To start with, this column on Monday, November 18, 2019, treated you to the future of SME Banking with a pointer to the pain-points or nerve-wracking challenges of this business segment to bankers across the world. This is based on the International Finance Corporation’s (IFC) maiden survey with the special focus ‘Banking on SMEs: Trends and Challenges-Perspectives from SME Banking Leaders’. In recap, we identified credit risk (Non-Performing Loans); economic instability; customer engagement; technology and competition (entry of new players) as the top-five pain-points. In the same spirit, today’s script flips over to the key indicators that will drive the future of SME Banking in terms of decision-making. Let’s be informed about these nuggets!
Policy and Regulation
According to the survey, (32%) of the respondents stated that policy and regulation will have the greatest impact on SMEs in the years to come. Hence, the respondents noted that many authorities have started advocating for SME-friendly legal and regulatory frameworks to promote the sector’s growth. Respondents expect to see changes in income tax structure as well as the introduction of government incentives for priority sectors, like agricultural and manufacturing, to enable SMEs grow faster and scale up.
Respondents also have strong convictions that specific policies relating to SMEs’ access to finance will shape the nature of banking for them going forward. They equally indicated that some governments have focused their efforts on financial inclusion, entrepreneurship support, and formalising informal businesses. Some central banks have also started issuing directives aimed at facilitating more bank-lending to small businesses. On the other hand, 35% of same respondents warned that stringent regulation – including information or compliance demands from authorities – will have an adverse effect on banks’ profitability, customer satisfaction and overall efficiency.
Concerning the external environment, (29%) respondents noted that SMEs are extremely sensitive to changes in political and economic stability. Thus, situations of political uncertainty such as presidential elections could cause instability within the economic environment – where loss of business or investor confidence often negatively impacts SMEs.
In the same vein, respondents revealed that new regulations that support the financial inclusion of SMEs, such as tax incentives and regulations to enhance the ease of doing business, will open up opportunities for banks to reach more SMEs. “The development of robust SME policy frameworks will be a critical step to ensure their growth.” Respondents also indicated that further policy implementations will require government and financial institutions to support SMEs with technical assistance and capacity-building.
Digital Technology and Fintechs
In this regard, (17%) of all respondents believed that technology would have a significant impact on SMEs into the future. Respondents said automating their operations and implementing digital lending will make lending processes more efficient for both banks and SMEs. As a result, the use of data analytics and external databases to inform decisions in their loan origination and assessment processes will allow banks to give more SMEs access to credit. Again, respondents highlighted that the digital delivery of high-quality product offerings and services will significantly improve customer experience, and enable banks to react quickly to customer requests and tailor products to suit SME-specific needs.
Supporting SME Development
With more references to the survey results, (14%) of respondents said more focus on SME capacity-building will positively impact SMEs’ ability to grow and access formal financial services. There again, many respondents said they will continue to improve their non-financial and advisory services to SMEs, and therefore noted that dedicated resources can help provide technical assistance to SMEs.
The respondents also believe that well-structured finance solutions will also enable SMEs to grow as well as develop improved financial capabilities. What’s more, respondents also stated that the development of digital platforms will allow banks to conduct financial literacy training that can reach more SMEs compared to traditional offline approaches.
The findings clearly showed (13%) of respondents indicating that the cost and accessibility of funds for banks will have a strong impact on their ability to lend to SMEs. “The existence of lines of credit and guarantees will allow banks to fund more SMEs at a reduced cost…. Increasing access to local currency funding had a large impact on their ability to lend to SMEs in the local market, using local currency without significant hedging risk.”
This is another strong factor that the respondents believe will shape the nature of SME banking. It has (17%) of respondents indicating it as a primary driver. Hence, respondents noted that they are continually innovating their products in order to satisfy SME’s needs and improve the quality of service they provide to them. Some respondents also noted that their banks have focused on developing products that are aimed at SMEs in particular sectors including agriculture, agro-processing and tourism. In all considerations, it also came to light that the majority of SMEs require simple products with fast turn-around times, particularly for credit and insurance products.
To conclude, the survey asserts that policy and regulation; the external environment; technology; SME capacity-building and funding access are the top-five factors that will have the greatest impact on SMEs going forward.
Thank you for reading. I welcome your feedback or comments on this script. God bless You!
This script was written by a Chartered Banker with a flair for feature writing. He works for a company which provides financial services. Apart from his work schedules, he edits or proof-reads corporate material for his colleagues, executive managers – including distinguished professionals working in various fields outside Banking. Through this column, his articles feature on third-party online media platforms in Ghana and outside. Email: Kwaku.Anumu@gmail.com