SME financing – Commercial banks vs micro-finance banks
The level of commercial bank funding in Nigeria to MSME s over the years has dropped from a high of 46 % of their total loan portfolio in 1992 to less than 1 % in 2012. It seems that some of this slack has been picked up by micro finance institutions. Following the guidelines for microfinance in Nigeria, there was a proliferation of players in that space such that there are currently over 800 micro finance banks in the country today. Whilst commercial banks’ lending to MSMEs have dropped, lending by microfinance banks has grown exponentially.
The microfinance institutions have devised some strategies to penetrate this segment of the market, and perhaps the commercial banks can learn a thing or two from these micro finance banks about reaching those at the bottom of the pyramid.
1. Commercial banks must realise that a large percentage of micro entrepreneurs in Nigeria are involved In the Agriculture value chain. So they require prompt financing to coincide with the seasonality of the commodities they deal with. This presupposes an understanding of those commodities by the potential lender. Microfinance banks seem to have built considerable knowledge of the businesses that they finance. Often times, banks jump into sectors they don’t understand, – a sort of herd mentality- and invariably they lose money. If commercial banks want to serve this segment profitably, they need to get involved in what most of them are involved in- the agricultural value chain.
•Most small business owners don’t require bankers in the strict sense of it, rather they require partners. The micro finance bank loan officers visit the borrowers every week, at their market place and in their homes. They know their children, they know their borrowers customers, and they know their buying and selling patterns. Commercial banks must move KYC beyond mere filling of forms, but must really strive to know their customers, especially the micro and small businesses.
•Every business, especially small businesses requires funds that are able to comfortably cover their cost of operations and earn a decent profit. There is no point earning interest income and making the borrowers bankrupt in the process. This proposition would not be sustainable for the bank or the customer. Whilst a number of people have criticised the micro finance model of charging interest on a monthly basis, they have devised means whereby the borrowers are able to pay back without really feeling the interest burden by spreading it out over a period.
•Micro finance banks realise that every sector’s client base is different. So, they design products that cater to the peculiar needs of women, traders, fishermen, farmers, e.t.c. They take product development very seriously as that is what will differentiate them from their larger competitors. Commercial banks must go beyond tweaking the traditional current and savings account products and devise products that address individual groups and sectors.
•Microfinance banks have also created value to themselves and potential borrowers through the cooperative based lending model. This model has a number of advantages; firstly, it reduces their cost of administration and monitoring, because they are able to bunch intending customers into one group overseen by a loan officer.
Secondly, it offers an inbuilt repayment mechanism, because each member of the cooperative group acts as a check on the other borrowers.
•Another area where commercial banks can learn from micro finance banks is in the area of business support services. For most micro finance bank borrowers, they are not given loans on the first day of applying. They have to go through some sort of business development training. The micro finance banks pair these potential borrowers to business trainers; they attend weekly meetings where they learn things like book keeping, marketing, e.t.c. The micro finance banks don’t view this expense as a cost, but as an investment into the future repayment capacity of the borrowers. Their philosophy is that lending to this segment of the society must go hand in hand with business development training.
Of course, there are also areas that microfinance institutions can learn from commercial banks as they seek to profitably serve the bottom of the pyramid.
The most important thing though is for both set of institutions to realise that they need to work together and not against each other in order to share information, share experiences, finance joint customers and perhaps share infrastructure to bring down the overall cost of lending to this segment.
The MSME segment is arguably the most important in the economy for the potential they have to create jobs, increase wealth formation and lift many out of poverty. Institutions In the financial service industry must continue collaborating to profitably serve this segment.
Oguche Agudah