It can be said that the small- and medium-sized enterprises (SMEs) sector has traditionally been treated as something of an afterthought by many banks in Egypt. This point was illustrated in a recent survey, which showed that lending to the SME sector amounted to only 5 percent of total lending in Egypt.
But as competition intensifies, and as margins are being eroded in other banking sectors, a number of banks and financial institutions across the Middle East are now starting to rethink their strategy towards SMEs. However, as they do so, many of them are finding that they need to take a different approach from their normal way of doing business in order to tap into this market segment profitably and effectively.
Balancing risks and rewards
A major concern banks have had with the SME sector revolves around how to boost their profit levels without increasing their risk exposure at the same time. Unfortunately, up until now they have been hampered by poor or limited credit information sources (e.g. credit registries, private credit bureaus), both internal and external. In addition, it has also been difficult for banks to achieve the same profit margins lending to SMEs as they do in other sectors since working with the SME sector is more service intensive, as it entails providing many small loans to many different enterprises.
To make matters worse, banks’ concerns about SMEs appear to have been justified during the recent financial crisis, when a number of them suffered non-performing loan rates of over 25 percent in their SME lending portfolios. With the high level of risk associated with SME lending, many banks must have wondered if the segment can ever be profitable enough for them to justify lending to it.
So, what actions are banks taking to successfully change this situation?
Firstly, banks are trying to reduce the cost of providing services to SMEs by developing economies of scale through more automation of loan procedures and standardized decision making. This can be done through activities such as implementing automated credit card scoring systems (fewer than half of the banks in the Middle East currently have any form of automated credit scoring system in place). The challenge here is to ensure that automation and centralization still allow for banks to maintain strong branch-based relationships with SMEs in their communities.
Another key area banks have been focusing on is how to provide the face-to-face interaction the SME sector requires in a more cost efficient manner. There are a number of strategies being deployed towards this end.
Some banks are achieving this cost efficiency by subdividing their dealings with the SME segment. For example, one bank in Saudi Arabia operates regional call centers dealing with sales and service for their smaller business clients, while the medium-sized, more profitable accounts are offered more traditional relationship management services.
Other banks are tackling this issue by concentrating on growing and refining their SME telephone banking services. In these situations, often the SME client is offered the desired continuity over the telephone, with the bank nominating and guaranteeing a specific relationship manager for a fixed time period (for example, two years).
While the importance of call centers to the SME market is growing globally, branches still remain an important means for most banks to target SMEs. In these cases, SME banking strategy has often focused upon banks converting some of their retail branches (sometimes as many as 20-30 percent) into more targeted SME banking centers, particularly in areas with high SME concentrations.
To successfully target SMEs, banks need to adapt what they are offering, taking into consideration each phase of growth for their clients. Ultimately though, to balance the risks and rewards banks will need to deploy more effective methods of providing products and services to SMEs. The rewards will be greatest of all for those banks that can leverage their strong relationships with SME clients as these customers progress through their development.
Andrew McCartney is a Senior SME Banking Specialist within IFC’s Banking Advisory Services Program, and he covers the Middle East and Europe. He recently helped establish an SME bank in Central Asia, and he has worked on numerous institution building programs with local and regional banks committed to developing their SME banking businesses. This article was written exclusively for Daily News Egypt.
The findings, interpretations and conclusions expressed in this article are the author’s own and do not necessarily reflect the views of IFC, a member of the World Bank Group.
Source: “The Status of Bank Lending to SMEs in the Middle and North Africa Region: The Results of a Joint Survey of the Union of Arab Banks and the World Bank,” June 2010