October 13th, 2016

How the use of non-financial services can help bankers deliver effective financing.

Poor communication between entrepreneurs and their bankers is often a stumbling block in the delivery of effective financing for enterprise growth throughout the world. The use of non-financial services (NFS) can help with this.

Bankers regard SMEs as high risk propositions, partly because they often cannot get the information they need from entrepreneurs to see what is going on in the business and why finance is needed. On the other side of the coin entrepreneurs get frustrated with their bankers because they feel that these bankers don’t really understand what ‘doing business’ is all about. As business owners they are not able to articulate their dreams and what they need to achieve these dreams, in a language and form that is acceptable to the banks policies and procedures – so uneasy conversations and relationships ensure and mutually beneficial opportunities are missed.

One way of improving these relationships and unlocking these opportunities is through the use of targeted NFS.  The provision of NFS to business clients is not new for the banking sector, where specialist adviser services, membership to premium business clubs and associated networking events and trips have long been offered to corporate clients.  However, the provision of such services specifically targeted at smaller businesses is a more recent phenomenon particularly in emerging markets.

Research by the IFC in 2012, referred to NFS provision for SMEs as ‘a growing trend’ with banks in emerging markets using these services as a means of differentiating themselves in what was seen as an increasingly competitive market. This upward trend in targeted SME provision has also been facilitated by new technology where online platforms and web based facilities enable wider promotion and more accessible and cost effective delivery to SMEs.

On the demand side, growth oriented entrepreneurs are keen on NFS. . A 2013 report on SME development in South Africa noted a strong unmet demand for NFS amongst SME owners and some recent FSD Kenya research with growth SMEs in Kenya found that several of entrepreneurs would benefit from receiving such help to plan and structure further business growth more effectively. Entrepreneurs want to network with the peers to help them find new business opportunities, know how to get the best deals for financing their business growth and how to manage the more complex mix of resources and activities that accompany growth.

Promotionally oriented NFS such as business competitions and awards provide entrepreneurs with opportunities to present their business ambitions in an non transactional context to audiences that include bankers.  Other NFS such as the banks own business clubs or sponsoring such clubs and events allow bankers and business owners to meet and talk about business in an informal yet informed setting. More in depth NFS such as sponsored business training programmes can help entrepreneurs to learn how to structure plan and better manage their ambitions for growth and in doing are better able to articulate these more coherently to others including bankers.

In Kenya NFS provision for SMEs by the banks is not widespread but definitely emerging.  At the time of writing (Sept 2016), KCB has partnered with with a local TV station to host the ‘Lions’ Den’ competition which is Kenya’s equivalent of the globally successful Dragon’s Den and Sharks Tank investment pitching programmes. This programme, aimed at both new and existing business provides an opportunity for Kenyan entrepreneurs looking for investment and mentorship to showcase their potential for growth. Barclays Kenya, KCB, and Family Bank promote business clubs for their SME clients whilst I&M Bank has introduced an ‘online business club’ for all its business account customers.

If you are a bank looking at developing and delivering NFS to SMEs you need to think about some key questions before you start.

1. Taking stock – have you delivered NFS previously and if so what, to whom when, how and to what effect?
2. Establishing a clear purpose – Why do you want to do this and what does the desired impact of doing this look like?
3. Identifying the target SME segment/s – what do you want to do, for which SMEs, and how do you know that these SMEs want or will benefit from such NFS?
4. Knowing the costs and funding – how much is this going to cost to develop test and deliver and where is the funding coming from for how long?
5. Deciding in house or out – NFS is not a bank’s core area of expertise so there needs to be a strong argument for doing it internally.
6. Setting indicators of success and monitoring them – make sure you are evaluating the delivery outcomes of any NFS offered with a schedule of follow up contact to SMEs that works closely alongside the bank’s core financial offers.

Learn more about NFS from the GrowthCap publication Non-Financial Services in SME Banking which can be found on the FSD Kenya website

IFC/ Miliaras, C and Barbarasa, E. 2012 Why Banks in Emerging Markets Are Increasingly Providing Non-Financial Services to Small and Medium Enterprises.

JP Morgan (2013) The Small and Medium Enterprise (SME) Catalyst for Growth Initiative in South Africa: final report.

Bennett, D. et al 2016

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