their focus on SMEs often cite a strong belief in the importance of the SME sector to the nationaleconomy as a whole.
Bank Approaches to the Challenges of Serving SMEs
To effectively serve SMEs, banks have had to change the way they do business, and manage risk, at eachstage of the banking value chain. This begins with working to understand the market, and how it differsfrom both the retail and commercial segments. Next, in developing products and services, banks havebegun to understand that SME banking means much more than SME lending and are, therefore,prioritizing non-lending products in order to provide total customer value. Leading banks report thatmore than 60 percent of their SME revenues come from noncredit products. Banks have found ways tomanage both costs a
nd credit risk as they acquire and screen clients. A bank’s current portfolio provides
both a low-cost starting point for generating new business and a source of valuable data that can enableit to understand and predict the risks associated with SME clients. Developing this capacity to predictrisk without completely reliable financial information, by using tools such as credit scoring, has enabledbanks to more effectively screen potential clients. In serving SME clients, banks are improving efficiencyby using mass-market approaches for smaller enterprises and using direct delivery channels whereappropriate. They also build their revenue base by prioritizing cross selling to existing clients. Finally,banks are adapting IT and MIS tools, and building capacity to effectively use these tools for managinginformation and knowledge in their service of the SME market, especially in understanding profitabilityand risk.
How to Begin Engaging the SME market
Banks looking to enter the market or expand their SME operations will be able to draw from the lessons
of other banks’ experience to date. These lessons apply to operations in five strategic areas: (1) strategy,
SME focus and execution capabilities; (2) market segmentation, products and services; (3) sales cultureand delivery channels; (4) credit risk management; and (5) IT and MIS. Before putting these lessons touse, however, banks need to follow a process for market entry that begins with understanding thespecific opportunity in the SME sector and ends with developing a strategy and implementation plan.Two tools that facilitate this process are a market assessment and an operational diagnostic. A marketassessment is concerned with determining the size and nature of the opportunity as well as thecompetiti
ve landscape. An operational diagnostic helps highlight a bank’s strengths and weakness.
In summary, serving SMEs is proving to be profitable and rewarding for individual banks, and assistingthe growth of SMEs will benefit national economies as well.
Small and medium enterprises are central to economic development, particularly in emergingmarkets. In order for SMEs to grow and their positive impact on the economy to continue, they needaccess to financial services, which has historically been severely constrained.
Many SMEs in emerging markets often rely on informal sources of capital, such as borrowing fromrelatives, to meet finance needs. However, when a small or medium enterprise does access formalchannels, it typically looks to a bank as its primary source of financial services. Banks have begun to turn