120
FINANCIAL INCLUSION FOR FIRMS
BOX 3.4
GLOBAL FINANCIAL DEVELOPMENT REPORT 2014
Financing SMEs in Africa: Competition, Innovation, and Governments (continued)
companies. Rwanda and Tanzania have considerably smaller economies. Commercial banks in Nigeria focus their lending on the oil, gas, and telecommunications sectors and the associated value chains, while, in Rwanda and Tanzania, banks need to lend to SMEs simply because of a lack of alternatives. The extent of government borrowing has led to the crowding out of the private sector, especially in Nigeria, but also in Tanzania, where banks continue to hold a sizable proportion of their balance sheets in government securities. Particularly in smaller fi nancial systems with weaker legal and regulatory structures and capacity, there is a strong relationship between the willingness of banks to lend to private enterprises and the availability and yields of investment opportunities perceived as safer, such as government securities. A strong determinant of the involvement of banks with SMEs is the degree of competition in the market and the innovation introduced either by domestic institutions or foreign entrants. Competition in the SME market is strongest in Kenya, where a large number of commercial banks target different market segments. The difference between Kenya and most other African countries is that innovation in Kenya started through a combination of microfinancerooted institutions scaling up to become commercial banks and innovative lending models and technology in the retail banking segment, most notably Equity Bank. The innovations pioneered by Kenyan banks have spread to other countries as banks expand their footprint in the East African Community and beyond. The studies outlined above show that competition among banks for SME clients and retail customers has increased in Rwanda because of the entrance of Kenya-based banks in the market, while the availability of innovative distribution channels such as agency banking has expanded as well.
In South Africa, in contrast, four big banks dominate the fi nancial sector, collectively holding about 80 percent of bank assets and covering the market for (cheap) retail deposits. The market concentration has affected innovation because competitors face difficulty growing in this market. Evidence from the five SME finance studies above suggests that competition, especially through innovators, can have a large impact on the frontier lending of banks. While competition and innovation cannot be introduced by government directive, encouraging innovation (for example, by allowing agency banking) or a supportive regulatory environment for MFIs (to boost competition from within the lower end of the market) is within the realm of possibility of a regulatory authority. Competition is required to move commercial banks out of their comfort zone in countries such as Nigeria, where high interest rates on government securities provide a disincentive to intensify lending to SMEs. In countries with lower yields on government securities, the incentives are much greater for banks to expand their lending to SMEs, and, if knowledge is transferred in such circumstances, as was the case in Rwanda, SME lending expands. While there seems to be a role for government to encourage lending to SMEs in markets where that development has not yet taken place, providing an environment conducive to lending seems to be crucial. Ensuring that an effective credit bureau is in operation and that the securitization and realization of (movable) collateral are effi cient is a fundamental challenge in a number of countries. The reforms in fi nancial infrastructure in Rwanda, for instance, have been appreciated as a positive development by the banking sector and have led to an increase in the use of movable assets to secure SME loans and to a general expansion in lending to the sector.
a. Enterprise Surveys (database), International Finance Corporation and World Bank, Washington, DC, http://www.enterprisesurveys.org.
SMEs with the goal of building a client base of healthy businesses, gaining new SME clients, promoting customer loyalty, and reducing the credit risk in the SME sector. The number
of the bank’s SME clients rose from 20,000 in 2005 to 700,000 in 2011, and the share of SME loans in the total loans of the bank grew from 25 percent in 2006 to 44 percent