SME Lending: East African Banks Gearing Up for Change

A recent Business Daily Africa article “SMEs pay high penalty for poor record keeping” has summarized the results of African Development Bank Research.

Financial institutions in Kenya, Uganda, Tanzania and Zambia are recognizing the vast potential of lending to small and medium enterprises. Banks are also intending to pursue additional opportunities among their SME clients. This brings additional risks to the forefront of bank’s thinking. The risks are caused by various macroeconomic and regulatory conditions and lack of formal records reflecting the activities of  the business. As a result small business owners face financial pressure in the form of higher collateral requirements and increased interest rates.

The majority of commercial banks are still using archaic risk management techniques and are thus contributing to both their inabililty to take advantage of the opportunities presented, but also the barriers these SME’s face in trying to obtain financing. Some lenders are now dedicating their efforts to building a solid framework for prudent lending practices and are increasingly adopting new risk management tools.