Small- and medium-sized enterprises (SMEs) are of crucial importance to many economies. SMEs are typically the most important creators of jobs, and provide critical functions in their own right, both as suppliers and as subcontractors to larger corporations. For SMEs to play these crucial roles, it is essential for them to have access to the banking system.
According to a study by the International Finance Corporation (IFC), there are between nine and 11 million micro-, small- and medium-sized enterprises in the Middle East and North Africa (MENA), and around 1.8 million in Saudi Arabia alone. The IFC further estimates that the credit gap in this segment in the MENA region is upwards of $300bn, i.e. SMEs would require $300bn of additional banking facilities not received today for them to optimally operate. This very sizeable credit gap presents a challenge as well as an opportunity to banks and governments alike.
In the remainder of this article I will look at three elements that are important when trying to bridge the credit gap. Two of these focus on changes required at the banks themselves, whereas the third considers the role of governments.
When it comes to providing banking services to SMEs it is important to be aware of the specific requirements they have. These requirements are different from both large corporate customers and from retail customers. Hence a bank cannot rely on copying its services for large corporate customers or retail customers and assume these are appropriate for SMEs as well. Servicing the SME segment is all about banking, not lending, from day one of the relationship. SME customers require cash management, trade finance and treasury solutions. SME customers also require a top class retail banking service for the owner and employees of the company. These products should be offered as packaged solutions, allowing fast and flawless delivery.
Small business owners/managers also often need non-financial support, in the form of advice and professional services, to help them achieve the next stage of development of their company. Training and education is therefore a vital part of the service offered to our SME client base. These initiatives range from organising awareness sessions for SME customers on products such as trade finance and treasury management to partnering with local and international organisations to develop specific SME toolkits, e.g. for writing business plans. These initiatives not only help SMEs move up the corporate curve, but also result in financial benefits for the bank by strengthening the customer relationship and improving the financial standing of the SME customer.
The need for speed
For a typical SME customer, the speed at which banking services can be made available is as important as other elements such as price or security to be provided. SMEs typically need banks to help them manage their cash or trade cycle or to finance an urgent capital expansion. With their limited access to the banking systems, SMEs need their banks to respond swiftly when they need them.
To allow banks to respond quickly to the requests of their SME customers, policies, procedures, processes and systems need to be set up correctly across the complete value chain. Firstly, banks need to change their credit evaluation approach for SMEs, as conventional approaches either do not work for SMEs or are too slow and cumbersome. At Saudi Hollandi Bank (SHB) this manifests itself in an increased focus on parameterised lending, a simpler application and approval process, standardised documentation and decentralised sales teams for SMEs, operating close to the customers. Secondly, banks need to change their operational processes to support the scale required to bank SMEs. At SHB we have replicated a retail banking operations infrastructure and equipped it to deal with small- and medium-sized corporate customers. Thirdly, banks need to manage their SME business on a portfolio basis, looking at retail-type risk indicators rather than a corporate risk management approach. Lastly, banks also need to manage collections tightly, given the increased risk of failure for SMEs and the absence of sizeable assets. In short, banks need to completely change their modus operandi in order to successfully service their SME customers.
Banking and government
Financial markets for SMEs are far from perfect, which impels governments around the world to try to address the perceived imperfections. Offering loan guarantees or providing SME funds from the central budget are examples of government initiatives. The role of governments in setting policies for the development of the SME sector, however, goes much further than the support for specific funding schemes. In fact, government departments responsible for fiscal policy, justice or employment law may well have an equally great impact on the availability of SME financing as those setting specific SME policies. Examples include favourable labour laws for SMEs, setting up or developing efficient credit information facilities, and well-functioning property and contract law frameworks.
In the Kingdom of Saudi Arabia, the government has clearly realised the importance of its role as a catalyst towards developing this key economic sector. This is not only visible in the very successful Kafala guarantee scheme, but also in the wide range of initiatives supporting both the banks and the SME sector. A good example of these is the special SME service ‘Taqeem’ offered by the Saudi Credit Bureau, SIMAH. Through Taqeem, banks get access to reliable credit scoring data, which greatly facilitates the evaluation of potential
In spite of the important role to be played by the government, it is important that banks continue to consider SME banking as a genuine business. When done right, SME banking is not only beneficial for the SMEs themselves and the country as a whole, but it also provides a profitable and sustainable business for the banks involved.
The importance of SMEs for an economy cannot be overstated. A well functioning and strong economy needs a well functioning and strong SME sector. Adequate finance is essential for the further development of the SME sector across the world, but particularly in the MENA region and Saudi Arabia. By focusing on providing the right service in the right way and by cooperating with the government, banks can equip themselves to ensure access to finance for SMEs. This will not only facilitate further development of the SME sector, it will also provide a sustainable business for the banks.
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