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THORSTEN BECK
Financing SMEs in Africa: Challenges and Options
T H O R S T E N B E C K , S A M U E L M U N Z E L E M A I M B O ,
I S S A F A Y E A N D T H O U R A Y A T R I K I
Financing Africa: Through the Crisis and Beyond
Do SMEs matter?
Share of SMEs across Countries
0102030405060708090
100
Bela
rus
Russia
n
Cam
ero
on
Zam
bia
Mexic
o
United
Bra
zil
Cro
atia
Esto
nia
Irela
nd
Denm
ark
Japan
Italy
Gre
ece
Sh
are
of
SM
Es i
n M
an
ufa
ctu
rin
g
SME250
Do SMEs cause growth?
Although there is a positive and strong association between SMEs and growth in GDP per capita, this is a correlation, not a causal relationship
A large SME sector is a characteristic of fast-growing economies but not a cause of their rapid growth
SMEs may face greater growth obstacles, e.g. difficulty accessing external finance.
A larger SME sector does not necessarily indicate a dynamic SME sector, but rather may be reflection of poor business environment where firms cannot grow
In some environments it may be optimal to remain small.
We care about new entry and growth potential of SMEs!
SMEs, entry and exit of firms
Average value added
Italy
United Kingdom
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Age of the firm (years)
Val
ue
add
ed (
usd
)
Source: Klapper, Laeven and Rajan (2006)
What is an SME?
Different segments to be distinguished
Microenterprises: informal, household- or family based
Small enterprises – formal; often “missing middle”
Medium-size enterprises: aspiring, export-oriented etc.
Different segments, with different needs and challenges
Access to credit by enterprises
Access to finance – the size gap0
20
40
60
perc
enta
ge
Africa Rest of the world
Sample size: 90 countriesSource: Enterprise Survey 2010
Share of firms with a line of credit
small(<20) medium(20-99)
large(100 and over)
020
40
60
80
100
perc
enta
ge
Africa Rest of the world
Sample size: 90 countriesSource: Enterprise Survey 2010
Share of firms with deposits
small(<20) medium(20-99)
large(100 and over)
Landscaping African finance
SME finance part of the overall challenging financial sector agenda in Africa
African financial systems characterized by
Small scale
Bank-based
Short-term
Costly
Concentrated and non-competitive
Small scale…
05
10
15
log o
f liq
uid
liabili
ties
(US
$ m
illio
ns
for
2000)
Sample size: 154 countriesTime period: 2009Source: World Bank’s Financial Structure database 2009Note: The highest African values are for Egypt, South Africa, Morocco, and Algeria
Size of Banking Systems across Countries
Rest of the World
African Countries
…and little intermediation
AGO
BDIBENBFA
BWA
CIV
CMR
COG
CPV
DZA
EGY
GAB
GNB
KEN
LSO
MAR
MDG
MLI
MOZ
MUS
MWI
NER
NGA
SEN
SLE
SYCTCD
TGO TUN
TZA
UGA
ZAF
ZAR
ZMB
0
1
2
3
Loa
n-d
ep
osi
t ra
tio
0 .5 1 1.5 2
liquid liabalities to GDP
Africa
All Other Regions
Sample size: 133 countriesTime period: 2009Source: MFWA Financial Structure database 2009Country abbreviations are included in the abbreviations list at the front of the book.
Loan-deposit ratio and liquid liabalities to GDP in 2009
Africa’s finance is bank-based…
…with little equity finance…
… and bond markets dominated by government
African finance is short-term..
…and costly
0 .05 .1 .15 .2
Net Interest Margin
South Asia
Middle East
Latin America & Caribbean
High-income countries
Europe & Central Asia
East Asia & Pacific
Africa
Sample size: 134 countriesTime period: 2009Source: World Bank’s Financial Structure database 2009The minimum, maximum, and median of the ratio of offshore to domestic bank depositsThe shaded boxes show the interquartile range.Outliers have been omitted (highest 5th percentile).
Net Interest Margins across Regions
Banking markets are concentrated and non-competitive
-.2
0.2
.4.6
Lern
er
index
Sample size: 80 countriesTime period: 2006Note: The Lerner index is the relative markup of price over marginal cost.
Lerner Index
Rest of the World
African Countries
Why are SMEs left out?
Transaction costs Fixed cost component of credit provision effectively impedes
outreach to “smaller” and costlier clients Inability of financial institutions to exploit scale economies
Principal-agent problems
Related to asymmetric information
Adverse selection: High risk borrowers are the ones most likely to look for external finance
Increases in the risk premium raise the risk of the pool of interested borrowers
Lenders will use non-price criteria to screen debtors/projects
Moral hazard: The agent (borrower) has incentives that are inconsistent with the principal’s (lender) interests
Agents may divert resources to riskier activities, loot assets, etc.
Access to credit: A conceptual framework
Access Possibilities Frontier (APF): constrained optimum; maximum access to credit given “state variables”: macroeconomic environment, contractual and informational framework, technology etc.
Define observed access relative to APF: Self-exclusion/too few investment projects Outcome below APF: lack of competition, regulatory
constraints, lack of appropriate lending techniques etc Outcome above APF: excessive, imprudent access APF too low: state variables
Supply or demand-side constraints?
Do you have a loan?
Region yes no
Africa 22.44 77.56
Rest of the World 47.59 52.41
Did you apply for a loan?
Region yes no
Africa 22.82 77.18
Rest of the World 40.01 59.99
Supply or demand-side constraints? (2)
Why did you not apply?
Africa Rest of the world
no need for a loan - establishment has sufficient capital 40.8 64.44
application procedures for loans or lines of credit are complex 17.96 6.51
interest rates are not favorable 16.74 12.48
collateral requirements are too high 9.55 5.18
size of loan or maturity are insufficient 2.25 1.68
it is necessary to make informal payments to get bank loans 5.69 1.75
did not think it would be approved 6.92 6.42
other 0.1 1.54
Empirical findings
Lower access to and use of credit in Africa reflected in both lower share of firms with credit and lower share of applications
Little evidence for self-exclusion
Important role for supply side constraints:
Macroeconomic environment
Contractual framework
Applicati0n procedures
How to close the SME financing gap
Competition is key for the financial innovation New providers
Government’s role: allow entry, but also force cooperation in infrastructure
Focus on the necessary services and look beyond existing institutions Service provision should be priority
Look beyond banks to NBFI
Look beyond stock exchanges to private equity
Focus on users, looking beyond supply constraints Supply constraints only part of story
SMEs: business environment; turn investment into bankable projects
Competition as key for financial innovation
Competition is key for innovation that is necessary for broadening financial systems Reap potential benefits of technology
New lending techniques
New players Foreign banks can bring experience and capacity
NBFI and non-financial corporations can expand overall scale and thus bring in more competition
Look beyond organized capital markets to OTC, private equity etc.
Level playing field – open infrastructure to all safe and sound players Might imply an activist government role
Relates to credit registries, payment system etc.
Expanding products and players
Leasing: Lending based on value of specific collateral provided by borrower rather than overall creditworthiness of borrower.
Better security since lessor is owner of asset
Dedicated use of funds
Tax advantages
Factoring: Sale of accounts receivable at discount
Does not rely on good collateral laws or efficient judicial systems
Reverse Factoring allows small, risky firms with large high-quality buyers to transfer credit risk and borrow on the credit risk of customers
Private equity funds: problem of too much debt, not sufficient equity in most SMEs in developing countries
But: demand-side constraints
Other innovations: Combine lending with extension services (Nigerian bank)
Step-up lending (Banque Misr)
Psycohmetric credit scoring (South Africa)
Look at demand-side constraints
Financial literacy
Financial awareness of products and options
Financial capability
Accounting and auditing standards
Business development services – turn investment into bankable projects
Don’t ignore non-financial constraints
The role of government
A mix of modernist and activist policies
Competition
Enable entry, domestic and foreign
Might have to force providers to share infrastructure
Move from retail to wholesale role
Looking beyond institution building
Space for activist policy a function of governance, size etc.
Partial credit guarantee schemes?
How to nurture innovation?
Challenge funds
One size does not fit all
Low vs. middle income countries
Large vs. small economies
Civil vs. Common Law countries
Post-conflict countries
Resource rich countries
Densely vs. scarcely populated countries
…
Conclusions
Although SMEs do not cause economic development, they are a crucial part of the private sector and suffer more from market and institutional failures
In order to understand access problem, consider different constraints and resulting policies
Competition can foster the necessary innovation to expand Different providers have important roles to play (foreign
and domestic banks, NBFIs, MFIs, equity funds etc.). One size does not fit all
Government has role to play, both in developing and enabling markets
Banks and NBFIs have to play their role, adjusting business models etc.
Demand-side constraints should not be ignored!
