Small businesses, big challenges: Increasing the lending pool for small and medium-sized enterprises

Smaller businesses tend to face greater difficulties in accessing credit than their larger counterparts. This is particularly the case in environments of institutional under-development or legal uncertainty. Unsurprisingly, this is a challenge affecting sub-Saharan Africa in general, including Côte d’Ivoire.

PRIME OBSTACLES: In a World Bank survey from 2009, 45.2% of businesses questioned identified access to finance as an obstacle to doing business in the country – a figure that has likely remained unchanged. The proportion of small and medium-sized enterprises (SMEs) identifying access to finance as an obstacle increased to 73.3% for medium-sized businesses, far ahead of the sub-Saharan average of 40.6%, according to the report. Only 65.3% of small businesses (those with 5-19 employees) had a bank account, while 76.2% of medium-sized businesses (20-99 employees) held such accounts. These lagged far behind the averages for sub-Saharan Africa of 84% and 93.5%, respectively. Only 10.1% of small and 15.9% of medium-sized businesses had a bank loan or line of credit, again far behind the respective sub-Saharan averages of 16.7% and 31.3%. Fully 90.7% of small and 85.7% of medium-sized businesses finance investments from internal sources (compared to the subSaharan averages of 82.1% and 77.8%, respectively), while only 7.8% of small and 7.2% of medium-sized businesses used banks to finance working capital (as against the sub-Saharan averages of 15.1% and 29.9%), further illustrating the extent of the challenge.

Given the political and economic difficulties the country has experienced in the interim, it is unlikely that the situation had greatly improved by 2013. “Foreign banks generally lend to large companies rather than SMEs, although SMEs certainly need it. However, it is admittedly risky to lend to SMEs, as clearer accounting and collateral are necessary to mitigate risk to acceptable levels,” Eugène Kassi N'Da, the managing director of Banque Nationale d’Investissement, told OBG. While SMEs account for 98% of all businesses in the country, they contribute only an estimated 18% of GDP, with their growth limited by the difficulties they face in accessing credit.

CREDIT LAGS: Credit opacity is one of the primary causes of this, hindered in part by the lack of a credit agency and the fact that coverage by the Central Bank of West African States (Banque Centrale des États de l’Afrique de l’Ouest, BCEAO) is limited to blue-chip firms. Smaller businesses, particularly those in the informal sector, are less likely to have audited balance sheets and income statements, making it difficult for banks to establish their credit worthiness and, therefore, to grant them loans. The management of smaller businesses may also lack the capacity to deal with banks and apply for loans, while the banks may in turn fear that the management will be unable to sustain the business and meet repayments.

Recognising the economic and social importance of SMEs, the government has introduced a range of initiatives in recent years. In 2012, for instance, they were granted CFA50.9bn (€76.35m) in tax relief as part of efforts to revive the economy, with further incentives contained in the new Investment Code published that year. There is currently a draft law under discussion that would create a new SME agency that would clearly define what constitutes an SME.

MAIN ACTOR: State-owned Versus Bank is the only explicitly SME-dedicated credit institution in the country. Having opened its doors in 2005, Versus experienced rapid growth in its early years before running into trouble as the quality of its lending portfolio deteriorated and its majority foreign shareholders faced financial difficulties of their own. The bank was nationalised and has been in transition since 2009. It has engaged since 2011 in a relationship-based lending model that is unique in the Ivoirian context.

Given the difficulties with analysing borrowers’ balance sheets to establish their credit worthiness, Versus quite frequently makes lending decisions that are based on the credit worthiness of the final buyer of the borrowers’ products or services, basically collateralising the sales receipts in the process. In such cases, the final buyer, often a big multinational, signs a contract to pay the bank upon delivery of the product or service, in return for which the bank advances credit to the small business so that they can fulfil their obligations to the buyer. To ward off the risk that the small business does not meet its end of the bargain, delivering the promised goods or services, the bank carries out an analysis of their capacity to deliver. It looks at, for instance, whether the order falls within the scope of their habitual activity.

Versus issued loans totalling CFA37bn (€55.5m) in 2012 and was targeting an increase to CFA45bn (€67.5m) in 2013. Half of its lending portfolio is accounted for by SMEs. Having lost CFA7bn (€10.5m) in 2010, the bank moved into the black in 2011, earning CFA223m (€334,500), with profits set to double for the 2012 financial year. Along with three other state-owned banks, Versus is slated for privatisation, but it is unclear if this will occur, and if it does, whether it can retain its SME-focused business model.

COMMERCIAL LENDERS: While SMEs tend to be an underserved segment in the broader commercial arena – as they are in much of the emerging world – that has not stopped some banks from building up business lines for smaller firms. SME loans represented a quarter of Ecobank’s 2012 year-end credit portfolio, for example, up from only 10% a few years earlier. For 2013, Ecobank is targeting SMEs managed by women in particular, and plans to set up a branch dedicated to female entrepreneurs. Ecobank and the International Finance Corporation (IFC) entered into a $213m West African Economic and Monetary Union-wide partnership in 2012 aimed at boosting credit to SMEs and building capacity for the lender.

The IFC actively supports the development of the private sector in Côte d’Ivoire, and the financial sector in particular. In addition to promoting entrepreneurship through youth competitions, for example, it also participates in a guarantee programme with the Banque Internationale Pour le Commerce et l’ Industrie De la Côte d’Ivoire (BICICI), guaranteeing 50% of a $40m SME loan portfolio. The IFC is hoping to expand its activities in this area and is working with BICICI and other financial intermediaries on the development of similar such guarantee programmes.

The government is also rolling out its own programmes to aid SMEs: the Investment Promotion Agency of Côte d’Ivoire (Centre de Promotion des Investissements en Côte d’Ivoire, CEPICI), a one-stop shop for opening a new business, started in December 2012. According to the World Bank, it now takes 48 hours to register a new business, as opposed to 32 days before the centre opened. The fee to register a new business is under CFA200,000 (€300), down from the CFA661,000 (€991.50) before December 2012. A new mutual loan association for SMEs, which provides financial assistance to small businesses, also opened in March 2013, though it was unclear as of mid-2013 what its lending capacity was.

CAPITAL MARKETS: Although the banking system is expected to prove the most fruitful avenue for improving access to credit for SMEs in the near future, the capital markets may come in time to represent a viable alternative, particularly for the most dynamic, high-potential businesses of a certain size. Venture capital and private equity has been on the increase but is still relatively small scale.

In addition to efforts to improve the business environment more generally, a more dynamic venture capital ecosystem will likely require a dedicated and improved regulatory framework. Arguably the most important development in SME financing on the regional capital markets will be the creation in 2013 of an SME compartment on the regional stock market, the Regional Securities Exchange. At most, however, this development is expected to attract three to five larger SMEs from the region every year, underlining the importance of efforts to improve the flow of credit through the traditional banking channel.