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BANK 404 CREDIT ANALYSIS AND LENDING

BANK 404 CREDIT ANALYSIS AND LENDING. WEEK 9 MICRO AND SMALL ENTERPRISE LENDING Hatice Jenkins (1999). ARGUMENTS ABOUT MICROENTERPRISE LENDING. OLD APPROACH MICROENTERPRISES ARE NOT SIGNIFICANT FOR ECONOMIC DEVELOPMENT MICROENTERPRISE FINANCE IS NOT PROFITABLE FOR BANKS NEW APPROACH

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BANK 404 CREDIT ANALYSIS AND LENDING

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  1. BANK 404CREDIT ANALYSIS AND LENDING WEEK 9 MICRO AND SMALL ENTERPRISE LENDING Hatice Jenkins (1999)

  2. ARGUMENTS ABOUT MICROENTERPRISE LENDING OLD APPROACH • MICROENTERPRISES ARE NOT SIGNIFICANT FOR ECONOMIC DEVELOPMENT • MICROENTERPRISE FINANCE IS NOT PROFITABLE FOR BANKS NEW APPROACH • MICROENTERPRISE FINANCE IS NECESSARY TO FACILITATE ECONOMIC DEVELOPMENT • MICROENTERPRISE SECTOR IS A POTENTIAL MARKET FOR BANKS TO MAKE PROFITABLE LOANS

  3. RATIONALE FOR SUPPORTING THE DEVELOPMENT OF MICROENTERPRISES MICROENTERPRISES • CREATE EMPLOYMENT • INCREASE ECONOMIC OUTPUT AND EXPORTS • IMPROVE INCOME DISTRIBUTION • ESTABLISH THE FOUNDATION OF A MARKET ECONOMY • CONTRIBUTE TO ECONOMIC GROWTH AND DEVELOPMENT

  4. MICROENTERPRISE ACCOUNT FOR MOST OF THE PRIVATE BUSINESSES IN BOTH DEVELOPED AND DEVELOPING COUNTRIES MICROENTERPRISES AS A % OF TOTAL COUNTRYPRIVATE BUSINESSES EGYPT 99 % KENYA 99 % ZIMBABWE 87 % POLAND 90 % SRI LANKA 89 % MALAWI 97 % CANADA 97 % USA 98 %

  5. MICROENTERPRISE CONTRIBUTE ECONOMY SIGNIFICANTLY EXAMPLE 1 : CANADA • 97 % OF ALL BUSINESSES (EXCLUDING AGRICULTURAL BUSINESSES) BELONG TO THE MSE SECTOR • 40 % OF GDP IS PRODUCED BY THE MSE SECTOR • 59 % OF EMPLOYMENT IS CREATED BY THIS SECTOR • 96 % OF EXPORTERS ARE MSEs.

  6. MICROENTERPRISE CONTRIBUTE ECONOMY SIGNIFICANTLY EXAMPLE 2: POLAND • 90 % OF ALL BUSINESSES (EXCLUDING AGRICULTURAL BUSINESSES) BELONG TO THE MSE SECTOR • 55% OF GDP IS PRODUCED BY MSE SECTOR • 60 % OF EMPLOYMENT IS CREATED BY THIS SECTOR

  7. MICROENTERPRISE DEVELOPMENT IS A WORLD ECONOMY TREND • PRIVATIZATION AND ECONOMIC REFORMS INCREASED THE NUMBER OF MICROENTERPRISE AND SMALL BUSINESSES IN EASTERN EUROPE, ASIA , MIDDLE EAST, AFRICA AND LATIN AMERICA.

  8. HOW DO WE DEFINE MICROENTERPRISES AND SMALL BUSINESSES DEFINITION VARIES ACROSS COUNTRIES, BUT IN GENERAL, • MICROENTERPRISES HAVE BETWEEN 1-5 EMPLOYEES AND THEY OPERATE MORE INFORMALLY. • SMALL ENTERPRISES HAVE BETWEEN 6-10 EMPLOYEES • MEDIUM ENTERPRISES HAVE BETWEEN 11-100 EMPLOYEES AND CARRY OUT THEIR ACTIVITIES IN AN ORGANIZED AND FORMAL WAY

  9. THE COMMON CHARACTERISTICS OF SMALL AND MICRO ENTERPRISES • THEY ARE ENTERPRENEOURS WHO DO NOT POSSESS SUFFICIENT COLLATERAL TO QUALIFY FOR COMMERCIAL BANK LOANS • THEY HAVE NONE OR LIMITED CREDIT HISTORY • THEY ARE FAMILY BUSINESSES AND HAVE LESS THAN 10 EMPLOYEES

  10. WHAT IS THE SIZE OF MICRO LOANs ? • THE SIZE OF LOANS CHANGES ACROSS COUNTRIES, BUT IN GENERAL SMALL, MICRO AND MEDIUM ENTERPRISE LOANS ARE : MICROENTERPRISE LOANS: $ 100 - $ 10,000 SMALL LOANS : $ 11,000 - $ 90,000 MEDIUM LOANS: $ 91,000 - $ 250,000

  11. WHY DOES THE FINANCING OF MICROENTERPRISES DESERVE A SPECIAL TREATMENT RELATIVE TO OTHER BUSINESSES ? • MSE SECTOR HAS A LIMITED OR NO ACCESS TO BANK CREDIT AS COMPARED TO LARGE BUSINESSES • THERE IS A STRONG EXCESS DEMAND FOR BANK CREDIT FROM THE MSME SECTOR • IF STRUCTURED PROPERLY, LENDING TO THE MSE SECTOR IS A POTENTIALLY IMPORTANT SOURCE OF PROFITS FOR BANKS

  12. SOURCES OF FINANCE FOR THE INITIAL INVESTMENT OWN SAVINGS COUNTRY& RELATIVESBANKSOTHER Bangladesh 75% 1% 24% Nigeria 98% 1% 1% Sierra Leone 80% 1% 19% Tanzania 93% 1% 6% Haiti 81% 1% 18% Swaziland 71% 3% 26% Malawi 80% 1% 19% • *Other sources include money lenders, NGOs, buyers’ advances and suppliers’ credit.

  13. EVEN AFTER THE INITIAL INVESTMENT, THE MSE SECTOR HAS A LIMITED ACCESS TO COMMERCIAL BANK CREDIT • ACCORDING TO THE INTERNATIONAL STATISTICS LESS THAN 30 PERCENT OF TOTAL EXISTING MSEs HAVE ACCESS TO COMMERCIAL BANK LOANS

  14. BARRIERS TO ENTER THE MICROENTERPRISE FINANCE • MISCONCEPTIONS ABOUT LENDING TO MICROENTERPRISES • THE PERCEIVED RISK ABOUT LENDING TO MICROENTERPRISES IS HIGH • MICROENTERPRISE FINANCE REQUIRES HIGHER ADMINISTRATIVE COSTS PER DOLLAR OF LENDING

  15. MISCONCEPTIONS IN MICROENTERPRISE FINANCE • IT IS IMMORAL TO MAKE PROFIT ON MICROENTERPRISES LOANS • IT IS IMPOSSIBLE TO MAKE PROFIT ON MICROENTERPRISE LOANS

  16. WHAT MAKES MICROENTERPRISE LENDING UNDESIRABLE FOR BANKS • INFORMATION BASE IS INCOMPLETE AND UNCERTAIN • THIS SECTOR IS HIGHLY HETEROGENEOUS • HAVE INADEQUATE EQUITY BASE • HAVE POTENTIAL FOR IRREGULAR CASH FLOWS • INVOLVES HIGHER LENDING COSTS PER DOLLAR OF LENDING • LACK OF SUITABLE AND ADEQUATE COLLATERAL

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