Commercial banks are lending more to small and medium enterprises (SMEs) but poor record keeping is costing the businesses as they face higher collateral requirements, a new African Development Bank (AfDB) survey has showed.
The study, which covered commercial banks in Kenya, Uganda, Tanzania and Zambia-- shows that commercial banks in Kenya have been the most aggressive in providing banking services to SMEs.
According to AfDB, Kenyan banks had the highest average loan exposure to SMEs and also displayed the highest deposit ratio than any of the other countries that participated in the survey.
All commercial banks across the four countries said they were lending to SMEs due to their profitable business prospects.
The lenders also said SMEs provide an important opportunity for cross-selling financial products, even though they are more informal and tend to be more risky clients when compared to large corporates.
“Banks in the region seem to have embraced the SME segment enthusiastically and are making substantial investments to develop their relationship with SME clients,” said AfDB in the report released towards the end of last month.
The report, which also notes that majority of commercial banks are still using risk mitigation procedures that are slow and cumbersome, says that banks in the region are looking to improve their evaluation of the businesses so as to effectively tap into the sector.
Commercial banks in Kenya have over the past two years increased their borrowings from large international lenders for onward lending to SME’s.
“The informality of SMEs came out as the main reason why banks in the region require SMEs to lodge security relative to corporate clients, according to 56 per cent of the sampled banks,” said AfDB.
Collateral requirements for SME loans are higher than for consumer loans and credit risk more difficult to evaluate, according to 63 per cent of the lenders.
In February, I&M Bank announced that it will be getting foreign currency denominated funding through an agreement with German investment and development company, DEG, allowing for the extension of a five-year credit line of Sh1.26 billion ($15 million).
Consolidated and ABC Banks announced that they would get funding from the European Investment Bank - to a tune of Sh1.5 billion.
Equity Bank received a Sh2 billion loan in January from a German development lender, Kfw, which will allow it to offer low-cost credit to small and mid-sized businesses in dollars.
Josephine Gathuri, regional director for Sub-Saharan Africa Scorto Corporation, a global risk consultancy firm, said that many lenders are still using outdated and labor intensive methods to process loan applications, and qualify borrowers.
The Eastern and Southern African Trade and Development Bank (PTA Bank), last month signed up with Scorto to help it appraise small business lending.
“While some lenders have portfolio management programmess in place, many still do not,” said Ms Gathuri.
Ms Gathuri said the use of outdated and time consuming models leads to extensive lead times in making a decision on a loan, missed opportunities in customer satisfaction and profitability, and in some cases, minimal profits and excessive risk in an organisation’s loan portfolio.