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    Innovation, Specialization and E-finance for SMEs


    © International Trade Centre, International Trade Forum - Issue 1/2002

    Access to finance is still a major limiting factor for small and medium-sized enterprises (SMEs) in most countries, and particularly in developing countries. In general, banks refuse credit to SMEs because they are perceived as risky and unprofitable. However, experience in the field shows that SME lending can be profitable and does not necessarily involve more risk for the bank than lending to large enterprises or the public sector.

    All too often, banks see any risk as dangerous. Yet, any type of transaction which provides credit involves a chance of failure. Rather than categorically turning down requests from SMEs, banks can learn how to calculate the risks. By developing an entrepreneurial attitude, they can start generating profits from this client segment, too. To do so, banks may wish to improve their risk-evaluation skills. One ITC study revealed that this was one of the major shortcomings that successful entrepreneurs in least developed countries (LDCs) noted in developing-country bankers.

    Banks can also adopt specific tools such as credit scoring which enables bankers to calculate and compare risks against an average benchmark. It introduces a degree of objectivity in the analysis and it can assist credit officers with limited experience. To help them, ITC has developed a guide for bankers on how to evaluate trade credit requests and software called The Score Card System. It offers a risk analysis tool to the loan officer who is responsible for these decisions.

    Why loans do not perform

    Non-performing loans are sometimes the result of lack of knowledge about business reality. In order to minimize their number, it is advisable to offer SMEs business support and development services, in addition to credit. Officers in charge of lending to SMEs have to know the customers, the market and the financial counterparts involved. Financing has to be adapted to regional customs, laws and regulations. Support services are not meant to be entirely free, but can be part of a package deal alongside the credit.

    Micro-enterprises are a long-neglected segment. But a new breed of financial institution is designing specifically-targeted products to bring them into the mainstream. However, it is understandable that banks should not be expected to deliver all types of services to all clients. Specialized banks will tailor products for the SME market, and will look at existing donor or government programmes to provide efficiency and complementarities. These programmes will also require the banks to train staff. Naturally, this is only possible if the bank's top management is fully committed and if loan officers receive incentives linked to their portfolio success.

    Other financing methods

    One example that stands out comes from India. The Government of India created the Small Industries Development Bank (SIDBI) alongside the larger Industrial Development Bank (IDB).

    SIDBI then introduced a full range of information technology (IT) facilities, including Internet cafes and mobile telecommunications, and made them available to small enterprises. It also launched technology and quality development funds. These initiatives can be successfully reproduced in other developing countries.

    Venture capital is an alternative way to finance SMEs when banks cannot intervene, and particularly when stringent collateral requirements cannot be met. It is also the only source of alternative finance when firms have outgrown their start-up phase, but have not yet reached full development. Private-equity financing for SMEs is still an underdeveloped market.

    Successful venture funds are extremely selective in their choice of projects, and export-oriented enterprises are usually preferred. In these cases, deals are carefully chosen after a field analysis because documentary evidence is not enough in itself. Finally, returns must exceed average market return.

    Tutoring and mentor programmes

    Sometimes, venture funds will provide non-financial assistance and close tutoring for talented entrepreneurs. So far, they have just launched themselves in emerging markets, and not in LDCs, although some companies such as Lotus Holdings in Nepal are already claiming significant results from their service and tutoring approach. In reality, there is no shortage of finance as such for SMEs; the problem is rather the risk aversion of banks and financial institutions.

    Non-financial credit support services can be offered via banks, government-backed initiatives or through private business support services. Sometimes, private business services are in reality funded by donors (e.g., United States Agency for International Development (USAID) aid in Egypt and the United Republic of Tanzania) and can therefore provide support at a cost that is affordable for most SMEs. Support can also be provided in the form of mentor programmes. Sometimes retired managers are made available through ad hoc government schemes from the United States, the United Kingdom or Australia, which provide a combination of expert skills and low costs. In some instances, for example Kemap in Kenya, mentor schemes take such an active role in new businesses that they can act as guarantors to banks. Again, India offers a good example of a proactive financial environment. At the end of 2000, an innovative Credit Guarantee Fund Scheme was set up to guarantee loans up to about US$ 514,000.

    Another useful scheme is bill-discounting which in many countries can replace credit and alleviate the difficulties of finding collateral. In other countries, credit insurance cover provides an interesting alternative. In Tunisia, Cotunace has removed collateral requirements, and in so doing, has improved the competitiveness of local SMEs. This is an example that could be repeated in most developing countries.

    E-finance to boost developing country trade expansion: how to make e-finance a reality?

    Governments and the international community have an important role to play in making e-finance a reality in developing countries. The first effort must be to provide affordable Internet access. But attention must also be paid to SME capacity building for the new economy. The challenge for governments may be to improve information-sharing rather than to become involved in direct investment in SMEs, as they did in the past in developing countries.

    Brazil provides a successful example of rapid development in this sector. Another important step for governments is to introduce rules that establish a competitive operational framework. There are different networks through which e-finance can function such as Internet portals, post offices or stores. Governments have to ensure that competition works properly. Some examples of best practice in e-finance include:

    Pride Africa and e-microfinance: Pride Africa is a microfinance network providing credit access to more than 80,000 African SMEs in Kenya, Malawi, United Republic of Tanzania, Uganda and Zambia. Its financial information service network offers microfinance opportunities for local people and small enterprises. Before this service was created, they had no access to flexible financing due to rigid banking regulations and to the information monopolies of the government and large business. Now Pride Africa will link micro-businesses to the formal financial sector by aggregating loans and providing loan tracking and accounting. Pride Africa branches located in low-income areas will be linked to a daily network via satellite, called DrumNet.

    SMEloan: SMEloan serves the needs of Hong Kong's SMEs. The company offers "Express Loans" up to about US$ 128,000, which are approved within one minute of submitting an online application. This allows business owners to instantly obtain their financing. Although it is not specifically a micro-finance institution, in practice it ends up lending modest amounts to most of its SME loan applicants. SMEloan offers the possibility to borrow more than US$ 128,000, but this involves more time-consuming procedures.

    E-banking: E-banking can also facilitate access to finance for SMEs. It has the advantage of lowering the bank's costs, so they can obtain greater gains without necessarily increasing interest rates. Banks in industrialized countries are slowly evolving to Internet-based payment systems. However, developing countries are still mostly left out of these new payment initiatives. Rapid progress in this area can only be achieved by a global approach to e-commerce: ITC's programme "e-Trade Bridge" is specifically designed for developing countries and LDCs, and may provide the basic structure to build national e-capabilities by involving strategy-makers, businesses and trade support institutions including specialized banks.

    Carlo F. Cattani is ITC Senior Adviser on Trade Finance, a business advisory specialized programme aimed at facilitating access to finance in developing countries. He can be contacted at cattani@intracen.org