SME Finance – a Global Perspective

Matthew GamserHead, SME Finance Forum

Kathmandu12 April 2013

SMEs provide 2/3 of formal jobs in the private sector in emerging markets

SMEs consider access to finance and power as the leading constraints

Formal SME credit gap remains as large as ever at ~ $ 1 Trillion

Today 55-68% of formal SMEs in emerging markets are either unserved or underserved

82-86% (~ 0.8-0.9 Tn) of total credit gap of formal SMEs in emerging markets is represented by formal SMEs that already have a deposit account

Worldwide majority of woman-owned formal SMEs are unserved or under-served

But financial institutions face 6 main challenges when lending to SMEs

….. And banks need capacity to address these challenges

…and if managed well, SME Banking can be very profitable…

Key observations• ROE can be very attractive (up to 25-35%)• Margin compression inevitable but can be

negated by establishing a “total wallet” P&L• Key profit drivers are typically deposits and

transaction banking, representing between 50-60% of total SME business profitability

• Need to take a 5-year view of product profitability

“We want to double in 3 years. Returns are the best in the Group. Risk-returns are now twice as high as all our consumer banking businesses”

Global Product Head, SME Banking Standard Chartered Sept.2010

Faster Revenue Growth………..

Higher RoA’s………..

10SME

Finance Gap

Challenges in SF

IFC – What &

How

IFC and G-20

IFC Footprin

t

But performance in SME Banking can be highly volatile if the right capabilities are not put in place…

SME ROA

PERCENT

SME Banking rewards those with the right capabilities in placeSource: Mckinsey

11SME

Finance Gap

Challenges in SF

IFC – What &

How

IFC and G-20

IFC Footprin

t

Financial infrastructure is a critical building block for SME financial inclusion

Credit reporting systems reduce information

asymmetries, support efficient credit allocation

and strengthen risk management

Payment and settlement systems

facilitate access to financial services and the safe transfer of funds. PS

can mitigate financial crises by reducing settlement risks

Secured transactions systems and collateral

registries reduce risk to lenders,

facilitate access to credit, and promote credit diversification

A solid Financial

Infrastructure serves both

Inclusion and Stability

Impact of improved credit reporting on financial inclusion

Source: Love & Mylenko (2003)

Full information-sharing increases access to credit

¨Out of every 100,000

loan applications

11,400 are lost if

assessment is based

on negative info only¨

% increase in lending volumes

73.7

83.2

Negative information only

Negative and positiveinformation

Source: Barron and Staten (2000). Note: Figure shows the simulated acceptance rate assuming a default rate of 4% overall

MSME and Payments

• More electronic transactions lower information costs• More electronic transactions save time and money for firms• More electronic transactions offer alternative portfolio

management options

Issues:• Payments data availability• Movable assets/secured transactions rights/regulations• Inter-operability• Financial institution capacity/awareness

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The Project facilitated strong growth of SME lending by banks (1/2) – absolute growth in FI portfolio

Secured Transactions Reform – China case

Source: 50 FIs surveyed in Anhui, Guangdong, Shaanxi, Shandong, Shanghai, ZhejiangNote: The multiple government policies targeted at SMEs, including financial stimulus, during the course of the Project are

potential confounding factors

4 of Big 5 banks reported an average 25% CAGR in 2008-2010, up from 2% in 2006-2008 period; 7 other large commercial banks also reported an average of 45% over 20%

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The Project facilitated strong growth of SME lending by banks (2/2) – FI perception

87% of surveyed FIs rated the 2007 Property Law as very/somewhat important to “serve new segments of SME market”

Secured transactions reform – China case

Source: 50 FIs surveyed in Anhui, Guangdong, Shaanxi, Shandong, Shanghai, Zhejiang

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The Project contributed to SMEs’ business performance, as perceived by SMEs (1/2)

Source: 100 SMEs surveyed in Beijing, Chengdu, Hangzhou, Wuhan and Zhengzhou

SMEs perceive “unacceptable collateral” as by far the #1 reason for why their loan applications were denied in the past. 59% of surveyed SMEs believe that their business development would be

severely impacted, or worse, if their current access to movables financing were to be removed

Secured transactions reform – China case

The Project contributed to SMEs’ business performance, as perceived by SMEs (2/2)

Source: 100 SMEs surveyed in Beijing, Chengdu, Hangzhou, Wuhan and ZhengzhouNote 1: This evaluation attempted to compare job growth between SMEs with A/R financing and those with immovables

financing. Yet the channel of immovables financing also provides needed working capital for business and employee growth. SMEs without access to both movables and immovables financing have likely winded down.

88% of surveyed SMEs said that business growth was a benefit resulted from obtaining accounts receivable financing

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Secured transactions reform – China case

• SMEs had increased their workforce, although employee growth was not perceived as a high benefit area

• The 2011 median and average growth rates in employees were 7% and 36%, respectively, according to the SME Survey

• However, a different methodology is needed to qualify the Project’s impact on job creation

• This evaluation lacks a control group for valid comparison1 (see more discussion on Lessons Learned)

Suppliers Pakistan

Suppliers India

SuppliersBangladesh

SuppliersVietnam

SuppliersBrazil

Buyer

SCF Delivery Solution/ Platform

Receivables purchase from Suppliers

Suppliers, Other EM

SuppliersUS

SuppliersGermany

SuppliersJapan

Buyer acceptance

Payment of discounted proceeds

Request for finance

Payment on Invoice Due Date

Accepts request and initiates payment

Funded Participation or Guarantee coverage on Buyer and country risk

$ Fees

GTSF Program Approach through Partner Banks

PartnerBank

1

2

3

4

5

Low SF utilization in emerging markets compared to OECD countries presents significant market potential

Global Warehouse Finance Program (GWFP) – WHR Scheme

Program focuses on IDA countries and works with banks which intend to increase exposure in the agriculture sector

Program covers pre-export and import financing, as well as domestic sales IFC will identify the pre-approved sub-borrower names together with banks.

Distributor Finance

IFC:• Funding or Unfunded risk

sharing facilities/partial guarantees

• Advisory Services solutions for distributors and / sub-distributors, for capacity building and risk mitigation, to be customized as per needs

BANK: Origination and monitoring in:• Receivables-based financing

to Seller• Overdrafts/loans to

Distributors/sub-Distributors or

• Floor-planning & equipment financing including end-user financing

End-Customer

SELLER varying forms of contractual support, including First Loss/counter guarantee

DistributorSeller (Anchor)

Sub-Distributor

Bank

Myths and Opportunities #1

Myths and Opportunities #2

Myths and Opportunities # 3

And maybe all of us?

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