Financing SMEs in Africa: Challenges and Options THORSTEN BECK
Financing Africa:Through the Crisis and Beyond THORSTEN BECK, SAMUEL MUNZELE MAIMBO, ISSA FAYE AND THOURAYA TRIKI
Share of SMEs in Manufacturing 100 0 10 20 30 40 50 60 70 80 90 Belarus RussianCameroon Zambia Mexico United Brazil Croatia Estonia IrelandDenmark Do SMEs matter? Japan Share of SMEs across Countries Italy Greece SME250
Do SMEs cause growth? Although there is a positive and strong association between SMEs and growth in GDP per capita, this is a correlation, not a causal relationship A large SME sector is a characteristic of fast-growing economies but not a cause of their rapid growth SMEs may face greater growth obstacles, e.g. difficulty accessing external finance. A larger SME sector does not necessarily indicate a dynamic SME sector, but rather may be reflection of poor business environment where firms cannot grow In some environments it may be optimal to remain small. We care about new entry and growth potential of SMEs!
SMEs, entry and exit of firms Average value added 1,600,000 1,400,000 United Kingdom 1,200,000Value added (usd) 1,000,000 800,000 Italy 600,000 400,000 200,000 - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Age of the firm (years) Source: Klapper, Laeven and Rajan (2006)
What is an SME? Different segments to be distinguished Microenterprises: informal, household- or family based Small enterprises – formal; often “missing middle” Medium-size enterprises: aspiring, export-oriented etc. Different segments, with different needs and challenges
Access to finance – the size gap Share of firms with deposits Share of firms with a line of credit 10060 80 6040 percentage 4020 20 0 0 Africa Rest of the world Africa Rest of the world small(<20) medium(20-99) small(<20) medium(20-99) large(100 and over) large(100 and over) Sample size: 90 countries Sample size: 90 countries Source: Enterprise Survey 2010 Source: Enterprise Survey 2010
Landscaping African finance SME finance part of the overall challenging financial sector agenda in Africa African financial systems characterized by Small scale Bank-based Short-term Costly Concentrated and non-competitive
Small scale… Size of Banking Systems across Countries1510 5 0 Rest of the World African Countries Sample size: 154 countries Time period: 2009 Source: World Bank’s Financial Structure database 2009 Note: The highest African values are for Egypt, South Africa, Morocco, and Algeria
…and little intermediation Loan-deposit ratio and liquid liabalities to GDP in 20093 NGA2 GAB ZAF TGO TUN1 AGO MAR TCD ZMB MUS MLICIV TZA SEN BDI SYC BFA BEN KEN NERUGA MDG CPV CMR SLE MOZ LSO ZAR MWI GNB BWA EGY COG DZA0 0 .5 1 1.5 2 liquid liabalities to GDP Africa All Other Regions Sample size: 133 countries Time period: 2009 Source: MFWA Financial Structure database 2009 Country abbreviations are included in the abbreviations list at the front of the book.
…and costly Net Interest Margins across Regions Africa East Asia & Pacific Europe & Central Asia High-income countriesLatin America & Caribbean Middle East South Asia 0 .05 .1 .15 .2 Net Interest Margin Sample size: 134 countries Time period: 2009 Source: World Bank’s Financial Structure database 2009 The minimum, maximum, and median of the ratio of offshore to domestic bank deposits The shaded boxes show the interquartile range.Outliers have been omitted (highest 5th percentile).
Banking markets are concentrated and non-competitive Lerner Index .6 .4Lerner index .2 0 -.2 Rest of the World African Countries Sample size: 80 countries Time period: 2006 Note: The Lerner index is the relative markup of price over marginal cost.
Why are SMEs left out? Transaction costs Fixed cost component of credit provision effectively impedes outreach to “smaller” and costlier clients Inability of financial institutions to exploit scale economies Principal-agent problems Related to asymmetric information Adverse selection: High risk borrowers are the ones most likely to look for external finance Increases in the risk premium raise the risk of the pool of interested borrowers Lenders will use non-price criteria to screen debtors/projects Moral hazard: The agent (borrower) has incentives that are inconsistent with the principal’s (lender) interests Agents may divert resources to riskier activities, loot assets, etc.
Access to credit: A conceptual framework Access Possibilities Frontier (APF): constrained optimum; maximum access to credit given “state variables”: macroeconomic environment, contractual and informational framework, technology etc. Define observed access relative to APF: Self-exclusion/too few investment projects Outcome below APF: lack of competition, regulatory constraints, lack of appropriate lending techniques etc Outcome above APF: excessive, imprudent access APF too low: state variables
Supply or demand-side constraints? Do you have a loan? Region yes no Africa 22.44 77.56Rest of the World 47.59 52.41 Did you apply for a loan? Region yes no Africa 22.82 77.18 Rest of the World 40.01 59.99
Supply or demand-side constraints? (2)Why did you not apply? Africa Rest of the world no need for a loan - establishment has sufficient capital 40.8 64.44 application procedures for loans or lines of credit are complex 17.96 6.51 interest rates are not favorable 16.74 12.48 collateral requirements are too high 9.55 5.18 size of loan or maturity are insufficient 2.25 1.68 it is necessary to make informal payments to get bank loans 5.69 1.75 did not think it would be approved 6.92 6.42 other 0.1 1.54
Empirical findings Lower access to and use of credit in Africa reflected in both lower share of firms with credit and lower share of applications Little evidence for self-exclusion Important role for supply side constraints: Macroeconomic environment Contractual framework Applicati0n procedures
How to close the SME financing gap Competition is key for the financial innovation New providers Government’s role: allow entry, but also force cooperation in infrastructure Focus on the necessary services and look beyond existing institutions Service provision should be priority Look beyond banks to NBFI Look beyond stock exchanges to private equity Focus on users, looking beyond supply constraints Supply constraints only part of story SMEs: business environment; turn investment into bankable projects
Competition as key for financial innovation Competition is key for innovation that is necessary for broadening financial systems Reap potential benefits of technology New lending techniques New players Foreign banks can bring experience and capacity NBFI and non-financial corporations can expand overall scale and thus bring in more competition Look beyond organized capital markets to OTC, private equity etc. Level playing field – open infrastructure to all safe and sound players Might imply an activist government role Relates to credit registries, payment system etc.
Expanding products and players Leasing: Lending based on value of specific collateral provided by borrower rather than overall creditworthiness of borrower. Better security since lessor is owner of asset Dedicated use of funds Tax advantages Factoring: Sale of accounts receivable at discount Does not rely on good collateral laws or efficient judicial systems Reverse Factoring allows small, risky firms with large high-quality buyers to transfer credit risk and borrow on the credit risk of customers Private equity funds: problem of too much debt, not sufficient equity in most SMEs in developing countries But: demand-side constraints Other innovations: Combine lending with extension services (Nigerian bank) Step-up lending (Banque Misr) Psycohmetric credit scoring (South Africa)
Look at demand-side constraints Financial literacy Financial awareness of products and options Financial capability Accounting and auditing standards Business development services – turn investment into bankable projects Don’t ignore non-financial constraints
The role of governmentA mix of modernist and activist policies Competition Enable entry, domestic and foreign Might have to force providers to share infrastructure Move from retail to wholesale role Looking beyond institution building Space for activist policy a function of governance, size etc. Partial credit guarantee schemes? How to nurture innovation? Challenge funds
One size does not fit all Low vs. middle income countries Large vs. small economies Civil vs. Common Law countries Post-conflict countries Resource rich countries Densely vs. scarcely populated countries…
Conclusions Although SMEs do not cause economic development, they are a crucial part of the private sector and suffer more from market and institutional failures In order to understand access problem, consider different constraints and resulting policies Competition can foster the necessary innovation to expand Different providers have important roles to play (foreign and domestic banks, NBFIs, MFIs, equity funds etc.). One size does not fit all Government has role to play, both in developing and enabling markets Banks and NBFIs have to play their role, adjusting business models etc. Demand-side constraints should not be ignored!
Thank youComments and suggestions?T.Beck@uvt.nl