The Ins & Outs of True MSME Banking
Small businesses and enterprises are vital to the growth of a country’s economy, especially in developing countries. In Africa, micro, small and medium scale enterprises contribute greatly to enterprise development and growth of the economy. So, what does MSME banking involve?
The MSMEs have a significant role in creating employment opportunities and reducing poverty, especially for the women and youth who are often significantly unbanked and underserved.
However, MSMEs face many difficulties:
- Access to finance and credit facilities
- Difficulty accessing the formal market
- Lack of adequate technology and skills
- Limited entrepreneurship skills
- Poor management
To address these challenges, many African countries are adopting various measures that include providing credit guarantees, business development services and infrastructure support. These measures aim to promote the MSMEs’ growth by broadening their access to both domestic and international markets. They will also ensure that MSMEs can build their capacities to respond to global challenges such as climate change. Today, we will discuss how the concept of MSMEs works, their categories, features, and the role of this banking system in the world’s economy.
What is MSME banking?
MSMEs are firms that fit in between microfinance and corporate banks. They have financial requirements that vary to great extents. Some being extremely tiny in size as small as a one-manned kiosk or cart on a curb of a road with others that are small-sized companies upto a 50 manhold. Some are too small and hardly recognizable to most banks and financial institutions for any sort of financial service, whilst others are small yet too big to be seen as microfinance eligible while not financially capable of matching corporate banks. MSME, an abbreviation for micro, small, and medium enterprises have and still are facing tremendous challenges in meeting their very basic financial requirements, albeit the great efforts and initiatives that had taken place over recent years. Perhaps, one major challenge is that it does represent the majority base of the modern corporate and businesses out there, especially so within emerging markets, let alone Africa. The emergence of startups and small businesses is the primary source of job creation and employment worldwide. MSMEs have been the driving force in increasing the GDP of many developing countries.
The MSME Complex Variations
Micro, small, and medium enterprises all aim to create jobs and provide economic growth in countries and globally. However, they could have a team of different experts to implement their goal. To understand the different roles in an MSME, we will categorise them into four. The technical, hybrid, instructional, and administrative MSMEs.
Technical
The technical group provides expertise in the development and strategies of MSMEs. Although they are not involved with the implementation, their technical knowledge provides correct details and expertise for an innovative project. Some good examples of this group are professionals, engineers, and scientists. They must have professional certifications in their field and sound knowledge of applying them.
Hybrid
This group has one of the most challenging tasks of all the categories. In this category, you need a combo of expertise in the field and implementation. This area is sensitive as it can be challenging to find a group with sound knowledge and technical implementations. So, here, the right balance between expertise and execution is essential.
Instructional
The role of this category is to offer mentorship and coaching. It is responsible for passing ideas on the implementation of various MSMEs projects.
Administrative
This area refers to people who monitor and manage different projects across MSMEs. They might not need technical knowledge or implementational skills. However, they are mostly committee members, governing bodies, and members of high-ranking organisations. But they are also crucial to the development of MSMEs.
What does MSME banking involve?
Although the primary aim of MSME is to produce goods and render services to consumers, there are other aspects you should know. It also features the following;
- MSMEs push businesses to get to the local and international markets at the seed stage.
- MSMEs play a significant role in employing people. This role is more common in developing countries. Research shows that they are accountable for 40% of the national income in developing economies. And this adds to their contribution of 50% to the world’s employment.
- They also oversee the development of technology and facilities and upgrade the industries.
- MSME takes charge of product and design developments in many businesses and offers interventions.
This institution represents about 90% of the world’s businesses and is vital in developing countries’ economic development. However, they still have some challenges –which we will discuss in the next section.
The impact of MSMEs in developing African states
The United Nations formed a category of the least developed countries (LDCs) in 1971. Africa has dominated the list of countries in this list for the past forty years with 33 nations. This fact highlights why MSMEs play a massive part in creating jobs in these countries. MSME accounts for a big part of the private sector in sub-Saharan Africa. Recent research has also highlighted the struggle of small businesses in Africa.
In 2021, a survey conducted in Nigeria, Kenya, and South Africa revealed the following facts;
- The study showed that the negative impact of COVID-19 on businesses in Kenya was about 81%. Nigeria and South Africa also saw 72% and 70% of the negative effects of the pandemic.
- On the positive side, there is increased technology adoption in these countries. For example, Nigeria’s use of technology among MSMEs in the last two years moved from 72% to 81%. Although Nigeria, Kenya, and South Africa are not among the LDCs, Africa is also becoming a fast-growing region tech-wise.
- Online channels for marketing have also been positive in Africa MSMEs. Social media is now a popular and useful tool in these regions. Small businesses also use freelancers to complete most of their campaigns, showing the role of MSMEs in creating jobs.
- However, financing remains a problem for these young innovations. 75% of startups use funds from savings to develop businesses.
What are the challenges of MSMEs in developing countries?
MSMEs contribute a lot to the global economy. They are also crucial to employment in developing countries. However, MSMEs face some challenges in their development and growth. We will highlight some of these challenges below;
- Since larger firms are more likely to get bank loans, MSMEs suffer from financial problems across different areas. So, their primary source of finances comes mostly from internal funds or support from families and friends.
- They also face challenges in getting risk management tools such as savings and insurance.
- MSMEs also lack access to credit and payment services.
These problems have affected the influence of these organizations in creating jobs, increasing national income, and developing human capital. So, what are the solutions to these challenges?
What are the solutions to the challenges of MSMEs?
There is no doubt that Micro, small, and medium enterprises need support to tackle their underlying problems. The world bank provides this assistance in different ways. Here are some solutions the world bank offers to MSME banking across the globe.
- The world bank analyzes and assesses the MSMEs to identify their financial sector and areas that require improvements.
- The World Bank offers support for developing designs and setting up credit facilities.
- They also provide services on consultation of the policies and financial activities of MSMEs
- Create global recognition for MSMEs at the G20 level
There are many ways that the world bank is offering its support to facilitate the development of MSMEs. These are evident as the world bank has conducted surveys in over 130 countries to assess the constraints of MSMEs. Their lending of finance for the growth of these young innovations worldwide is already over $3 billion.
The World Bank’s $30 million lending operation in Lebanon highlights its support to innovative and young firms at the seed stage. MSMEs are an essential part of the growth in the world’s economy today. The world bank is taking measures to ensure that they tackle the challenges of these innovative enterprises.
MSMEs do not only get financial support from the world bank; advisory on monetary policies is also one of their support. The world bank also offers access to training and valuable resources on financial management to these business organisations.
The importance of MSME banking cannot be overemphasized. Although these enterprises help provide national income mostly in developing countries, their contribution to the global economy is commendable. And thus when CIT VERICASH started tackling the MSME needs years back, assessing and predicting the futuristic needs and necessity of having a proper platform that tailors the very specific needs of this crucial segment to serve the above mentioned needs and be an integral part of forming the growth and expansion needed today. So by the tools developed over years of CIT VERICASH’s work in bridging the gap between technical needs and financial inclusion paid off handsomely in the form of a set of financial services intertwined with an agile platform, all capable of paving the way for MSMEs and their immediate and future needs. Through its comprehensive digital banking platform, it has a dedicated incorporated workspace and independent solution to help a lot of the banks, financial institutions, and Fintechs to deliver its products and services digitally and innovatively to MSMEs.
Especially, when we talk about a majority of the big banks across Africa, there has always been a relcutance in truly investing towards technology dedicated towards MSMEs. This is over and above the operational cost in acquiring and managing the limited returns from this customer segment, and in most cases intentionally make it difficult for a big chunk of this sector to have affordable access to various financial services and make their eligibility close to nothing.
Even though, there has been in recent years an increasingly amount of pressure through mandates enforced by most African bank regulators to include a minimal percentage of banks’ portfolios to include MSME customers, their has been an intense resistance and workarounds with no serious strategic directions into sincerely serving this sector.
Interestingly enough, however, with the uprise and explosion of tech startups, particularly fintechs, posing a seriously growin threat to most incumbant banks, especially smaller sized local ones, and gradually eating up market share from their retail segment, that a large part of, is linked to the MSME segment. It has been a growing pattern, that a major part of this segment are the consumer retail market themeseves, with a lot of these micro businesses being in themselves sole propieterships, and the growing need to to link their personal and business finances into one has become essential. Fintechs, have caught up on this, serving various financial aspects from account opening, to providing digital payments services, to credit, savings and even investments. And with growing desperate needs to gain financial access, they had no option but to turn these Fintechs.
Hence, the most obvious solution to reach a lot of these MSMEs, who are in many cases located in very remote areas, is to have solid digital platforms with simple customer oriented features that are tailored to their needs. As such, the VERICASH digital MSME platform offers just that, enabling a lot of its customers from banks of all sizes, to FIs, and Fintechs to deliver innovative financial services to their MSME customer base, offering htem the agility to easily alter their products services and features on their mobile application solutions and the scalability required to easily absorb in growth in business or new market expansions.
Wrap Up
It is with no doubt, that there is a magincently pressing realization that the MSME customer segment plays a key role in the economic development of most developing markets, and that this segment represents a significant part of the addressable financial markets. They have been sidelined and ignored for years on grounds of profitability, cost, and eligibility. Today, both regulators, and the various financial stakeholders are seeing how wrong they were and on a mass scale they could create the balance between financial inclusion, economic growth, and being able to create a profitable model. With the rise of Fintechs and digital transformation of most financial service providers, technology is at the core of enabling this to happen in a cost effective, efficient manner. The interesting take on this, most Fintechs are evn viewing scaling up beyond just local markets they originate from but look at the sustainability in offering a Pan-African approach.
About CIT Vericash
CIT VERICASH is a division of CIT GLOBAL, an international leading provider of innovative eCommerce and mCommerce software solutions and services with solid expertise spanning 25 years, since its establishment in Toronto, Canada in 1993. By applying CIT Global’s dedicated centers of excellence and its specialized leading products, in cooperation with its strategic partners, the company has delivered innovative and award-winning solutions to its clients in more than 48 countries, serving leading brands from North America, Europe, Asia Pacific, the Middle East, and Africa.