Making Liberian banks work for SMEs (and vice versa)
This post was written by Stephen Lee, Building Markets’ 3FP Director.
We here at Building Markets are about creating, well, markets. We match supply with demand: in essence, basic economics. This is often in the form of matching a buyer’s procurement needs with a supplier who can fill that need (see: Sustainable Marketplace Initiative). In addition, the Factor Finance for Procurement (3FP) team is out to tackle the credit markets for SMEs who need financing. This, however, is much easier said than done.
Many people have heard of the “missing middle” phenomenon when it comes to SMEs and their access to credit (or lack thereof). Microenterprises have microfinance institutions, while corporates have commercial banks. There isn’t much in between. Relative to corporates, challenges to SME lending that are cited include the high costs of lending to SMEs (i.e., same effort from banks for smaller return), higher riskiness of SMEs (i.e., smaller size, less diversified, more volatile earnings, etc.), informational asymmetries (i.e., banks just don’t have the same kind of relationships with SMEs that they do with corporates), among others. These challenges all have some validity to them.
In Liberia, many of the banks we’ve talked to want to grow their SME sector lending portfolio. This fact should not be overlooked. Imperfect as many SMEs are, they represent growth — the next generation of consistent, profitable clients. However, in the last ten years or so, Liberian banks have been burned by many SMEs’ dishonesty, mismanagement or both.
From the perspective of SMEs, they have their fair share of complaints. Banks take an extremely long time to process an application, at least not without a little (or a big) “tip.” This is especially frustrating when timely financing is absolutely necessary. When SMEs have gotten loans and repaid them, they’ve sometimes had their payments “diverted,” breeding mistrust in the minds of these businesses. How do we make sure banks are working for SMEs (and vice versa)?
This is a complicated question that cannot be answered in one blog post. However, I can share one of the things that we’re beginning to work on: a pre-financing product.
At Building Markets, we commonly work in the procurement contract arena — we speak to local businesses who win procurement contracts on a regular basis. Many of these businesses win contracts contingent on the fact that they receive financing with a certain period of time, often 30 days. The typical loan approval process in Liberia takes considerably longer than 30 days, so you can imagine the problems this causes.
Although we’re still in the early stages of discussion on this topic, our goal is to work with Liberian banks to design a pre-financing credit product, one in which a business can expect to receive an answer from a bank before the 30 days are up. What does this mean? It means overcoming the corruption problem; it means optimizing a bank’s credit procedures for speed and quality; it means overcoming any training gaps for both businesses and banks; and it may also mean working with the business up front to get all the required documents in place once the contract is conditionally awarded.
This will require some work to set up. However, the market is there – we simply need to build it. Banks want to find good, high-quality SMEs who are winning procurement contracts. These SMEs need financing. And if we’re successful, we’ll see Liberian banks and SMEs working together in a way we haven’t seen before.