Lack of adequate date hinders SMEs from growing

Lack of adequate date hinders SMEs from growing

Many SMEs lack appropriate financial services to grow, reduce costs and promote efficiency, according to a research by FinAccess. The project undertaken in collaboration with  FSD-Kenya, the World Bank, and the Central Bank of Kenya (CBK) was meant to seek knowledge and ways to improve understanding of the SME market on both the supply and demand sides

Banks often lack crucial information to inform their product development and expansion strategies due to a lack of systematic data collection and a common definition of the SME finance market. This also affects the work of the Government, regulatory authorities, and credit bureaus, as it makes it difficult to identify the key developments, challenges, and opportunities in the market, reveals the report.

The report authors that the demand-side data continues to be limited due to the lack of a representative list of active business establishments in Kenya, which makes it difficult to track the size of the market as well as the evolving characteristics of the business population and their need for financial services.

This is a major gap in the analysis of the Kenyan SME finance market,

hence will be analysed in a forthcoming, in-depth report.

The present report provides instead a comprehensive view of the supply-side of SME finance and its evolution between 2009 and 2013.

The study shows that the total SME lending portfolio in December 2014 was estimated to be sh350 billion, representing 23.4 per cent of the banks’ total loan portfolio.

The SME portfolio grew fast in absolute values but also as a percentage of total lending: in 2009 and 2011 the total SME portfolio was estimated to be sh133 and sh225 billion, respectively, representing 19.5 and 20.9 per cent of total lending. These figures show that in the context of the general growth of the financial sector, SME financing is growing at a relatively fast rate, and is thereby representing a growing share of the commercial banks’ portfolios.

Based on the findings of the study, the banks’ business models in the SME finance market can be divided into three main types: the corporate-oriented business model (CBM), the supply-chain oriented business model (SBM) and the micro-enterprise oriented business model (MBM). Although banks may diversify between these categories, resulting in some overlap between the three categories, banks tend to differ in terms of lending technologies, customer acquisition strategies, and risk management mechanisms.

On the other hand, risk management strategies vary widely across banks and may be based on ‘hard information’, ‘soft information’, or a combination of the two. Hard information may consist of financial ratios calculated from certified audited statements and data assembled by credit bureaus. Soft information consists of non-financial information about the firm or entrepreneur, such as the sources of revenue or the borrower’s historical relationship with the bank.
While there have been positive developments over the last few years, there is still considerable room for product innovation in the SME finance space.

A large number of SMEs continues to use overdrafts to finance their working capital needs, although banks have introduced several trade finance and asset finance products designed for the SME market. The development of other important SME finance products, such as factoring and financial leasing, has made some progress over the last few years but is still very limited.

Developing such products is expected to lower transaction as well as borrowing costs for SMEs and reduce reliance on collateral by drawing on a more diverse set of information. The main constraint to financial leasing appears to be the ambiguous treatment of leasing in the Hire Purchase Act as well as the application of VAT.

Potential constraints to the development of factoring, such as the recourse mechanism and the impact of stamp duties, need to be explored as well. In addition, it would be useful to study in more detail the potential and feasibility of an electronic reverse factoring platform similar to the one operated by Nafin in Mexico or factoring schemes as used in Paraguay or Peru. This could lower transaction and borrowing costs further and introduce more competition into that market segment while also increasing transparency.


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