SMEs: small struggles, big rewards

By Nicholas Norbrook
Posted on Thursday, 24 September 2015 10:28

Nnakeme Gbelebu pores over a list. It is a feeding schedule for fingerlings, the small fish he hopes to grow into a commercial catfish catch at his fish farm outside Benin City in Edo State, Nigeria.

He has three ponds but has run out of money to buy the aerators for a fourth pond. And so for now, he continues at his day job providing administrative support at a big hotel in Lagos.

Finding jobs for the 350 million Africans who will hit the job market over the next three decades has policy-makers up in cold sweats at night.

But while some reach for large-scale industrial policy to focus the economy squarely on manufacturing or agriculture to create jobs, there is another avenue to consider: small and medium-sized enterprises (SMEs).

Economic linchpin

With inclusive growth the watchword for leaders from the African Union to the African Development Bank (AfDB), supporting SMEs has become a cause célèbre and with good reason – they really are the backbone of employment.

“In South Africa, SMEs employ 61% of the total population,” says Eliki Boletawa, a team leader at the Alliance for Financial Inclusion (AFI).

But while nearly everyone can rally behind the rhetoric of supporting small businesses, bankers are yet to fully embrace them. A recent AfDB report outlined some of the financial hurdles: less than a quarter of African SMEs have a loan or line of credit, compared to nearly half in comparable developing economies.

In addition, in sub-Saharan Africa, 45% of firms cite access to finance as a major constraint to growth.

An estimated 84% of investments in SMEs in Africa are financed through internal funds. The Benin City catfish farm is a prime example.”I have never even asked a bank,” smiles Gbelebu. “They don’t look at us.”

So how can small companies get over traditional hurdles like a lack of collateral and a paucity of information to provide to potential lenders? Technology, government support and a new attitude from a corporate banking sector that now sees SMEs as an opportunity are helping to turn the tide.

The situation faced by SMEs in South Sudan might seem exceptional, as the country has spent more than half of its short existence mired in civil conflict. In the three worst-affected states – Upper Nile, Jonglei and Unity – banks have been overrun and looted, and financial services have halted.

But while security remains the top priority, businesses across the continent will recognise the challenges elsewhere in South Sudan.

“Banks are sitting on a lot of liquidity, [but] they are wary of lending,” explains James Garang, an assistant professor at Upper Nile University, “and they won’t lend to SMEs without collateral.” With land titling still rudimentary, using property as collateral is out of reach for most small businesses in South Sudan.

Banks are also chary of lending to individuals who might seek to disappear. “Suppose I take a loan in Juba and then run away to another state like Northern Bahr el Ghazal. The bank has no way of finding out where I am and even if they do, it is hard to bring me to court,” Garang concludes.

But even when there are strong identity checks and credit bureaux that help give comfort to banks, financial institutions are not keen on lending to SMEs – partly because these companies often lack well-defined organisational structures, bookkeeping and solid business plans.

Helping re-engineer SMEs into viable companies is a key focus for the AFI’s SME working group, which aims to bring lessons from around the world to its South African and Kenyan participants.

Two key proposals, which have worked in many other countries, are SME support bureaux and credit-guarantee schemes.

The bureaux help SMEs in the traditionally expensive task of creating modern and transparent financial accounting practices, a necessary leap towards convincing a banker to part with his cash.

By centralising this task, a government can help many SMEs, as well as provide assistance with other elements like market research, seeing what products might work in which segments and linking SMEs with potential clients.

Credit-guarantee schemes are also widely spread in developing countries, whereby a government takes some of the credit risk onto its own balance sheet.

For this to work and not become riddled with corruption, “it needs high-level support”, says AFI’s Boletawa.

“In Malaysia, the prime minister along with ministers from seven other portfolios came together and said we need to have this.” A subsidiary of a Malaysian development bank created a register of SMEs and acted as a link between banks and borrowers, assessing the proposals from the SMEs then liaising with the financial institutions and guaranteeing around 60-70% of each loan.

SME support networks

Both these routes require significant government support. Morocco has its own version of an SME bureau and is also supporting SMEs with legislation, another route for using the public purse to back small businesses.

Since 2014, 20% of government contracts are reserved for SMEs. The Casablanca Stock Exchange (CSE) is also working with the London Stock Exchange to pick groups of small companies to receive two years of business training and contacts with investors.

Karim Hajji, chief executive of the CSE, explains: “SMEs often have a problem reaching capital markets. They are not aware of the needs of investors as far as information, reporting requirements and strategic business plans.”

In Nigeria, even though a coordinated government approach to funding SMEs has been tabled, small businesses have yet to seduce the commercial banking sector.

A recent report from the Economic Intelligence Unit highlights some stark challenges: Only 2% of Nigeria’s adult population received loans from a financial institution over the past year; the rejection rate for SME loan applications by the nine leading commercial banks between 2011 and 2014 was 50%; and only 14% of SMEs had access to a loan or overdraft account.

SMEs in Nigeria could clearly use a support bureau, with around 95% of them lacking financial statements or reporting, according to the report.

Elsewhere, however, corporate banks and other institutions are starting to seize opportunities.

In Kenya, the ease with which money now circulates around the economy due to mobile-money schemes like M-Pesa facilitates small businesses, especially now that agency banking – where a mobile-money vendor can perform limited banking operations – is commonplace.

Where before a business might spend half a day travelling to a bank branch, “they now have them at the end of their street,” says Upper Nile University’s Garang, “and they can send money to suppliers and customers just as easy.”

Key to growth

Equity Bank is the most aggressive Kenyan commercial lender to SMEs – and owes its graduation into the ‘big bank’ class precisely because of its large SME loan book.

Only 2% of Nigerian adults received loans from a financial institution over the past year

In 2012, “Equity Bank made 166,000 SME loans valued at over $680m,” writes James Mwangi, Equity Bank’s chief executive.

And the Nairobi-headquartered lender has internalised the lessons of both technology and the need to extend help to SMEs in structuring their businesses.

Its agency banking model has prospered in the markets in which it operates – Kenya, South Sudan, Tanzania, Uganda and Rwanda – and it ensures that SMEs receive help in developing business plans and connects them with potential clients. Other corporate banks abroad are taking notice.

In September 2014, in the Democratic Republic of Congo, for example, set up an SME support service bankrolled by the International Finance Corporation. Meanwhile, Ghana’s Access Bank tapped the European Investment Bank for a €15m ($17.3m) facility destined for SMEs in July.

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