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Benchmarking SME Banking Practices

Benchmarking SME Banking Practices

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Benchmarking SME Banking Practices is an IFC initiative which aims to identify key success factors and highlight links between performance and business models, processes and tools adopted by participating banks. In it's current phase, which began in 2005, the project has focused on qualitative and quantitative benchmarking studies in five banks in OECD countries and six emerging market banks located in US, EU, Latin America, Asia and Australia.
Benchmarking SME Banking Practices is an IFC initiative which aims to identify key success factors and highlight links between performance and business models, processes and tools adopted by participating banks. In it's current phase, which began in 2005, the project has focused on qualitative and quantitative benchmarking studies in five banks in OECD countries and six emerging market banks located in US, EU, Latin America, Asia and Australia.

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Published by: IFC Access to Finance and Financial Markets on Mar 10, 2011
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01/05/2013

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InternationalFinanceCorporation
WorldBankGroup
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SMEBankingandIFe'sRole
Smallandmediumenterprises(SMEs)aremajorcontributorsto~andem-ploymentinmanypartsoftheworld.However,theirfinancialneedsa]j~ftenunderservedandthiscontinuestobeaconstrainttotheirgrowth.Banks,hichhavetraditionallyservedthecorporateandlargebusinesssegmentsofthem.ket,viewSMEsasachallengeduetoinformationasymmetry,lackofcollateralanhehighercostofservingsmallertransactions.However,ascorporatebankingmargicontinuetoshrinkandincreasingfiscalrestraintlowersyieldsongovernmentbor-rowing,bankshavebeguntoassesstheopportunitiesthatSMEsofferintermsofgrowthandportfoliodiversification.Inrecentyears,IFC,amemberoftheWorldBankGroup,hasshifteditsin-volvementwithSMEsfromdirectinvest-mentinenterprisestomainlychannelingfundsthroughfinancialintermediaries.
IFCOutstandingPortfolio
in
FinancialInstitutions
MSME
_Non-SME
8,000----------------.------------.------------.------------.----------6,000----------------.------------.------------.------------.-
IFC'smicro,smallandmediumenterprise(MSME)portfoliorepresents24percentofitstotalportfolioand56percentofitsfinancialmarketsportfolio.Commit-mentstofinancialinstitutionsfortheMSMEsectorreached$1.9billioninfiscalyear2007.AsofDecember2006,IFC'sfinancialinstitutionsclientsaccountedforaboutfivemillionMSMEloansfor
2,000
atotalvalueof$57.1billion.Inadditiontoitsinvestments,IFC'sfinancialmarketstechnicalassistanceactivitiesinSMEbankingincludecreatingSMEoperations,bankdownscaling,scalinguprnicrotinanceinstitutions,andcreatingleasingopera-tionsandproducts.
BenchmarkingSMEBankingPractices
BenchmarkingSMEBankingPracticesisanIFCinitiativewhichaimstoidentifykeysuccessfactorsandhighlightlinksbetweenperformanceandbusinessmodels,processesandtoolsadoptedbyparticipatingbanks.Initscurrentphase,whichbeganin2005,theprojecthasfocused
BanksviewtheSMEsegmentasastrategicopportunitythat/despiteitschallenges,canbeprofitable.
onqualitativeandquantitativebenchmarkingstudiesatfivebanksinGECDcountriesandsixemergingmar-ketbankslocatedintheUS,EU,LatinAmerica,Asia,andAustralia.
/
TheresultsoftheBenchmarkingSMEBankingPracticesinitiativegointtoa
#'
numberofemerginglessonslearnedbybanksofferingSMEbanking.TheenabledIFCtoestablishacoresetofbenchmarksandbestf'Tactices~l'aresetout.Inasecondphase,thecoresetofbenchmarksbuiltwillbeus..hadditionalemergingmarketsfinancialinstitutionsinterested~participa·.g'.theexercise.
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SMESegmentOffersGrowth
&
Profit
Thebankssurveyedduringthebenchmarkingexercisehighlightfiercecompetitioninthecorpo-rateandretailsegmentsasakeyfactorinenteringtheSMEmarket.TheSMEmarketisviewedasanuntappedsegmentwithmarginsforgrowthgivenshrinkingmarginsinthecorporatesectorandincreasedcompetitioninretailbanking.Inaddition,SMEbankingisseenasahighmarginbusinesswithastrongpotentialforprofitabilityandimportantcross-sellingandportfoliodiversificationopportunities.ThebankssurveyedrevealthatSMEbankingisaprofitablebusinessdespitechallengessuchastheneedforbuy-inatbothmanagementandoperationalstafflevelsandtheneedtoadaptproductsanddevelopITtools.Ashighlightedin
ROASME
Versus
TotalBank,
page4,SMEportfo-liosgeneratehigherreturnonassets(ROA)thantotalbankportfolios.FouroutoffivebanksnotedhigherportfolioandincomegrowthfortheSMEsegmentthanthetotalbank.
DefinitionsofSMEsVary
Theparticipatingbanks'definitionsofSMEsandthecriteriausedtocategorizethemvarycon-siderably.Mostbanksnotethatloansizeisnotanadequatecriteriaandindicatethattheyhaveevolvedmoresophisticatedcriteriabasedonthor-oughanalysisoftheirSMEclients.Nineofthe11surveyedbanksuseclientintrinsiccharacteristics
ThechallengesinSMEbankingaresimilarforallplayersbutthesolutionsvarysignificantly.Banksarestillrefiningtheirbusinessmodels.
astheirprimarycriteria.ThebankssuggestedthattheydefineSMEsusingdataeasilycollectablebyfrontofficestaffandbasedon:(1)whethertheyareassetcustomersorliabilityonlycustomers:and(2)risk/returnprofileswhichenablesthebanktodeterminepotentialrevenue,adjustcosttoserve,andmaximizeprofit.
HigherUnsecuredLendinginOECD
UnsecuredlendinginthesmallbusinesssegmentishigheroverallinthebanksinOEeDcountriescomparedtoemergingmarketbanks.Unsecuredlendingis64percentfortheOEeDbanksana-lyzedcomparedto36percentonaveragefortheiremergingmarketcounterparts..ThisislikelyduetotheavailabilityofbetterinformationonclientsandcreditscoringtoolsinOEeD
countries,
Thebanksanalyzedinemergingmarketsviewtheability
to
FocusonIFC'sCoreA2FProducts
CoreltraditionalA2Fproductsareshadedindarkorange.
FinancialIntermediariesFinancialInfrastructure
StrategicGoals
SMEBankingCreditBureaus
I
MaximizeMicrofinanceCollateralRegistriesIFe'sdevelopmentimpactHousingFinanceSecuritiesMarketsDifferentiateLeasingPaymentSystemsIFe'sproductSustainabilityFinance&RemittancesofferingsTradeFinanceAddvaluetoIFe'sclientsInsuranceBrandIFe'sname
E~nd
AccesstoFinance
BENCHMARKINGSMEBANKINGPRACTICES
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SEPTEMBER2007
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