The Chief Executive Officer of Absa Group, Kenny Fihla says commercial banks across Africa urgently need to rethink traditional SME lending models because outdated credit assessment frameworks are locking out the very businesses driving economic growth.
According to him, the long-standing reliance on historical financial statements as the primary basis for lending decisions is fundamentally flawed when applied to small and emerging enterprises.
“For small and emerging enterprises, we are asking a question that is not relevant because these are enterprises that have ups and downs run usually by individuals or families. They are not going to give you a history of financial statements.”
His solution is a model toward behavioural and data-driven lending where banks assess how businesses operate in real time through alternative data sources and partnership with institutions that already track SME performance and payment behaviour of such entities.
“So we need to modify our lending criteria to focus more on understanding the behaviour of the client. We also need to form partnerships with a number of role players who already have data and have modelled the behaviour of small businesses. They will tell you who is reliable and who will honour their debt obligation because these people have been their customers for a number of years”, Kenny Fihla suggested.
He was speaking Wednesday evening on a special edition of The Point of View on Channel One TV.
On the show, he suggested that, beyond credit assessment, banks must also play a more active role in unlocking market access for SMEs.
While large corporates are increasingly interested in sourcing locally, he noted that small businesses often lack the scale, networks and negotiating power to tap into these opportunities.
What Absa is doing
To bridge this gap, Absa has been rolling out market access programmes in several countries connecting SMEs directly with large buyers and equipping them with the knowledge to compete effectively.
“We run in many of our markets, access programmes where we educate small enterprises about where these opportunities are and we play the matchmaking role between these small enterprises as well as big customers who could access or buy their goods and services. I think we need more of those kinds of initiatives”.
However, the Absa Group CEO stresses that meaningful progress will require stronger collaboration across the financial ecosystem adding that deeper partnerships between commercial banks, governments and development finance institutions is crucial to de-risk SME lending.
“I think there’s still a lot of work that we can do across multiple players to connect better and to drive this sector of the economy that is the engine for growth for Africa”, the Absa Group CEO concluded.
