys have been conducted to understand the real needs of SMEs. The outcomes have consistently placed access to finance and unconducive environment as the top 2 limitations of SMEs in Nigeria, but the sample size are often limited to SME business owners and managers. The concern here is that business owners and their manager often see financing as the silver bullet and the survey only provides a forum to express their thinking. Feedbacks from my engagements with small and medium business owners have been, “if only I can access a loan, …”. The purpose for the loan is usually to acquire more stock, buy new machines, open new outlets with fewer owners wanting working capital and hiring of staff. Other operational items (eg marketing) are usually not mentioned, but that is a discussion for another day. Without prejudice to them as business owners and managers, they hold better understanding of their business needs except that needs can be misunderstood and misrepresented.

 

An international qualified risk manager in one of the award winning SME friendly commercial banks in Nigeria identified cashflow and profit margins as key considerations when assessing a loan request. Both factors speak of efficiency of business. For example, reducing operating expense and increasing margins, reaching out to a wider market, eliminating waste, deriving the right staff productivity levels, knowing when the needs of your customers have changed etc. These should also be part of the fundamental interests of business owners and managers. When these factors are addressed, their cash flows are healthier and profit margins wider which is the first step towards positioning for growth/expansion. A loan at that point may be considered as an option among others.

 

Lending to individual customers is many times easier, faster and with far less pressure from stakeholders largely because of what the investments commercial banks have made in creating a digital banking platform. While the operations of SMEs have benefitted from these platforms, the current level as provided through digital platforms presents a framework for digitalized SME relationships. Once within the framework, the focus of commercial banks changes, the operations of SMEs will become more efficient, margins will get wider with cash flow healthier, while waste is reduced. This will change the perception of commercial banks from the high risk and low margin “mind set”.

 

In February of this year, First City Monument Bank (FCMB) offered free banking services for 3 months to new customers to the bank. The recession gave meaning to this proposition so it was easy for SMEs to see cost reduction as added value to their business operations. The value earned from a drop in expense is organic far different from that derived from a loan disbursement for stock or expansion for example. While the proposition of FCMB is a good start, it is still very infant for a sector with huge digitalized relationship opportunities.

 

Threats from FinTech vs digitalized relationship management

 

I would rather commercial banks focus on a digitalized relationship than worry about the threats from FinTechs particularly in the payment and collection space. Let me use the outcome of a study published in May 2014 by McKinsey High Tech that examined four global economic parameters – Trade, Finance, People and Data. McKinsey claimed that there is a shift in the weight of the global economy towards emerging countries. FinTechshave become relevant today because they are positioned to attract two of the four global economic parameters – people and data, while commercial banks have all of the global economic parameters. Therefore, when banks build digital relationships, they absorb the real needs of SMEs by helping them become more efficient, improve their reach and resultantly their margins. This will deliver and keep ownership of banking customers to commercial banks for a very long time and will in addition, build a less risky and profitable commercial banking business.

 

Paul Adebo

Paul Adebo, an SME Liability Expert, writes from Lagos