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African SMEs crowded out by big companies, public debt, says EIB

By David Whitehouse
Posted on Thursday, 27 February 2020 12:46

European Investment Bank President Werner Hoyer speaks during a joint news conference with European Commission President Jean-Claude Juncker at the EC headquarters in Brussels
European Investment Bank President Werner Hoyer REUTERS/Yves Herman

Banks in many African countries still favour lending to governments and large companies, resulting in less finance for small and medium-sized enterprises (SMEs), according to Banking in Africa, published by the European Investment Bank on February 27.

“Banks consider lending to SMEs highly risky and ask for significant levels of collateral, while a significant portion of their investment is allocated to government assets,” the report says. Larger firms typically find it easier to get credit, and smaller businesses are at a particular disadvantage in Lesotho, Malawi, Namibia and Zambia.

“There are only so many big corporates in Africa that you can bank,” Jean-Philippe Stijns, senior economist at the EIB and one of the report’s authors, told The Africa Report.

Stijns sees signs of progress. Banks are now starting to “move down the food chain” to find new business customers, he says.

Last year’s edition of the EIB report found that crowding out increased throughout Africa from 2014 to 2018, and was particularly marked in Ghana, Niger, Tanzania and Zambia.

  • On average, public debt supply was initially the main factor behind the increase of crowding out, but was then overtaken over by banks’ lending decisions.

Fintech for SMEs

Economic growth prospects remain bright in some areas. The EIB predicts that in 2020 and 2021, GDP growth in East Africa will accelerate to 6% in 2020 and 2021 as infrastructure investments boost domestic demand.

  • But Nigeria, which accounts for two-thirds of West Africa’s GDP, is expected to grow at only around 2.5% this year.
  • Overall, the EIB says, risks to the outlook are tilted to the downside.
  • “The high level of public debt leaves a number of states vulnerable to external shocks and reduces or even blocks access to external financing,” the report says.

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There is an increasing recognition by pan-African banks of the need to set up dedicated departments for lending to SMEs, Stijns says, giving France’s Société Générale as an example. Banks are also starting to get serious about using fintech to develop credit assessment tools for SMEs, he says.

  • The EIB is in the process of launching a new centre in Abidjan that aims to provide capacity-building and technical assistance to SMEs in west and central Africa.
  • The other part of the equation, Stijns says, is helping bankers to become more knowledgeable in assessing the risks of lending to SMEs.

Reform of secured transaction frameworks would benefit both banks and firms, the EIB’s report says.

This would make it easier for firms to use movable assets as collateral and would help SMEs in particular, as they are more likely to lack high-quality collateral.

  • Standard models for measuring the credit strength of SMEs are unlikely to be sufficient, Stijns argues. One unresolved issue is that the line between personal and business use of a loan, for example for a motorcycle, is often blurred.
  • “Necessity is the mother of all invention,” Stijns says.

As has already been the case in mobile banking, that means Africa could find itself leading the rest of the world in terms of fintech for SME lending, he argues.

Bottom Line: Smart credit-assessment tools are the key to unlocking the potential of Africa’s SMEs.

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