Are small and medium-size enterprises an asset or liability for banks?
Two veteran Nigerian bankers stand on opposite sides of this question. Given the tenure and influence of these bankers in West Africa, their positions could have a broad impact on the behavior of banks in the region toward SMEs.
It is important for SME owners to be aware of these positions as they determine which institutions to approach for financing.
Arnold O. Ekpe, group chief executive officer of the Ecobank Transnational Inc. from 1996 to 2001 and from 2005 to 2012, sees SMEs as a liability, incurring huge risk and costs for banks. “SMEs are the biggest risk of banks. They don’t pay. So they are the engine of growth, but they are also the source of very bad loans,” he says.
Ekpe has more than 30 years’ experience in banking, beginning in 1977 when he joined Citibank in London. He has since held several senior positions in African and international banking, including at First Chicago and United Bank for Africa. He was vice president and head of Sub-Sahara Africa Structured Trade and Corporate Finance at Citibank, where he played a leading role in building the bank’s corporate finance business in Africa. He also served as CEO of United Bank of Africa from 2002 to 2004.
His stance on small enterprises extends to banks. “Small banks do not finance development,” he notes. “If you don’t have the finances, you can’t develop. You have got to have the money. If you look at the major transformation of the Nigerian economy, it’s because the banks have been consolidated into the biggest banks that can finance development,” he says. (Read Ekpe’s extended remarks in the COMMENTRY section of this site.)
A fellow alumnus of both Citibank and United Bank for Africa, Alex C. Otti stands in the camp that sees SMEs as an asset. Otti has been group managing director and CEO of Diamond Bank PLC. since March 2011.
“The myth [about micro, small and medium-sized businesses] is that they’re a loss business. The reality is that it is not that bad,” Otti says. “Today, we are probably the only bank doing something in the micro, small and medium-scale enterprises sector in Nigeria. In recognition, both the International Finance Corporation (IFC) and USAID have given us loans to on-lend to micro, small and medium enterprises. Fifty percent of our deposit base today comes from that sector.”
Otti began his banking career in 1989 in the Operations department of Nigeria International Bank Ltd., a subsidiary of Citibank. In 1992 he joined merchant bankers Société Bancaire Nigeria Ltd., a subsidiary of Banque SBA Paris, as senior manager, and moved to Nigerian Intercontinental Merchant Bank, where he served in the Treasury, Financial Services and Corporate banking divisions. He left in 1996 for United Bank for Africa, undertaking responsibility for corporate banking and the development of the oil and gas business. Otti also served in senior executive positions with the Energy group of FBN Holdings PLC, formerly First Bank of Nigeria PLC.
Ekpe and Otti made their remarks as opening and closing keynote speakers, respectively, at Columbia University’s 2013 African Economic Forum in New York City in March.
Small and medium-size enterprises are important drivers of growth in Africa, accounting for up to 90 percent of all businesses in Sub-Saharan Africa and 70 percent of the economy of the continent as a whole, according to the IFC, the private sector arm of the World Bank. SMEs are estimated to account for 70 percent of Ghana’s gross domestic product and 92 percent of its businesses; 91 percent of established businesses in South Africa; and 70 percent of the manufacturing sector in Nigeria.
So important is the sector, that business intelligence providers Fleming Gulf created an annual “SME Africa” conference to bring together entrepreneurs, micro, small and medium-size enterprises, banks, telecoms providers and government agencies to discuss business strategies, identify complexities, find commerce solutions and collaborate with each other to enhance business processes with the aim of achieving substantial economic growth.
SME Africa 2013 is scheduled for October 17 and 18 in Johannesburg, South Africa.
Otti concedes that “you can lose money” with SMEs, but he contends that “the middle market” is the source of bigger losses. A “sensitive and sensible” financial institution will start looking in the SME direction, he says.
“When you finance a middleman, the collateral he gives you might not be worth anything. He is the one who knows his rights and is well educated. He can take you to court,” Otti argues. “You need to get out of the myth of the SME space being dangerous. Of course, you can lose money. You need to have propositions that address the risks that exist in that space. Make a call about the risk premium. If I think it is a very risky area and I’m looking at 10 percent loss, I need to price that into the product.”
Where Ekpe sees a cost burden, Otti sees potential. “You will be amazed at the ideas that come from [entrepreneurs] when they have no support. In Nigeria today, Diamond is the only bank that will lend you money without collateral once you have a good idea,” he states.
On this point Ekpe agrees. “SMEs with a good proposition will have access [to financing],” he says. But he is adamant about the greater need for “big banks” and “big companies” when development is at stake.
“African banks are small. They cannot finance development. They are prone to shock. Their governments can’t support them. If you want to finance SMEs, in the long run they are profitable, but in the short run they can be dead,” he says. “You need to do the big banks and the big companies. SMEs do not develop the country. You need large companies to create the chain. For example, South Africa has one of the best-developed agro industries on the continent. Move out of South Africa and agribusiness is struggling to survive because the chain is not there. If you are a farmer, whom do you sell to?”
Ekpe insists that bringing down the cost of borrowing will benefit banks and businesses alike, including SMEs. “The cost of money is important. But if you don’t have good infrastructure, you have to pay more and that gets into your cost. The challenge for all of us is, if we can work through these things and have the government manage better, that will reduce the cost of borrowing. Fix the infrastructure. Fixing the government borrowings, fixing the people cost, fixing the operating cost and all of that will reduce the cost of money. That’s what gets factored into cost.”
True, but all that fixing requires political will and extraordinary effort.
“Today you can give money to [mobile operator] MTN and the oil companies and go to bed. Of course they will pay you. We’ve come to the lazy attitude in the financial system where you go it easy. The reality is that the money you are making from that easy business will disappear and when it does you will need to do the real financial business. It’s the way to empower your people and get them out of the unemployment lines,” Otti warns.
He adds: “I do believe that if some people come out of their cocoons and do these things we will be better off. Fifty thousand shoemakers are idle in Aba [Abia state] because they have no light. So we are putting $466 million behind a project to put power there. No society develops unless people decide to do things that are extraordinary.”
