The importance of the sme segment to banks in developing countries a perspective
1 / 10

The Importance of the SME Segment to Banks in Developing Countries A Perspective - PowerPoint PPT Presentation

  • Uploaded on

The Importance of the SME Segment to Banks in Developing Countries A Perspective. New Technologies for Small- and Medium-Size Enterprise Finance Washington, DC Hany A. Assaad December 4, 2002. Globalization of the Financial Services Industry .

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'The Importance of the SME Segment to Banks in Developing Countries A Perspective' - bernie

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
The importance of the sme segment to banks in developing countries a perspective l.jpg

The Importance of the SME Segment to Banks in Developing CountriesA Perspective

New Technologies for Small- and Medium-Size Enterprise Finance

Washington, DC

Hany A. Assaad

December 4, 2002

Globalization of the financial services industry l.jpg
Globalization of the Financial Services Industry Countries

  • Globalization and technology are fundamentally changing the financial services industry worldwide

  • Competition has accelerated and is fierce for “best credits”/corporates in most countries

  • New competitors have entered the market

  • Margins and fees are narrowing significantly

  • Development of securities markets is disintermediating banks

  • Impact on domestic Financial Intermediaries (FIs) of deregulations, mergers/acquisitions/consolidations, global networks/alliances, universal banking

Globalization of the financial services industry3 l.jpg
Globalization of the Financial Services Industry Countries

  • In Emerging & Transition Economies:

  • Historically:

    • limited competition, banks not under pressure to target the underserved

  • Today:

    • growing competition, FIs have incentive to tap new markets

    • Need to diversify portfolio

    • Is the SME market profitable?

Commercial and Retail Market




“A” Clients



Small Businesses, Microenterprises &


Underserved Market

Fis facing the choice the sme market l.jpg
FIs facing the choice: The SME Market Countries

  • Too many FIs are focusing on the top tier corporate sector

  • In many transition and developing countries, banks are awash with deposits

  • SMEs are perceived as high risk and high cost

  • For many governments the development of SMEs is crucial for economic and social development (growth, employment, innovation)

Impediments to target the sme market l.jpg
Impediments to target the SME Market Countries

  • Many FIs lack strategies & skills to tackle impediments associated with SME finance

  • Evaluating SME risk is “too labor-intensive” to be profitable

  • Inappropriate products & services (rigid, supply-driven)

  • Inflexible credit criteria – one size fits all

  • The need for collateral-based lending

  • SMEs have small transaction sizes and in many countries cash transactions  costly for FIs

Characteristics of smes l.jpg
Characteristics of SMEs Countries

  • SMEs constitute the most dynamic segment of many transition and developing economies (more innovative, faster growth, possibly more profitable)

  • Formal vs. informal, wide variety of industries and activities

  • Only a small portion (~5-10%) of small businesses want to grow – the rest want to remain a certain size

  • Many SMEs are in the service industry low level of fixed assets

  • SMEs have on average a lower ratio of fixed assets to total assets and a higher level of working capital  long-term debt is not the solution

  • Accurate accounts or financial position are difficult to get

  • Failure rate of is high in early years of new businesses

  • Small firms and micro-entrepreneurs tend to limit their financial service provider to one financial institution  relationships with FI are important  captive clients for range of financial services

  • In many communities, reputation of the entrepreneur is important  reputation collateral?

Paradigm shift in financial services for small businesses l.jpg

Paradigm Shift in Financial Services for Small Businesses

  • Shift from product focus to customer focus

  • Shift from providing credit to a “package” approach, i.e. distributing a range of financial services and serving as a payment intermediary

  • Application of consumer finance techniques to the small business sector

  • Portfolio approach with mass-customized financial services

  • Rely on financial, information and communication technologies to develop new products and services and manage information-intensive distribution, service delivery and portfolio management

Pre requisite the enabling environment l.jpg
Pre-requisite: The Enabling Environment Countries

  • Countries that encourage entrepreneurship and SMEs seem to have higher economic growth  many governments and development institutions have programs to encourage the development of the SME sector as part of strategies for economic growth and poverty alleviation

  • Under-developed financial and legal systems and corruption have a significant negative influence on the size, growth and profitability of SMEs  breadth and depth of financial system contributes significantly to the development of SMEs

  • Protection of creditors’ rights

  • Property rights and collateral enforcements

Sme finance what do fis need to do l.jpg
SME Finance: What do FIs need to do? Countries

  • Segment the market and build up in-depth knowledge of SME clusters, identify good potential customer groups, understand their needs

  • Reduce cost of acquisition of new customers & retain credit-worthy customers

  • Develop wide range of demand-drivenproducts& services, offer a range of tailor-made (mass-customized) financial services (credit, savings, transactions/payments, life cycle products)

  • Maximize profit contribution per customer not per product

  • Develop multi-channel networks for delivery of products & services

  • Use of advanced, cost effective tools for comprehensive risk management

  • Reduce cost of delivering the best possible service = quality at low transaction cost

  • Align organization structure to target market and train staff

  • Develop efficient integrated MIS systemsby leveraging on appropriate technologies and focusing on maintaining cost of technology

  • Focus the branch network on marketing and sales and client relationships

  • Good governance and transparent reporting and adhere to highest environmental & social standards

Conclusion l.jpg
Conclusion Countries

  • Opportunity:

    • Large underserved market Potential for significant growth

    • Leverage financial, information & communication technologies to reduce transaction costs and improve portfolio risk management thus expanding services to SMEs profitably

  • Benefits to the FIs:

    • Potentially profitable(e.g. ROAA of 3% and higher for leading US small business lenders)

    • Risky but manageable(e.g. write-offs below 4% for leading US small business lenders)