This paper was presented at the Future of SMEs Banking Conference organised by Business a.m on 27th November, 2019 in Lagos. For SMEs to be able to play the role of engine of growth, Banks and other financial services provider need to be creative in managing funding and credit risks.

1. MANAGING THE RISKS IN SMEs
FINANCING IN NIGERIA
DR. EMMANUEL MOORE ABOLO
DG, The Economic Thinktank Centre Limited
President, Professional Speakers Society of Nigeria
GMD/CEO, The Risk Management Academy Limited
08021003297; 09071941111; aboloemma@gmail.com; mail@drabolomoore.com
abolomoore@yahoo.com

2. OUTLINE
• Quotable Quotes
• What Type of SME Financing is Needed?
• Challenges to SME Funding
• DFIs: Beyond Financing
• Approaches to SME Banking
• Risk Models Can Add Value to Risk Management In SME Lending But They
Are Not Infallible
• A Forward-looking Risk Management Function Needs To Link Risk
Measurement & Strategy
• How Banks Can Raise Their Game In Small Business Lending
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3. Small and medium-sized enterprises (SMEs) play an important role in the
world economy and contribute substantially to income, output and
employment. However, the recent global financial crisis created a
particularly tough climate for SMEs, with a reduction in demand for goods
and services and a contraction in lending by banks and other financial
institutions.
---------------------------Edinburgh Group
Assessing the credit risk of small and medium size enterprises (SMEs) is
one of the most challenging tasks in banking. The difficulties stem from
fragmented financial data, the strength of risk models, length of the
process, and broader issues such as the tension between sales and credit.
The competitive lending environment, regulatory requirements, different
geographies, and positions in the economic and credit cycles also have an
impact.
--------------------------Moody’s Analytics
QUOTABLE QUOTES
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4. SMEs in Africa: The Missing Middle
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5. Missing Middle Financing Gap in Africa
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6.  Funding gaps for smaller firms are a major impediment to growth. Wide variance in the
profitability, survival and growth of SMEs compared to larger firms brings special
financing problems.
 Owners and managers of smaller firms often lack commercial experience and/or track
record as entrepreneurs. Early stages of growth are marked by uncertainty both in
production and marketing.
 Smaller, innovative firms operate in environments of high complexity and rapid change
and rely heavily on intangible assets.
 SMEs often have trouble obtaining financing because banks and traditional lending
institutions are averse to risky ventures.
 Expansion of private equity markets is greatly improving access to venture capital for
SMEs, but there are considerable differences across countries.
 Fostering an adequate flow of financing for small firms is a crucial step in
enhancing entrepreneurship and creating a vibrant economy.
What type of SME financing is needed?
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7.  The small business lending process at most banks today is highly manual and conducted
across a multitude of unintegrated systems. This results in a small business lending
operation that is inefficient, inconsistent, and expensive.
 The challenges generally fall into two categories: data and process problems.
 With respect to data, these challenges exist:
 The credit information vendor market is fragmented, meaning financial providers and
small businesses do not have a single source of credit information to meet their
growing need for quality data.
 Banks use manual, time-consuming, and antiquated processes for collecting
information from prospective borrowers.
 Once information is gathered, underwriters or credit managers spend significant time
reconciling and merging data from various sources.
 Often, information on the credit risk of the owner or proprietor of a small business is
used as a proxy for the risk of the business.
 Existing scoring models that are heavily weighted to consumer data lack credibility
at levels above micro-businesses and generate high levels of manual overrides.
Challenges to SME Funding
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8. Even when lending decisions are made, a gap remains in terms of systems
needed to document, monitor, and report on portfolio performance:
 Banks may encounter challenges through every step of the lending cycle, from
information-gathering through monitoring and portfolio management.
 Small businesses also face a unique set of challenges that make the process
of getting credit difficult, including:
 Lack of knowledge of their credit risk and how they can improve their
business credit standing.
 Opacity of banks’ credit assessment process and expectations.
 Inconsistent requirements among banks in terms of the lending process,
necessary data, and documentation.
 Difficulty in maintaining current and accurate financial reporting due to
manual processes and lack of expertise.
Challenges to SME Funding
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9. Traditional Approach to SME Banking
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10. DFIs: Beyond Financing
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11. DFIs: Beyond Financing
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12. Components of Sound Credit Risk Management Process
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13. Credit Risk Management in SME Lending
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14. Risk assessment of SME borrowers
presents some unique challenges …
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15. PAIN POINTS FACED BY BANKS IN THE SMALL BUSINESS LENDING PROCESS
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16. Risk management has traditionally relied on relationship
lending for this segment and this is not likely to change…
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17. If banks are to be successful in the SME segment, there is a need to ensure that
internal processes and strategic business objectives are aligned …
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18. Alignment of internal process starts with a segmentation approach that
can support different types of risk assessment …
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19. There are a few different approaches to risk assessment, and they are not mutually
exclusive …
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Credit scoring / rating methodologies —
 Scoring methodologies are based on consumer business (such as
behavioral and application scores are developed based on
customer information)
 Rating methodologies are developed based on borrower’s balance
sheet and P&L, usually for larger corporate businesses
 Expert / Judgment templates are usually based on credit culture
and lending policies
Program-lending
 Predetermined risk acceptance criteria (via policy) to fast-track
credit approvals
Portfolio approach
 Identify vulnerabilities of portfolio and regularly undertake stress
testing

20. Risk models can add value to risk management in SME lending but they
are not infallible …
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 Assuming historical data is available & reliable, we can utilize different
risk assessment techniques:
 Use of multiple approaches allows banks to:
 Reduce time & cost of risk assessment
 Reduce bad debts (combination of better risk differentiation
and early warning & management)
 Achieve more objective & consistent credit decisions
Virtuous cycle of improving data quality through use
 Models are incomplete but they can support credit intuition and reduce
uncertainty
 Risk focus should be directed at:
 Demystifying assessment of risk
 Build bridges with the business to drive value
 Provide pro-active value-added engagement with borrowers

21. An emerging capability is to augment borrower level risk
management with portfolio management capabilities …
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22. A forward-looking Risk Management function needs to link risk
measurement & strategy …
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23.  Streamlining banks' internal processes and offering customer tools that match the
experience provided by online lenders will require active divestment in legacy systems,
not just the introduction of new tools overlaid on dysfunctional or inefficient processes.
 To avoid legacy problems, banks must design new, modular systems and
processes that leverage cloud technology, APIs, and web tools, and require less
customization and implementation to prevent them from becoming obsolete and
weighing down lenders as new technologies continue to emerge.
 Online and marketplace lenders will continue to disrupt the small business lending
industry by changing customer expectations with high-speed, technology-facilitated loan
decisions, more accessible credit information, and vastly improved customer
experiences.
 Across the industry, the rapid evolution of technology and new sources of data will
shorten the time to obsolescence of in-house, customized, non-modular platforms and of
existing decisioning models.
How Banks Can Raise Their Game in Small Business Lending
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24.  It is critical for banks to modernize the small business lending process now to
remain competitive.
 This means divesting of heavy, obsolete, customized systems and
adopting modular cloud-based technologies for rapid deployment and
agility.
 It means automating processes that are typically done manually and leveraging
workflow solutions that speed the process.
 It means buying into automated scoring solutions and innovative use of
data to inform rapid and consistent decisioning, while maintaining a
position of strength in traditional credit and risk management.
How Banks Can Raise Their Game in Small Business Lending
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25.  Streamline the collection of borrower information. Lenders commonly complain that small
business information does not provide sufficient detail to make a lending decision. Borrowers argue
that the information they produce is sufficient for them to run their business successfully, and that they
do not have the resources to produce additional analysis. Banks can rethink the required information
and more effectively differentiate the level of information requested based on the potential risk
exposure. They can also explore new tools and data sources that facilitate data- gathering.
 Leverage proven rating models for standard loans.
 Update processes. The key issue here is the time it takes for a lender to process a loan application
and disburse funds – the time-to-money. Banks should focus on automation of manual processes
and implementing rule-based decisioning to fast-track simpler and lower exposure loans and
refocus precious resources on higher-value activities.
 Upgrade infrastructure. Systems-related efforts should focus on removing duplicate tasks (e.g.,
multiple instances of keying in the same data) via integration and implementation of solutions with a
lower overall cost of ownership.
 Learn from the data. Keen focus on exactly what data is the most meaningful; and second, data
structures and systems that capture the right data and make it readily available for analysis.
 Enhanced early warning, portfolio monitoring, and business intelligence capabilities.
How Banks Can Raise Their Game in Small Business Lending
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26. Thank you.
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