Banks Must Step Up For SME Development
By: Claudette Nahum and Nangula ShejavaliTHE importance of SMEs in any economy cannot be understated. They play a formidable role in national development by creating employment, contributing to domestic and export earnings, reducing poverty, and spurring product innovations. In fact, researchers note that “a nation that does not create new SMEs will stagnate its own economy” (Olawale & Garwe, 2010).
Despite their important role, however, Namibian SMEs face numerous obstacles in meeting their full potential and contributing meaningfully to the economy. While access to finance remains the biggest challenge for most SMEs, several non-financial obstacles exist. These include access to markets, business advisory services and support networks, lack of infrastructure, limited leadership/management skills, and poor marketing/growth strategies and financial management.
These non-financial challenges can have serious implications for a business’s balance sheet and, in turn, further hinder access to finance. Hence, beyond the traditional scope of banks (i.e. providing financing and money management solutions to their clients by accepting deposits, advancing loans, investing funds, etc), banks have an important role to play in providing business development services (BDS).
Banks are usually the first port of call as SMEs embark on their growth paths, and are concerned with the financial performance of SMEs. This performance determines whether, for example, SMEs can meet their loan requirements or payment terms, which in turn influences the level of risk the bank assumes by financing an SME. But because the non-financial challenges that SMEs face often manifest themselves in the business’s cash flow statement or balance sheet, banks should be cognizant of these underlying factors. By looking at the big picture and ensuring that the factors that impede the financial performance of SMEs are addressed through business development support services, banks can get more value from their banking relationships with SMEs.
Whether or not an SME succeeds does not always start with a loan or other form of financing. This success is premeditated on a great idea, sound business strategy, good leadership, and access to relevant markets, to name a few – all of which impact the banking relationship. By merging their financial offerings with non-financial services, not only will SMEs be able to match their financial performance with their business systems and strategies, but banks themselves will benefit from reduced risk, the ability to extend larger loans with the assurance of improved loan management, and an enhanced personal relationship with business clients.
For example, in order to qualify for financing, all the commercial banks require that SMEs submit a business plan in order to assess “desirability, market/industry viability, security” (Bank Windhoek, 2013). The business plan also provides key insights into the extent of the non-financial services SMEs require, irrespective of their growth stage when the application is made. Providing business planning support to loan applicants will not only mitigate risk on the part of the bank, but will also provide valuable support to SMEs, regardless of whether or not they qualify for the desired financing.
Other non-financial services that the banks could play a role in include financial management training, mentorship, business education and skills transfer; conducting business plan workshops, hosting strategy sessions, and communicating best practices market planning. These services would contribute to a vibrant SME sector that is more innovative and makes use of creative business approaches.
Clearly, when banks look at the big picture when dealing with SMEs, everyone stands to gain.
It is encouraging to see that many of the commercial banks either have SME branches or SME-specific financial services. However, the SME brochures to which we were directed show that few banks actively go beyond the scope of traditional banking to ensure non-financial support. Moreover, the banks provide very little information about the business development services (BDS) providers to whom they outsource. By bringing BDS providers in-house and ensuring that financial literacy initiatives are more proactive, banks can be more strategic and forward-looking in supporting SME growth while taking care of their bottom line.
The establishment of the SME Bank in December 2012 is promising. However, our attempts to get documentation or information from the SME Bank on the financing options and/or services available to SMEs proved futile. Letters in the media from SMEs have expressed concern about its financing terms and conditions (e.g. the bank appears to cater mainly for “tenderpreneurs”).
Given the important role of SMEs in national development, we believe that the SME Bank has the greatest prerogative to ensure a more holistic approach regarding SMEs. By being more responsive to the needs and concerns of SMEs, and creating initiatives that are meaningful for SME growth beyond mere financing, the SME Bank can move towards harnessing the potential of SMEs and contributing meaningfully to the economy.
Banks alone are not responsible for the success of the SME sector, and there is a role to be played by various entities, particularly SME owners themselves. Nevertheless, combining financial and non-financial services in the long run ensures the holistic survival of an SME, and if banks are truly invested in contributing to national development, they need to step up their game in the business development services they provide to SMEs.
*Claudette Nahum has conducted research on SMEs in Namibia and holds a Master’s Degree in Development Finance. Nangula Shejavali is a Communications & Research Consultant, with a MS Business degree in Global Marketing Management.