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Making the financial system more accessible to SMEs - Increasing SME Access to Finance: A Four Pronged Approach

Guest post by: OECD Development Centre

Article Overview: Most African financial systems are fragmented. The “missing middle” in the pattern of size of firm is matched by one in the range of financing available.

Making the financial system more accessible to SMEs - Increasing SME Access to Finance: A Four Pronged Approach

Most African financial systems are fragmented. The
“missing middle” in the pattern of size of firm is matched
by one in the range of financing available. Lack of funding
for SMEs has partly been made up for by micro-credit
institutions, whose growth is due to the flexible loans they
offer small businesses. In Angola, Novobanco provides loans
free of bank charges, without a minimum deposit and with
informal guarantees (property assets and a guarantor),
as well as permanent contact with loan managers. Though
adapted to local needs, however, micro-credit institutions
remain fragile and modest-sized.

As well as lacking trained staff, micro-credit institutions
face limited expansion because of their limited funds. Their
mainly short-term finance means they cannot easily turn
the savings they collect into medium or long-term loans.

They are also up against the cost of refinancing through
the formal banking sector and have no access to refinancing
either by the central bank or by venture capital. Microcredit
institutions could be put on a firmer financial footing
by developing and adapting long-term savings products that
exist elsewhere, such as life insurance and home-saving
plans, and encouraging the setting up of specialised
refinance banks such as Mali’s “solidarity bank” (Banque
malienne de solidarité), or working more closely with the
formal banking sector (Benin’s SME support organisation
PAPME and the local Bank of Africa).

Some countries (such as Kenya) have dealt with the lack of
funding by supporting growth of smaller commercial banks
or (in Ghana) of rural banks, so as to bring traditional banks
and SMEs closer geographically and business-wise. South
Africa passed two laws in early 2005 to expand the banking
system to include savings and loan institutions (second-tier
banks) and co-operative banks (third-tier banks) while easing
banking regulations so the newcomers could still be flexible
in providing loans. In many countries, commercial banks
are also setting up their own micro-credit services.

Removing the obstacles to access for SMEs’ to finance
requires that commercial banks, micro-credit institutions,
community groups and business development services (BDS) work closely together. Pushing for agreements
between financial bodies and BDS suppliers will help make
up for lack of capacity and reduce costs by more efficient
division of labour. The BDS supplier makes the initial choice
of projects on a purely technical basis and the credit institution
looks at financial viability.

Making loans to intermediaries (NGOs and federations of
SMEs) with the job of allotting funds to members can also
help cut administration costs. Solidarity between banks,
especially setting up inter-bank financing to (as in Nigeria)
pool money to be invested in SMEs, reduces the extra risk of
lending to SMEs, as well. Working with banks boosts the
financial viability of micro-credit institutions and can also help
informal financial bodies to move towards the formal sector.

Financing SMEs in Africa
by Céline Kauffmann
Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication
of the African Development Bank and the OECD Development Centre

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Article Tags: bank charges, bank of africa, banking regulations, banking sector, banks and co, business wise, commercial banks, credit institutions, financial footing, flexible loans, limited funds, loan institutions, long term loans, micro credit, property assets, rural banks, short term finance, sme support, support organisation, traditional banks



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