East African Small and Medium-Sized Enterprises ‘a Strategic Priority’ for Banks, Finds New AfDB Study

26/03/2012
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A new survey from the African Development Bank (AfDB) of the East African banking sector has found that it eager to do business with small and medium-sized enterprises (SMEs). The banks surveyed in Kenya, Tanzania, Uganda and Zambia view SMEs as ‘highly profitable’. They are also important providers of employment in the region.

The report, entitled "Bank Financing to Small and Medium Enterprises in East Africa: Findings of a Survey in Kenya, Tanzania, Uganda and Zambia", is published by the Chief Economist’s office of the AfDB.

It finds ‘that the SME segment is a strategic priority for the banks in the region.’  SMEs are considered a profitable business prospect and provide an important opportunity for cross-selling.  The banks view the lending market to SMEs as large, not saturated and with a very positive outlook.

There are obstacles, however, to the banks doing more business with SMEs.  They include not just factors related to the nature of SMEs, but also macro-economic and regulatory factors and the legal and contractual environment.

The survey also notes the lack of a more proactive government attitude towards the SME sector, some areas of prudential regulation and some bank-specific factors.

However, banks have learned to adapt to their environment and have adapted through innovation and differentiation.

The AfDB concludes that ‘this trend should be encouraged through reforms to soften the negative impact of those obstacles which are hindering the further involvement of banks with SMEs’.

Encouraging SMEs is important for employment.  The report notes earlier research which found that SMES on average contributed 60 percent of total formal employment in the manufacturing sector in various countries.  

In Africa, their role is even larger.  According to this earlier research ‘taking into account the contribution of the SME sector to job opportunities is even more important [in African countries], SMEs account for about three-quarters of total employment in manufacturing.’

However, SMEs in Africa are lagging behind other parts of the world when it comes to access to finance.  The survey reports that ‘only 20 percent of SMEs in sub-Saharan Africa have a line of credit from a financial institution compared, for example, with 44 percent in Latin America and the Caribbean.’

The report also notes certain similarities among the four countries where the survey took place.  Kenya, Tanzania, Uganda and Zambia are all growing, emerging economies, and they have put in place various financial reforms over recent years, with their banking systems becoming increasingly integrated.

In fact, the survey is part of a wider regional project from the AfDB on this topic.  Its objective is to identify best practices in SME lending as well as constraints that impede growth in the SME finance market so as to draw relevant policy implications.

Exposure by banks in the region to SMEs as measured by the proportion of SME loans to total lending is 37 percent on average.  Kenya had the highest SME exposure at 50 percent, followed by Uganda with 42 percent, Tanzania with 37 percent and Zambia with only 18 percent.