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The SME Banking Knowledge Guide

The SME Banking Knowledge Guide

Can small and medium enterprises be banked profitably, and is the market today an attractive one? How do banks overcome the challenges and capture the opportunities offered by the SME segment, particularly in developing countries? What is the difference between SME lending and SME banking? How can banks successfully expand their SME banking operations?

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The State of SME Banking Today

SME banking is an industry in transition. From a market that was considered too difficult to serve, it has now become a strategic target of banks worldwide. The “missing middle,” describing the gap in financial services provided to SMEs, is shrinking. SME banking appears to be growing the fastest in emerging markets (low- and middle-income countries) where this gap has been the widest. More and more emerging market banks are developing strategies and creating SME units. IFC’s committed portfolio of investments in SME financial institutions has grown dramatically over the last five years — by 271 percent — totaling $6.1 billion as of end of Fy09.

Competition in other markets is one reason cited for commercial banks moving “downstream” to serve SMEs. Also, governments around the world now recognize the importance of the SME sector and have worked to support its access to finance, sometimes by addressing legal and regulatory barriers or building credit infrastructure. But the key to the growth of SME banking may be that banks are starting to understand the particular needs and preferences of SMEs, and are developing tailored approaches to overcome the historical challenges of high credit risk and cost to serve.

One sign that banks are unlocking some of the potential in the market is that they are reporting higher returns on assets from their SME operations. For example, leading banks reported rOAs of 3–6 percent for their SME operations compared with 1–3 percent bank-wide. Also, contrary to common perception, the SME market is served by a wide spectrum of banks, not just smaller banks with relationship-based models.

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