Financing SMEs in Africa

8/2/2019 Financing SMEs in Africa

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Paper presented at theAfrican Banking and Finance Conference

Crowne Plaza Hotel, Nairobi, Kenya6th 7th March 2012

ByDr. Alex Otti

Group Managing Director/CEODiamond Bank Plc


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Outline Introduction

Perspectives on SMEs

SME Finance Characteristics Current Sources of Finance

Issues in SMEs Financing

Overcoming challenges in SME Finance SME Finance - A Nigerian Perspective

Conclusion

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Introduction - SMEs SMEs are non subsidiary, independent firms which employ fewer

than a given number of employees. Most frequent upper limit is250 employees;

They have strategic economic, developmental and employment

creation role in national economies; SMEs can be found mostly in the service sectors like

construction, foundries, wholesale, retail trade andhotels/restaurants;

SMEs most often run domestic operations but the innovativeones have gone ahead to become global companies;

In European Union, 98% of 19.3 million companies arecategorized as SMEs and they provide 65 million jobs*;

3*OECD SME and Entrepreneurship Outlook July 2005


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Introduction - SMEs In EU and OECD countries, SMEs account for more than 66% of

employments and new jobs that are created;

In 2009, the IFC put the annual market opportunity of SMEs inhigh and medium income countries at about 40% of GDP;

In developing economies, available data indicate that the SMEsmake up fewer proportion of companies and account for lesspercentage of jobs created. This is presumably due to a largeinformal economy;

Independent research by Mutual West in Nigeria validates theratios from OECD and EU as SMEs accounted for 71% of numberof companies and employed 97% of working population.

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Introduction - SMEs There is no universally accepted definition of SMEs as it varies

from country to country;

As shown on next slide, definitions are based on

Number of employees, which in most jurisdictions is cappedat 250. In USA, SMEs include companies with as much as 500employees;

Asset Size with a cap of $15 million. Many SMEs howeveroperate assets of smaller size

Annual revenue which is tied closely to the size of the assets.

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Introduction - SMEs

Firm SizeEmployeesAssets Annual SalesMicro


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SME Finance Characteristics They are not reliant on Bank financing they are in business in-

spite of lack of bank financing; They can seldom meet normal commercial bank collateral

requirements; Many SMEs remain in the informal sector to avoid paying tax; SMEs are made up of enterprises in wide range of business

segments with diverse financing needs; There is usually little competition in the market for SMEs due to

perceived risks;

They are willing to pay higher financing costs; Minimal formal financial records; Usually operated by dominant owner with little or no external

ownership.

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Current Sources of Short Term Finance for SMEs:

Regional Comparison

0

10

20

30

40

50

60

70

80

RetainedEarnings

BankLoans

SupplierCredits

Family andFriends

New Debtor Equity

Africa

Asia

South America

Note 1: Figures in PercentagesNote 2: Source Investment Climate Assessment Reports, 2000 - 2010 8


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Current Sources of Long term finance for SMEs:

Regional Comparison

0

10

20

30

40

50

60

70

80

RetainedEarnings

BankLoans

SupplierCredits

Family andFriends

New Debtor Equity

Africa

Asia

South America

Note 1: Figures in PercentagesNote 2: Source Investment Climate Assessment Reports, 2000 - 2010 9


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Issues in SME Finance.evidence indicates that SMEs continue to be undersuppliedwith the financial products and services that are critical totheir growth. In global surveys, including the World Banks

Enterprise Surveys and Investment Climate Assessments,SMEs report that the cost of finance is their greatest obstacleto growth and rank access to finance as another key obstacle.While these constraints are more acute in developingcountries, SMEs in any environment are nearly one-third more

likely than large firms to rate financing constraints as amajor growth obstacle. In low-income countries, this meansthat nearly half of small firms report being severelyconstrained by financing difficulties.

IFC SME Banking Guide 2009

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Issues in SME Finance No SME expertise in banks: Financial institutions

approach them from perspective of a retail or smallcorporate client;

Available solutions are mostly credit based solutions,which address only part of the universe of financialneeds;

Prevalence of collateral based lending;

Absence of a competitive credit information system toprovide information on companys credit history;

Regulators/Government well meaning interventionwhich ends up imposing more burden on SMEs;

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Issues in SME FinanceContd Many do not keep proper books of accounts or

financial transactions;

There is usually a high cost of doing business power,multiple taxations, access to finance;

Long term financing is virtually non existent for thisbusiness genre;

Meaningful market data not usually available howmany what sectors where levels of business etc.

No specific SME strategy, unit or dedicatedrelationship managers in banks.

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Overcoming challenges in SME Finance Financing SMEs should focus on a whole range of banking

products/services and not just lending; Banks should build a strategy that meets the basic needs;

Decide where and how SME banking should be situated: inRetail Banking, Business Banking or as a standalone unit(they can all work);

Build a central dedicated team to drive SME Banking andFinance;

Find suitable partners with expertise e.g. IFC to help deliverresults; Tailor your account types to suit segments of SMEs you

want to serve.

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Overcoming challenges in SME Finance

Contd Use internal credit scoring models whenever possible;

Credit ratings from private and public credit bureaus areusually helpful;

Information requirements from SMEs should bestandardized;

Help build capacity of SMEs and proprietors throughworkshops, seminars etc.;

SME customers can bank in all branches but considerspecial branches to have SME desks;

In managing the risk asset portfolio, build in expectedlosses and price accordingly.

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SME Finance A Nigerian Perspective (Diamond

Bank) Diamond bank was founded in 1990 as a privately held

company but commenced operations in March 1991 as acommercial bank;

In 1991 it pioneered electronic banking in Nigeria throughan online, real-time integrated banking system;

In 2001 it was granted a universal banking license by theCentral Bank of Nigeria;

In 2001, it established first international subsidiary in theRepublic of Benin. It now has subsidiaries in Senegal, Togoand Ivory Coast. Our first European subsidiary shouldcommence operations before end of June 2012.

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Bank) In January 2005 it became a public company as a result of a

private placement exercise; In May 2005, it was listed on the Nigerian Stock exchange;

In January 2008, Diamond Bank's Global DepositaryReceipts (GDR size of $500 million) was listed on theProfessional Securities Market of the London StockExchange.

As at December 2011, it had an asset base of about $5 billionand Gross Earnings of over $611 million.

It carries out business from over 220 locations in Nigeria; Specific initiatives in SME finance follows in the following

slides:

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Bank) $20 million IFC Africa Micro, Small and Medium Scale

Enterprises Program;

$20 million IFC Small and Medium Scale EnterprisesLoan;

$10 million USAID Risk Share Guarantee Program(Medi-loan);

$30 million Aspire Nigeria Fund; SME improvement seminars;

SME Business clinics.

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Bank)$20 million IFC Africa MSMEProgram This is a loan designed to

encourage lending to micro

small and medium scaleenterprises; Loan comes with a resident IFC

SMEs specialist to assist inprogram design;

Loan is tenured for 7 years;

Targeted primarily at Assetfinance (3 years) and Workingcapital finance (1 year);

Lending is based on cash flowspattern rather than collaterals;

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$20 million IFC SME Loan

Targeted at mediumenterprises and is distinct from

the IFC Africa MSME program.

Principally for asset andworking capital finance;

Where SMEs cash flows are

healthy, requirement forcollateral is relaxed;

Specialist software is availablefor financial and ratio analysis.


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Bank)$30 million Aspire NigeriaFund A fund jointly owned by

Diamond Bank, Shell Petroleum

and Grofin HoldingsInternational;

Established in 2007 to providebusiness development andfinancial support to SMEs;

Competitively priced mediumterm loans of between $40,000and $800,000 are available;

Preference is given to Nigerianenterprises with limited capacityto meet collateral requirements.

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This loan is targeted at SMEs inthe Healthcare sector;

USAID guarantees againstdefault of up to 50% of principalamounts loaned;

Loan size per borrower of atleast $10,000;

Primary targets are practitionersin reproductive health, maternalmortality etc.

$10 million USAID Risk ShareGuarantee Program (Mediloan)


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Bank)Seminars Business Clinics

Seminars are designed to buildcapacity of SMEs;

Open to non loan beneficiariesas well;

18 seminars with over 4500SMEs attending have beenheld since Q4 2009;

Seminar is subsidized by thebank as participants pay only$35 attendance fee;

Provides networkingopportunities for SMEs.

Organized to address specificskills gap in SMEs

Focuses on - Strategy, Finance,marketing, Business Planningand Human Resourcemanagement;

Business consultants are

contracted for one-on-onesessions with these SMEs;

Business clinic costs aresubsidized by the bank asparticipants pay only $70;

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Bank) As at September 2009 there were 7,000 designated SME

accounts in purpose built products. Liabilities totalled$43.3 million;

New Proposition was launched in October 2009 and nowwe have 65,000 accounts (having closed 20,000 dormant)and interest freeliabilities of $290 million;

Monthly transactional fee income in December 2011 was $2million (average of over $30 per account per month);

Lending - Started early 2009 and portfolio is now $194million across 14,000 borrowers with healthy interestincome and fees (average loan size of $13,824);

New current accounts are opened at an average rate of 900per week.

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Bank) Low cost banking for SME clients with fixed monthly fees

at 3 different levels micro, small and medium;

Availability of loans for asset purchase and overdrafts for

stock and cash flow support; Regular Enterprise seminars subsidized but paid for by

clients - where successful entrepreneurs and consultantsshare experiences to help clients grow their business;

Access to web sites for clients own business andentrepreneurs book/CD full of useful information;

Networking events in towns and cities across Nigeria ;

Free Quarterly business guides on planning, importing etc.

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Conclusion SMEs are critical for the economic and social development

of emerging economies; SMEs play a major role in creating jobs and generating

income for low income people; As Large corporations get bigger and specialize, they will

outsource more to SMEs thereby providing assurancesabout the future;

SMEs promote economic growth, social stability, andcontribute to the development of a dynamic private sector;

Improved SMEs access to financial services is vital indeveloping a vibrant SME sector in any economy;

In many emerging markets, however, access to financialservices for SMEs remains severely constrained

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Conclusion Contd Financial Services needed by SMEs are wide ranging

and includeEquity investments to be provided by private equity/

venture capitalists/investment banks;Payments solutions like mobile banking, money

transfers etc. to be provided by banks;

Loans and advances to be provided by Banks etc.;

Advisory services to improve business processes andloan management.

African Financial Services Providers should rise up to theoccasion and develop a healthy portfolio of SME business.

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Thank you

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Documents

Financing SMEs in Africa