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