SME Banking

• Publication date: April 2012
• Report size: 100 pages

Synopsis This VRL report tackles the main issues concerning best practice in SME banking • It analyses the ways in which banks approach SME's in terms of outreach, offering and risk-based considerations • It contains extensive data, a number of global case studies and a comparison of SME banking practices in developed and developing countries • Product and risk implications are analysed with regard to the gap between est...

Synopsis
This VRL report tackles the main issues concerning best practice in SME banking
• It analyses the ways in which banks approach SME's in terms of outreach, offering and risk-based considerations
• It contains extensive data, a number of global case studies and a comparison of SME banking practices in developed and developing countries
• Product and risk implications are analysed with regard to the gap between established and emerging markets

Summary
The majority (95 percent) of firms operating around the world are, in fact, SME's with European and Chinese SME’s contributing 99.8 percent of the total. According to the World Bank, the SME sector can contribute to the GDP of high income countries by as much as 51 percent as opposed to middle and low income countries, where SME's produce up to 39 percent and 16 percent of local GDP. Moving to emerging Eastern economies, Indian SME output represents 45 percent of industrial production and 40 percent of total exports. Even more staggering is the contribution of Chinese SME’s to the creation of the national taxable profit, 40 percent of total production. Judging from these figures, obstacles to funding means forcing SME's to downsize their businesses and ultimately exert a major influence on their country’s wealth.

European and US SME’s are still relatively well served (only between 12-14 percent of the high-income OECD countries are underserved or financially constrained), but economic conditions for businesses are getting tougher. SME’s from emerging markets are equipped with more solid growth-driven potential. This growing involvement in new SME markets will, based on country specific evidence, contribute substantially to a bank’s revenue. For example, Malaysian banks with a significant SME portfolio are expecting higher revenue growth due to a set of government projects deployed across the country to boost the economy.

Scope
• A look at the moves being taken to serve the needs of SME’s globally
• Both bank and government sentiment to this sector is analysed
• The sector’s profitability is examined
• Case studies embrace microfinance institutions, municipal banks and world bodies
• Risk management and credit scoring is discussed in depth

Reasons To Buy
By reading this report you will:
• Understand the crucial role of SME's and the need to serve them
• Investigate the drivers and barriers to SME engagement
• Overcome obstacles to engagement with SME's
• Understand the legislation driving SME best practice
• Succeed in serving the SME segment
• Develop an effective product offering
• Read global case studies

Key Highlights
• The financial sector is failing SME's throughout Europe and the US
• Unless the value of lending increases, there will be serious repercussions on the Western economic system in terms of contribution to GDP and employment figures
• SME's have great potential in emerging economies
• For banks to optimally serve the SME sector, they should develop dedicated internal units

Banking Industry in Malaysia

Table of Contents
Executive Summary
1 An overview of the SME Landscape
1.1 Introduction
1.2 Sales volume as the only criterion in use among Argentinean and Chilean banks
1.3 Alternative criteria for banks to identify SMEs
1.4 The crucial role of the SME
1.5 The large composite European SME reality
1.6 The US
1.7 Japan
1.8 Business confidence rising across emerging SME markets
2 SME banking practises and banks’ approach to SMEs
2.1Changing the habit of a lifetime: how banks see SMEs as a risky venture
2.2 From treacherous to temptress: banks see SMEs as viable opportunities
2.3 How banks can meet the financial needs of an SME
2.4 The luxury of (no) choice: how the size of an SME often prohibits access to finance
2.5 Oil-based economies can undermine the scope of SME lending opportunities
2.6 For banks to optimally serve the SME sector, they should develop dedicated internal units
2.7 The implementation of internal SME units follows a common denominator throughout the world
2.8 The adoption of SME units by MENA banks is more variegated
3 Best SME banking practices: Actors, Drivers and Barriers
3.1 The most active players in the Western SME Banking System
3.2 The US SME banking system is one of the least concentrated in the Industrialized World
3.3 The oligopolistic UK SME banking sector
3.4 The duopoly established in the Scottish SME market
3.5 The European Investment Bank as one of the most committed actors in the European SME banking market
3.6 The EIB has become increasingly involved in the SME sector
3.7 Lending a hand: The European Investment Fund as the combined effort of European banks
3.8 Factors that are peaking the interests of the European banks
3.9 World Bank case studies: exploring emerging markets
3.10 SMEs account for a large fraction of banks’ customer base
3.11 David vs Goliath: large banks are the predominant players in this emerging SME market
3.12 Asian SMEs: a review
3.13 Don’t touch that dial: MENA banks follow a variety of channel-related patterns
3.14 Understanding what influences SME banking practices in emerging markets – potential profits prove to be the over-riding factor
3.15 Best practices in SME banking often begin with large Corporations
3.16 The profitability of the SME segment is behind MENA banks’ practices
3.17 Obstacles between SMEs and banks are more plentiful than openings
4 Best practices when serving the SME segment
4.1 Introduction
4.2 The need for banks’ specialisation
4.3 How to succeed in serving the SME segment
4.4 The International Finance Corporation as a significant example of an SME lender operating within emerging markets
4.5 Worldwide case studies
4.5.1 Microfinance institutions serving the lower end of the SME segment
4.5.2 Microfinance initiatives have started to prioritise profit-seeking plans
4.5.3 Community, co-operative and municipal banks
4.5.4 Equity funds
4.6 Summary
5 Understanding SME products and services to optimise banks’ practices
5.1 Introduction
5.2 Banks’ challenges in developing an effective product offering
5.3 The weak legal framework of MENA countries behind traditional products
5.4 A wider scope of the products offered to SMEs
5.5 The contribution of SME products and services to the banks’ revenues
5.6 Standardised products lie behind successful strategies
5.7 Lending is just one part of a larger overall package
5.8 Project Merlin: an agreement for economic recovery
5.9 The secret behind wallet share and customer loyalty
5.10 An example of product-based initiatives to increase SME lending: the European Investment Fund as a producer of advanced products
5.11 Summary
6 Risk Management
6.1 Introduction
6.2 The mitigation of risk and the enabling environment
6.3 SME risk management practices
6.3.1 Credit Scoring
6.3.2 Credit rating systems to foster SME growth and secure lending transactions
6.3.3 Banks from MENA regions rely heavily on internal ratings systems
6.4 Noor Islamic Bank case study
6.5 Banks collateral requirements behind underserved developing countries SMEs
6.6 Beyond traditional lending techniques
7 SME banking legislation driving SME banking practices
7.1 Boosting support to European SMEs
7.1.1 Structural managed funds
7.2 A European example of government influencing SME banking practices: Project Merlin in the UK as an agreement for economic recovery
7.2.1 Lending commitments
7.2.2 A representative example: Lloyds Banking Group’s lending capacity on a growth trajectory
7.2.3 Other commitments
7.2.4 Co-operative spirit does not seem to have produced the intended effects
7.2.5 Business growth fund
7.3 The major lack of support for Icelandic SMEs. Limited government support and banks measures
7.4 Technological improvement needed by the Indian manufacturing SME sector
7.4.1 Indian banks have the potential to increase their SME lending
7.5 Basel 3 concerns for the SMEs world
7.5.1 SMEs may end up bearing more expensive loan-based conditions
7.6 Australian SME technological innovation on a growth trajectory
7.7 Government’s intentions leading to insufficient support for Chinese SMEs
7.7.1 A fruitful connection established between Chinese and British SMEs
7.8 Hong Kong SMEs potential unleashed
7.8.1 But there still seems to be a lack of long-run prospects
7.9 Japanese government and local authorities working in co-operation to support regional industries


List of Tables
Table 1: SMEs are classified according to diverse criteria throughout the world
Table 2: EU SME composition
Table 3: Banks definition of SMEs in Argentina and Chile (US$)
Table 4: World Bank definition of SMEs – with at least 2 or 3 characteristics met
Table 5: Average sales range for bank definitions of SMEs
Table 6: Malaysian SMEs definitions vary by industrial sector
Table 7: EU-27 enterprises
Table 8: EU-27 annual growth rates (%)
Table 9: Large lending activity to European SMEs
Table 10: Formal SMEs’ access to finance, by region
Table 11: US Banks’ market share, 2Q 2010
Table 12: US Banks’ market share, 2Q 2010
Table 13: Top 10 US small business loan lenders, 2009
Table 14: The number of UK banks fell significantly over the last decade
Table 15: Combined banking intervention EIB/Spanish financial institutions
Table 16: Combined banking intervention EIB/Dutch financial institutions
Table 17: A snapshot of SMEs in major Asian countries
Table 18: Commercial banks’ SME initiative outcomes
Table 19: Summary of Access Holding’s investments from 2006
Table 20: Microfinance institutions’ SME initiatives
Table 21 Equity funds-led SME initiatives, internal rate of return
Table 22: Bank products offered to SMEs
Table 23: Average number of products use by SMEs and percentage of SMEs that use each product
Table 24: SME products and breakdown of revenue generated
Table 25: A few examples of recent worldwide credit rating based initiatives
Table 26: Rating parameters
Table 27: Average share of SME loans in total bank loans
Table 28: Lending technologies

List of Figures
Figure 1: GDP contribution of SME and informal sector
Figure 2: SME contribution to formal country employment (median values)
Figure 3: EU-27 enterprise proportion (%)
Figure 4: EU-27 propensity to invest by size
Figure 5: US enterprise proportion (%)
Figure 6: Development of number of Japanese enterprises, non-primary economy 2001-2007
Figure 7: SME business confidence back up in Hong Kong and across Asia
Figure 8: Average operating incomes and profits for credit products
Figure 9: Share of firms with loan/line of credit from financial institutions
Figure 10: Size and prospects of the SME market
Figure 11: Size and prospects of the SME market (Argentina, Chile, Columbia, Serbia)
Figure 12: Percentage of firms with a loan/line of credit from financial institutions, MENA and other regions
Figure 13: The adoption of dedicated SME units around the world
Figure 14: MENA Bank involvement with SMEs: GCC against Non-GCC
Figure 15: Scottish SME banking actors
Figure 16: Loans to European SMEs (€m)
Figure 17: Volume of EIF business (€m), 2001-2010
Figure 18: Change in availability of bank loans for Euro-area SMEs
Figure 19: Credit availability by English banks
Figure 20: Banks with SME clients (Argentina, Chile, Columbia, Serbia)
Figure 21: Main banking players in the SME industry (Argentina, Chile, Columbia, Serbia)
Figure 22: Typical business landscape in emerging economies
Figure 23: Most banks report that the SME market is large and that prospects are good
Figure 24: Percentage of MENA banks using various distribution channels to reach and serve SMEs
Figure 25: Banks’ perceptions of the drivers of SME lending
Figure 26: Drivers of bank involvement with SMEs (Argentina, Chile, Serbia)
Figure 27: Percentage of MENA banks responding that driver is “very important” or “important” for SME financing
Figure 28: Obstacles to banks’ involvement with SMEs (Argentina, Chile, Columbia, Serbia)
Figure 29: Banks’ perceptions of the obstacles to SME lending
Figure 30: BRAC Bank’s coverage in Bangladesh]
Figure 31: BRAC Bank’s business segment loan portfolio, 2010
Figure 32: Sparkassen Kfw-StartGeld related market share vs. other banks, 2010
Figure 33: Products and services offered to SMEs (GCC vs Non GCC Banks)
Figure 34: Products and services offered to SMEs (State vs Private Banks)
Figure 35: Standardisation of SME products
Figure 36: Branches as the primary delivery channel for non-lending products
Figure 37: Leading banks have increased their product offering to SMEs
Figure 38: Risk management practices
Figure 39: Banks’ use of scoring models in SME lending
Figure 40: GCC and non-GCC banks’ risk techniques
Figure 41: Risk techniques use by state and private banks from MENA regions
Figure 42: The Noor Islamic Bank approach to the local SME field
Figure 43: Banks’ use of collateral in business lending
Figure 44: Leasing assets (% of GDP)
Figure 45: Factoring volume (% of GDP)
Figure 46: Percentage of structural funds allocated to European SMEs 2007-2013

Banking in Malaysia

Malaysia Parkinson`s Disease, 45-59 Yrs, Male, Dalys

• $ 250
• Industry data
• May 2013

Yearly, From 2005 To 2030
By Business Monitor International
Source: WHO, World Bank, IMF, BMI research

• Industries : Banking
• Countries : Malaysia

Malaysia Polio, 60-69 Yrs, Male, Dalys

• $ 250
• Industry data
• May 2013

Yearly, From 2005 To 2030
By Business Monitor International
Source: WHO, World Bank, IMF, BMI research

• Industries : Banking
• Countries : Malaysia

Malaysia Parkinson`s Disease, Total, Female, Dalys

• $ 250
• Industry data
• May 2013

Yearly, From 2005 To 2030
By Business Monitor International
Source: WHO, World Bank, IMF, BMI research

• Industries : Banking
• Countries : Malaysia

Malaysia Polio, 70+ Yrs, Male, Dalys

• $ 250
• Industry data
• May 2013

Yearly, From 2005 To 2030
By Business Monitor International
Source: WHO, World Bank, IMF, BMI research

• Industries : Banking
• Countries : Malaysia

Malaysia Polio, 0-4 Yrs, Female, Dalys

• $ 250
• Industry data
• May 2013

Yearly, From 2005 To 2030
By Business Monitor International
Source: WHO, World Bank, IMF, BMI research

• Industries : Banking
• Countries : Malaysia