Monday, September 27, 2021

    Smart credit-assessment tools, key to unlocking potential of Nigeria’s SMEs Experts Say

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    Big Banks in Africa needs to set-up Smart credit-assessment tools to unlocking the potential of Africa’s SMEs, according to Banking in Africa, published by the European Investment Bank on February 27.

    “Banks consider lending to SMEs highly risky and ask for significant levels of collateral, while a significant portion of their investment is allocated to government assets,” the report says.

    In Nigeria’s informal economy is largely cash-based, meaning most small-scale businesses barely consider having a bank account. This sector, which includes traders like Kasali, accounts for about 60% of the entire economy or about $240bn. It creates much-needed new jobs (more than 80% of workers are informal), offering more chances to people than the formal sector.

    But access to finance remains a major barrier to expansion. Banks often do not only have high interest rates but also include collateral requirements when providing credit facilities. Most small businesses struggle to meet these demands, cutting them off from the capital they need to grow.

    Economic growth prospects remain bright in some areas. The EIB predicts that in 2020 and 2021, GDP growth in East Africa will accelerate to 6% in 2020 and 2021 as infrastructure investments boost domestic demand.

    But Nigeria, which accounts for two-thirds of West Africa’s GDP, is expected to grow at only around 2.5% this year.
    Overall, the EIB says, risks to the outlook are tilted to the downside.
    “The high level of public debt leaves a number of states vulnerable to external shocks and reduces or even blocks access to external financing,” the report says.

    There is an increasing recognition by pan-African banks of the need to set up dedicated departments for lending to SMEs, Stijns says, giving France’s Société Générale as an example. Banks are also starting to get serious about using fintech to develop credit assessment tools for SMEs, he says.

    The EIB is in the process of launching a new centre in Abidjan that aims to provide capacity-building and technical assistance to SMEs in west and central Africa.
    The other part of the equation, Stijns says, is helping bankers to become more knowledgeable in assessing the risks of lending to SMEs.

    Reform of secured transaction frameworks would benefit both banks and firms, the EIB’s report says.

    This would make it easier for firms to use movable assets as collateral and would help SMEs in particular, as they are more likely to lack high-quality collateral.

    Standard models for measuring the credit strength of SMEs are unlikely to be sufficient, Stijns argues. One unresolved issue is that the line between personal and business use of a loan, for example for a motorcycle, is often blurred.
    “Necessity is the mother of all invention,” Stijns says.

    As has already been the case in mobile banking, that means Africa could find itself leading the rest of the world in terms of fintech for SME lending, he argues.

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