SMEs struggle to get funds from cash-rich banks

Small and Medium Enterprises (SMEs) continue to struggle with an inability to obtain finance facilities from banks and continue to borrow at prohibitive rates from the informal sector while banks have surplus liquidity. Why do SMEs, which constitute 94% of total business units in the country, fail to benefit from the traditional financial sector?

It is common knowledge that the main challenge faced by the SMEs is the difficulty to obtain financial assistance to start up a business or for expansion of an existing undertaking. Banks have over the years ignored or made covert excuses for their inability to finance this sector, pushing SMEs more and more towards high cost informal lenders.

All governments have purported to be the champions of the medium and small entrepreneur and have sought the assistance of the chambers and regional trade bodies to come up with new and innovative ways to motivate and sustain SMEs.

Many are the awards ceremonies recognising entrepreneurship and felicitations whilst the key issue of obtaining finance from the banking sector remains unaddressed.

Traditionally, banks have perceived SMEs as being structurally weak, and are being faulted for not providing proper financial records. It’s common knowledge amongst the bankers and business circles alike that SMEs, unlike corporates, shy away from keeping proper accounting records in order to avoid paying high taxes.

This in turn precludes banks from ascertaining the repayment capacity and the cash flow of the SMEs.

Proper financial records and security are not the only criteria banks look to. Banks also expect borrowers to have sophisticated business plans. Many of the SMEs are first generation start up ventures, and do not have the knowledge or the access to persons with the required skills to put their business ideas in a format acceptable to banks. Who will address this issue is of critical importance, if SMEs are to benefit from the low cost finance facilities on offer from banks? The lack of equity capital and the high sensitivity of SMEs to political and economic changes also make lending to SMEs a higher risk than to corporates. Are these factors mere perceptions of bankers or is the SME sector really too risky to lend to?

SMEs will continue to be a very vital part of the economy. Then is it the government’s duty to motivate the formal financial sector to take note of the needs of SMEs, or will the banks on their own consider the importance of lending to this sector which comprises over 90% of the business units in the country, and employs over 30% of the total industrial employment? “Will bankers take a less conservative approach to lending in today’s scenario?” is the burning question in the minds of the majority of small and medium entrepreneurs.