Financing for SMEs
“If only they could understand my business model, then they would see that their demands are unreasonable” said Rotich (not his real name) a serial entrepreneur who had started a marketing agency with his wife 5 years ago. Rotich and his wife pioneered experiential marketing in Kenya. Their activation campaigns had seen leading household brands cultivate customer loyalty and significantly increased product uptake especially in the rural parts of the country.
The business had a KShs. 20 million unsecured invoice discounting facility with a leading bank which they rarely fully utilised. Rotich had approached his bank with a proposal to access part of this credit limit as Local Purchase Order (LPO) financing to help them meet increased market demand for their services. Despite their long-standing relationship, the bank wasn’t willing to consider their proposal without them having to give collateral in the form of land or property. “My bank can no longer support the growth of my business as I don’t have collateral to secure my loan” said Rotich
So often financial institutions assume that they know what is best for their customers and it is tempting for banks to think that cut down variants of corporate businesses products and services will meet the needs of SMEs but this is rarely the case. Moreover, smaller businesses are a heterogeneous bunch of customers with different types and sizes of enterprises needing different solutions.
A mystery shopping exercise with 30 Kenyan banks by FSD Kenya, found that banks were not serving this market particularly well, providing very few differentiated offers actually tailored to the needs of different types of SMEs. When banks undertake customer satisfaction surveys or hold focus groups they often find out what financial solutions they feel SMEs need and what SMEs tell them they need are very different. Many of the solutions currently on offer do not have the depth and breadth to meet typical needs of small businesses such as Rotich’s Marketing Agency.
However, some recent research by FSD Kenya – Financing SME Growth in Kenya– suggests that great opportunities exist for banks to better finance SMEs and make profits from this client group.
The research involved in depth case studies with 18 successful Kenyan businesses over a period of a year to capture their entrepreneurial drive, business practices, growth and critical incidents as well as developing a better understanding how the entrepreneurs sourced finance for their business growth.. The study offers invaluable insights as to how banks can better understand and serve their business customers by developing a genuine partnership that will be of mutual benefit, facilitate risk appraisal and maximise the benefits to both parties.
The message coming loud and clear from the entrepreneurs is that banks need to listen to and work more closely with entrepreneurs when designing their financial solutions for SMEs. Without better insights on entrepreneurs, the mismatch between what the banks offer and what SMEs need will remain. SMEs will continue to rely on expensive informal sources of financing and banks will miss out on such a significant portion of the market. The only way to grasp the opportunities that exist in this market segment is for banks to roll up their sleeves and “roll in the mud” along with their SME customers in order to truly understand them and innovate solutions that will speak to their needs.