Governor urges banks to look beyond SMEs’ difficulties

Governor of the Central Bank Dr. Henry Kofi Wampah says banks must seek innovative ways to turn around the difficulties of small- and medium-scale enterprises into opportunities that will enhance their profitability in the long-run.

“What is important is for banks to adequately understand the mode of operation of SMEs and to develop innovative financial services for them in line with their peculiar needs,” Dr. Wampah said.

According to him, banks consider lending to SMEs as a risky venture despite the critical role they play in the economy. “It is documented that SMEs tend to serve as a catalysts for economic growth, employment and poverty reduction.

“Players in the industry will also have to embrace the challenge of reaching out to startups to grow new businesses that sustain their balance sheets in the long-term,” he said.

Speaking at a public discussion organised by the Institute of Statistical, Social and Economic Research (ISSER) on Wednesday, he said banks will have to continually review their risk management system and explore new avenues to maintain bottom-line with emphasis on cost rationalisation and growing other areas of income.

Most SMEs, by their nature, lack proper management systems, have low technical knowledge and often possess poor labour skills. Some challenges which reinforce their perceived risk profiles include weak competencies in financial management as well as low levels of productive capital.

Dr. Wampah, delivering a lecture on the topic “What does it take to build a stable and efficient financial sector for sustaining growth and structural transformation in Africa”, said beyond the constraints faced by SMEs, evidence has shown that it is prudent to finance SMEs.

According to him, efforts to develop the financial sector should focus on enhancing depth, access, efficiency, and stability -- adding that “these have underscored efforts in many African countries to build a safe, sound and stable financial sector.

“Building an efficient financial sector is indispensable for sustained economic growth and structural transformation. This is why reforms in the sector have been ongoing for the past seven years,” the BoG Governor said.

Despite the banking system on the continent making considerable strides over the years with improvement in balance sheets, capital base and an enhanced risk management, challenges still remain -- undermining its contribution to the real sector.

“Corporate lending is still in many cases focused on the short end of the market, and few banks engage in long-term ending while bank balance sheets tend to be dominated by short-term deposits.

“There is also a lack of adequate competition as the banking sector remains in many cases – oligopolistic -- leading to inefficient pricing of financial assets,” he said.

Oligopoly is a market condition that exists when there are few sellers, as a result of which they can greatly influence price and other market factors.

He added that banks must remain focused on maintaining their progress-pace over the medium- to long-term as macroeconomic stability gets anchored and interest rates decline further.