The art of understanding an SME

Small and medium enterprises (SMEs) - informal and formal - continue to mushroom almost daily on the continent, but most of them find it difficult to survive due to banks' lack of understanding of the sector.

Spending time with SMEs

Speaking at the Africa SME Banking conference in Johannesburg this week, Amrei Botha, head of SME Banking Africa at Standard Bank, said financial institutions need to personally spend time with SMEs in their premises to understand their businesses end-to-end.

"Create time to observe, to listen and to learn from SMEs. Give senior executives in the organisation the opportunity to 'experience' SMEs in Africa for themselves," she urged.

Botha was speaking at the Sandton Sun Hotel in Johannesburg. The three-day SME conference is being hosted by the International Finance Corporation (IFC), a member of the World Bank Group, in collaboration with the Austrian Development Bank and the Netherlands Government. Botha said engaging with 'influencers' and governing organisations in one's selected markets will eventually help to understand and unpack the value chain of SMEs.

Johannesburg-based Standard Bank, which operates in 33 countries in the world, including 17 in Africa, is the continent's largest bank in terms of market capitalisation and assets. Standard Bank said it has established SME banking in 13 African countries, providing services to about 130 000 SMEs, and hoping to treble that figure over three years.

Appear informal and chaotic

"Most banks have for a long time neglected these markets because they appear informal and chaotic. But our experience on the ground is that once you enter them, you actually see that there are indeed structures and that they are in fact bankable," she explained.

"We have seen a huge appetite for the kind of lending that we are doing. It is only when you have that understanding that you can appreciate the huge opportunities that this market offers."

IFC senior manager (access to finance) Peer Stein told delegates that between 75 and 80% of formal SMEs in emerging markets that are unserved - do not have credit but need a loan - have a deposit account. Stein also said that the top five banks serving SMEs in each region collectively reach 20% of formal MSMEs in emerging markets, corresponding to between 17 and 19 million MSMEs.

The conference also heard that many banks found that SMEs are likely to be loyal clients when they feel the breadth of their needs have been understood and met.

Furthermore, Botha said Standard Bank came to terms with the following factors when it ventured into SME lending:

• There is no 'silver bullet' solution
  
• The organisation has to be willing to lose some money in order to learn
  
• The organisation must be committed to the cause for a pre-determined period of time (and amount) in order to give itself a fair chance
  
• Equally important to risk mitigators is pricing and processes
  
• The organisation has to re-invent itself and how it does business
  
• Success lies in execution which is ultimately measured in terms of turnaround times, losses and repeat customers.
  
• Scalability and sustainability has to be part of the design from inception.

For more information, go to www.ifc.org.