The need to improve access to credit for small and medium size enterprises’ access in order to boost economic growth has now become a well received mantra, popular with International Financial Institutions and African politicians alike.
To be sure, the object of this consensus remains hazy, its outlines ill-defined and useful data hard to find. For example, the statistics provided by banking authorities in both West and Central francophone Africa do not segregate SME’s borrowings from other types of borrowings. Arguably, it’s difficult to understand, let alone manage, something that is not being measured.
One thing remains: the supply of credit for SME’s far lags demand in sub-Sahara Africa. The World Bank (1) found that, in our region, only 22% of businesses had credit lines available from their banks in 2009 and that, for 46% of businesses, access to credit stood as a major constraint on growth. With SME’s being responsible for 80% of output and employment, it’s hard to understate the consequences of the scarcity of credit on the economy.
There are multiple reasons to this state of affairs. A major cause is the discrepancy between the methods used by banks to assess creditworthiness and the realities on the ground in sub-Sahara Africa.
Historically, banks were designed to cater to the financing needs of (i) large companies, mostly foreign ones, (ii) by looking at a few crude ratios reflecting the company’s asset base.
This approach becomes ineffective when banks are faced with the task of financing (i) small and medium size companies, often operating informally, (ii) which do not provide reliable financial statements nor offer substantial assets as collateral.
Rising to the challenge of financing SME’s will require that banks change their perspective and position themselves to finance bankable transactions brought in by SME’s instead of trying to find bankable SME’s to finance.
The focus must, therefore, turn to identifying and capturing the cash flows generated by the proposed transaction and away from the strength of the borrowing company.
The focus must also turn to developing product expertise. In most of our banks that expertise is often lacking, the headcount being heavily skewed toward customer and risk management personnel. Without essential product expertise, it is next to impossible to provide financing that closely reflects the client’s needs.
Without such a paradigm shift, financing SME’s will remain as elusive as ever.
(1) World Bank Enterprise Survey 2009.