Fruit sellers at a market in Nairobi, Kenya.
Fruit sellers at a market in Nairobi, Kenya.
By Ahmad Haniff Jamaludin, Bank Negara Malaysia, with significant contributions from Jason Barrantes, SUGEF, Charles Kimaro, Bank of Tanzania, John Mwaka, SASRA - Kenya, David Mfanimpela Myeni, Ministry of Finance - Eswatini, and other AFI members.

SME finance as seen by regulators: focus on Sub-Saharan Africa

A sound, progressive micro, small and medium enterprise (MSME) sector is critical to balanced, inclusive economic growth. According to the International Labour Organization, MSMEs create 67 percent of global employment, yet MSMEs have the potential to assume an even greater role in economies.

Access to financing is crucial for MSMEs to attain their potential. With sufficient funds, they can expand and impact economies by paying more tax and providing more employment. The unanimous adoption of the Maputo Accord by AFI members at the 2015 Global Policy Forum reinforced the importance of access to finance for MSMEs “in driving employment, economic development and innovation.”

The role of financial regulators in SME finance

The role of financial regulators is to ensure the stability of the financial sector. To accomplish this, policymakers need to ensure that smart policies and supervision are in place, including rules and frameworks for intermediation.

In 2016, AFI’s SME Finance Working Group (SMEFWG) conducted a survey among member countries, five of which were in Sub-Saharan Africa -- eSwatini, Kenya, Tanzania, Burundi and Madagascar. While government funding for subsidized loans to MSMEs was regarded by members as being insufficient, responses indicated that governments have established various measures, programs and schemes aimed at providing MSMEs with better access to financing.

These measures and interventions include direct monetary intervention, legal and regulatory frameworks for MSMEs, and policy and market development initiatives.

Direct monetary intervention

Direct monetary intervention (DMI) entails subsidized credit and refinancing programs that provide lending at below market rates to targeted MSMEs. It allows MSMEs to lower their cost of doing business. For governments, it offers a strategy for spurring entrepreneurship, reducing poverty, lowering income inequality and stimulating economic growth. The SMEFWG survey found that while DMI is a trend in South Asia, in Sub-Saharan Africa only Eswatini and Kenya had subsidized credit or refinancing schemes implemented by financial regulators. In eSwatini this comprised a loan guarantee scheme, a regional development fund, a youth enterprise fund, and a community poverty reduction fund. In Kenya, SACCOS (Savings and Credit Cooperative Societies) received credit from commercial banks, governments and donors for onward lending to its members.

Legal and regulatory frameworks for MSMEs

Legal and regulatory frameworks for MSMEs are aimed at promoting their growth and development. The survey found that in sub-Saharan Africa only Eswatini and Kenya had legislation specific to MSMEs.

Classifying MSMEs as micro, small and medium enterprises (MSMEs) enables policy makers to target specific sectors, facilitate technical assistance and channel financial benefits and other policy incentives. It also facilitates the collection of data on MSMEs.

Financial regulators may enact prudential regulations and lending guidelines to directly or indirectly encourage banks and financial institutions to lend to MSMEs. SMEFWG survey respondents reported that the two most common prudential regulations implemented were lower risk weights and liquidity requirements for MSME loans. Other types of regulation used to spur lending to MSMEs included improving credit processes and imposing a quota/ lending requirement on financial institutions, specifying a percentage of their total lending for MSMEs. In Sub-Saharan Africa, only Eswatini had a prudential regulation, in the form of its Money-Lending and Credit Financing Act 1991, designed to protect MSME borrowers.

Many MSMEs do not possess valuable fixed assets to pledge as security for loans. Often, though, they do have ‘movable’ collateral, such as equipment and machinery, livestock, accounts receivables and inventories. Having a secured transactions framework that provides adequate protection to lenders allows MSMEs to leverage these types of assets and secure loans. Such frameworks are less common in Africa than they are in East Asia and Southeast Asia, Latin America and the Caribbean countries.

Policy and market development initiatives

The banking sector plays an important role in providing information to MSMEs, and capacity building and training are important aspects of enabling this. The SMEFWG survey found that only Eswatini, Tanzania and Kenya provided regular workshops, seminars and training to enhance the sector’s capacity. In Kenya, SACCOS advise members on the best options for deposits. They also conduct surveys on financing satisfaction and ICT challenges. In Eswatini, the Micro Finance Unit collaborates with several stakeholders in building capacity and providing training for MSMEs.

Public financial education and awareness programs enhance access to finance for MSMEs. The SMEFWG survey found that regulators in Eswatini, Tanzania, and Madagascar provided public financial education on the various services and schemes available.

Countries in East, South and Southeast Asia have long been expanding their financial education and awareness outreach, and over the past decade, this has become evident in Sub-Saharan Africa as well. Eswatini provides mentoring and coaching, a financial services guide, a radio program, and a toll-free number for MSMEs. Madagascar organizes partnerships with donor agencies and other partners, such as the Microfinance Association Network, to raise awareness and educate.

Readily available credit information helps lenders to evaluate applicants’ creditworthiness. Yet, often with MSMEs, a great deal of information is either not readily available or is opaque. A credit information mechanism facilitates access to finance, by providing information on MSMEs. The SMEFWG survey found that Madagascar, Kenya, Tanzania and Eswatini had dedicated credit bureaus, providing MSME-specific information.

Credit rating and scoring is a value-adding extension of the services of credit bureaus that provide information on MSMEs. Many countries, however, have not introduced credit scoring guidelines or regulations for credit-rating MSMEs. While credit rating is not common in Africa, in Kenya MSMEs are assigned a rating by a private credit reference bureau.

Traditionally, banks conduct their own credit analyses, making it unviable to assess many individuals and MSMEs. Instead, they use collateral, which is often not available in Sub-Saharan Africa. Consequently, credit bureaus have emerged: by aggregating credit data, they have reduced costs. And the disintermediation continues: providers of the most accurate, detailed and extensive information on customers are best positioned to analyze that information and price credit (and other financial services). Examples of this type of entity are operating in all countries with a high level of tech penetration, including Kenya (Safaricom/M-Pesa).

By sharing the risks with lenders, credit guarantee schemes provide access to financing for MSMEs with insufficient collateral or credit track records. They are provided by institutions established by the government/financial regulator or directly by the government. Different mechanisms are used to set up guarantee schemes. The Principles for Public Credit Guarantee Schemes (CGSs) for MSMEs, published by the World Bank, are available to countries for reference and implementation.

For start-ups without access to capital markets or formal banking, venture capital is an essential source of financial assistance. The SMEFWG survey found that Kenya and Madagascar had venture capital funds. Although they have been developed in Asia and Eastern Europe, they are not widely available in Sub-Saharan Africa.

MSMEs may at some point have difficulty repaying their loans for a variety of reasons. In the countries surveyed by SMEFWG, there was an absence of debt resolution mechanisms; instead, debt resolution was market-driven and involved rescheduling or restructuring loans.

The majority of countries surveyed had consumer protection mechanisms. The financial regulators in many of these countries had a dedicated consumer protection division, while others had dedicated entities or an ombudsman.


This article was originally featured in Proparco's Private Sector & Development Magazine.