Small and Medium Enterprises (SMEs) are important growth drivers and contributors to job creation and economic development worldwide. On the Africa continent, SME’s makeup approximately 90 percent of all companies and provide nearly 80 percent of the region’s employment1. So, why does this sector struggle to survive when we are dependent on them for the future success of our economies?
Before the pandemic crisis, 40 percent of SMEs in Africa identified the primary factor constraining their growth as accessing finance2. Without funding, SMEs cannot grow or innovate to sustain economic development. This is further exacerbated by the pandemic affecting the financial and economic landscape, dropping the demand for goods and services, and the tightening of credit terms by the Banking sector.
Government relief schemes during the pandemic in partnership with Banks are not enough, the lack of funding from our experience results in thousands of SMEs being out of business before they can even hit the first phase of their growth trajectory.
Why is SME financing a risky business? We continue to see more African SMEs vulnerable, due to their lack of management strategies, weak cash flows, low equity reserves, underdeveloped risk management & business continuity structures, capacity constraints, and lack of adaptability to changes in market conditions & technology.
SMEs typically raise their capital through short-term debt which is one of the few viable options to them, sourced mainly through the Banking sector. However, this comes with SMEs needing to provide guarantees and collateral which many of them cannot produce along with stringent credit scoring models which limits their access to funding through the Banking sector.
We found that the Banking sector lacks the distribution channels to reach SMEs at scale along with their traditional lending processes and channels which are not fully digital or automated to enable them to secure funding3. Interestingly, Banks are also challenged with limited data insights into understanding the SME market, which reinforces the issue at hand.
According to the International Finance Corporation, the credit gap for funding SMEs is approximately $30 billion. As much as this staggering amount provides a bleak reality for many SMEs, we see this as an untapped market opportunity that needs to be exploited by the banking sector.
The African Banking sector cannot remain relaxed when it comes to SMEs, the real threat comes in the form of Non-Financial Banking Institutes (NFBIs) that provide seamless online loan application processes, competitive interest rates, and easier terms. NFBIs have leveraged digitalisation and advanced analytics to create more cost-effective credit and scoring models to address SME challenges, capturing this SME market quickly when compared to the traditional Banking sector.
In light of this, can Banks make SMEs a profitable segment? The motivation to support SMEs lies in them leveraging product innovation, alternate data insights, collaborative partnerships, and technology to achieve competitive advantage in the areas of client acquisition & retention, portfolio growth, and customer service.
We have identified the following ways in which Banks can change the way they do business to stay relevant and gain exposure within the SME sector:
Grow and scale through alternate data
Banks need to shift their approach from a one size fits all to one that provides a more personalised experience that will demonstrate a better understanding of the SME markets. To do this, Banks could implement advanced analytics platforms to build better digital credit assessment models in the absence of unavailable traditional financial data and scorecard models.
Further, sourcing of new alternate data points in the form of social media, payment data from utility providers and other players can also be used to assess creditworthiness which emerging NFBIs are now using to assess SME risk to limit the risk for both lenders and borrowers.
As new data insights emerge Banks can redesign and customise their lending products to better serve SMEs, as an example this can include different options on unsecured products based on new credit risk assessments which may have flexible terms, giving an SME more say in how they plan on using the funds and pricing the risk based on that plan.
Optimisation of digital channels through a platform approach
To create a better customer experience for SMEs, convenience and efficiency are key for digitising the SME journey. Current processes entail lengthy turnaround times and paperwork. A digital omnichannel banking platform approach allows Banks to accelerate SME digital solutions to market, based on reusable building blocks and integrations to different ecosystem partners, which allows them to provide a better service to SMEs to help them grow and scale quicker. Some examples of solutions that can be built on a platform are:
SME digital onboarding – This will allow SMEs to self-register and apply for loans remotely without the need to visit a branch to complete lengthy documentation requirements. Authentication is done through a quick ID and OTP verification with no or minimal paperwork required. Digital onboarding enables the bank to collect important information and collateral from the SME automatically and keep up-to-date, clean customer profile data.
SME loan origination – Enables SME and business clients to create a business plan, and apply for a business loan entirely digitally. For the back office, a loan origination solution streamlines credit processes providing origination, risk ratings, analysis, underwriting, documentation, and portfolio management, and provides a unified view of the customer’s financial data and documentation.
Merchant payment digitisation – Lowers transaction costs for both banks and merchants, while keeping transactions within the bank’s closed or semi-closed payment ecosystem. Helps merchants manage payments, driving revenue and digital engagement through merchant portals that include point of sale management, QR code payment acceptance apps, and more. Beyond the digital payment itself, value-added features can include special offers and promotions.
Agricultural lending – Can be done through a mobile app, with a simple five-step process, allowing Agricultural SMEs to apply for tailored loans within minutes. It also provides banks with Agri lending risk assessment through real-time data on business performance. Digital educational tools like cash flow-based repayment plans and in-app peer mentoring help SMEs manage and grow their business.
Partnerships can create unique value propositions for SMEs
Partnerships should be seen as enablers to accelerate growth and scale for Banks. Thanks to them, banks can share risks, achieve higher cost efficiencies, and bring forth innovative capabilities. Collaborating with ecosystem players like solution providers to assist in broadening reach through innovative platforms makes banks adaptable to market changes and helps them gain further market exposure within the SME sector.
Building on these points will allow Banks to be more accessible, convenient, and agile. In the long term, they can become a trusted partner for SME funding, to grow a sector that will continue to create employment, innovation and affect economic growth on the African continent.
Software Group is a trusted Pan African partner driving digital transformation across the continent. We leverage expert knowledge and technologies to help banks and financial institutions build their digital future. Contact us today.
Sources:
