The State of SME Banking in Africa
In the context of EIB’s Africa Day, the EIB in partnership this year with UNIDO, officially launched its study of banking in Africa on Thursday November 22nd in Addis Ababa. This blog post presents some of the key findings EIB survey of banking groups in sub-Saharan Africa (SSA) with particular emphasis on questions related to SME financing. The survey covered 25 pan-African banks.
Strategic market focus of banks: large multinationals, large local companies, retail clients or SMEs? Three salient results came out of responses to this question. First, SMEs are reported as the main strategic focus by 60% of banking groups. This reflects in our view intensifying competition in many SSA banking markets, which is incentivizing banks to move out of their comfort zone and to maintain profitability by going after new borrowers.
Retail clients are now the next most important strategic focus for banking groups in SSA and are reported as most strategic by 30% of banking groups. This share has risen remarkably since 2016, reflecting the growing reliance by banks on deposit financing. This rising strategic focus on retail clients is also reflecting a growing tendency of savers to entrust their savings with banks. It implies an opportunity in terms of helping individuals to save and for banks to lend more in local currency.
However, the issues of funding stability and consumer protection are also becoming more prominent with rising reliance on deposit financing.
Surveyed banks reported being less focused on large multinationals and large local companies going forward. Large multinationals are not mentioned anymore as a strategic focus by banking groups in our survey while banking groups focusing on large local companies have decreased from 25% to 10% of respondents. This may reflect the intensification of competition in lending to these segments, and the relative increase in opportunities in the SME and retail segment.
Main barriers to financing SMEs. More than one third of banking groups reported that the lack of collateral of sufficient quality was the main obstacle to SME lending in the region. Another third of the banking groups reported that it was the high rate of default. These figures suggest that portfolio guarantees are an important tool for development partners to support bank lending to SMEs. Indeed, 45% of banking groups report their needs are met, indicative of increased availability of such products, from various development partners, including the EIB. However, half of the banking groups report that their needs are either partially met or largely unmet, indicative of a large untapped market for portfolio guarantee tools. Clearly, there is a need to design and deploy competitive and effective portfolio guarantee products. This is a potentially very important policy option for development partners, especially if accompanied by relevant capacity building programmes that help boost managerial capacity within targeted SMEs.
Indeed, the lack of managerial capacity was the third most important obstacle to financing SMEs, cited by 17% of respondents. This suggests that technical assistance targeted towards developing SME management capacity both in terms of financial and business skills enhancement can in itself be an important tool at the disposal of development partners. The EIB is already running such capacity building programmes in Southern and Eastern Africa. These provide for capacity building initiatives both at the level of the financial intermediaries as well as for their final beneficiaries. In East Africa over 200 capacity building activities were carried out between 2014 and 2018 with over 9,000 participants being trained, these being the staff and clients of 30 EIB financial intermediaries. These encouraging results coupled with strong demand expressed by EIB clients explain why the EIB will be deploying in 2019 a similar technical assistance facility in West and Central Africa.
Demand for loans in local vs foreign currencies. Remarkably, 30% of banking groups report that demand for loans in local currencies is growing above market trends, 70% in line with market trends. This indicates that credit lines to banking groups is local currency do meet strong demand from local banks and are a very important instrument to help banks lend to local economic players with revenue streams in local currency. Demand for loans in hard currency (dollars, euros, etc.) is also noticeable although less remarkably. These results indicate that credit lines in hard currency are still relevant for at least some clients, presumably those with revenue streams in hard currency such as exporters and importers and, of course, multinational corporations. In conclusion. We are observing a rising level of competition which is pushing banks operating in SSA to step out of their comfort zone and to get more serious about lending to SMEs. Having said that, in the World Bank’s Enterprises Survey, the unavailability of loan is still cited by a large share of SMEs as their main obstacle to expanding their business. Given the challenges faced by banks to offer loans to SMEs, the banking groups we surveyed indicate a need for more local currency lending and portfolio guarantees. Development partners will need to meet this demand if lending to SMEs is to be further expanded without putting too much currency or credit risk on the balance sheet of local banks.
Another way partners like EIB contribute to the financial stability of local banking groups is by offering longer tenors, allowing banks to reduce risk related to maturity transformation and facilitating lending for more productive investment purposes. In addition there is more that can be done than just the provision of longer term funding: capacity building initiatives can be stepped up to enhance the creditworthiness of SMEs, not just to improve their access to finance but also to make more productive use of bank financing and enable them to punctually meet their debt service obligations. There are no shortages of opportunities to make SSA’s banking sectors more inclusive and to increase their contribution to development. Looking ahead, challenges also abound. As first-time depositors and borrowers expose themselves increasingly to the banking sector, much is at stake. Should depositors lose their savings in a bank run or should borrowers suffer from over-indebtedness, progress could go in reverse for an unpredictably high number of years. On the banks’ side, rising non-performing loans (NPLs) raise concerns about the sustainability of the rapid deepening of SSA’s banking sectors.
As the global business cycle becomes less supportive and banks reach out to riskier borrowers, there is a need for banks to up their game in terms of governance and risk management. Development partners, including the EIB, need to support local banks in their efforts to meet these challenges, including via the provision of appropriate technical assistance targeting risk management and compliance skills of bank staff.
About the Authors
Jean-Philippe Stijns is a Senior Economist at the European Investment Bank (EIB), responsible for sovereign and banking sector risk rating in Central African countries, supporting EIB’s operations in the corresponding countries. He is the coordinator of and a contributor to EIB’s annual Study of Banking Sectors in Sub-Saharan Africa. He also coordinates EIB’s survey of African banking groups. Prior to joining EIB, Jean-Philippe held positions at the IMF’s Africa Department, with the OECD’s Development Centre, as an Investment Strategist for ING, and as an Assistant Professor of Macroeconomics and International Economics at Northeastern University. While working at the Development Centre, he contributed to the African Economic Outlook.
Adeline Pelletier is a lecturer in Strategy at the Institute of Management Studies. Previously, she was Assistant Professor in Business Administration at Instituto de Empresa (2015/16) and postdoctoral researcher affiliated to the Centre for Economic Performance at the London School of Economics (2015). She also holds an MPhil in Development Studies from the University of Cambridge (2011) and an MPhil in Economics from Sciences-Po Paris (2006). She has worked in both public and private financial institutions. She started her career as an economist at the Banque de France in the African Franc Zone and Development Financing department. She subsequently worked in investment banking as an Economist at HSBC in Paris and then as an Equity Research Associate at Societe Generale in London. She has carried out consulting work for the OECD, the U.K. Department for International Development (DFID), the African Development Bank (AfDB), and for Ashoka, a nonprofit supporting social entrepreneurs.