Micro, small and medium-sized enterprises (MSMEs) are of vital importance for economic growth, stability and prosperity worldwide. The MSME sector provides the largest number of employment opportunities, both in industrialised countries and in less developed economies. In addition, many MSMEs are family-run businesses whose decision-making processes are oriented towards stability, and these companies often contribute greatly to the development of the local social environment in which they operate. However, investments are a necessary part of enabling growth and creating additional jobs. This in turn requires reliable financial partners that provide these enterprises with access to loans on a permanent basis and at fair and affordable conditions.
Against this background, we have been working with banks and other financial institutions all over the world for over 35 years. Our primary objective is to provide these institutions with the knowledge and skills they need to serve MSMEs in a commercially successful and responsible way.
Financing micro enterprises
We consider the financing of very small enterprises to be an area of business with which financial institutions can achieve solid earnings while at the same time providing these local companies with permanent access to external capital. In contrast to most of the players in the “microfinance industry” today, we do not promote business lending purely as a means of combating poverty. Moreover, we clearly distance ourselves from the practice of issuing consumer loans to low income borrowers, as we are convinced that such an approach often increases poverty instead of reducing it.
Specifically, we provide advisory support in the establishment of a department dedicated to small business lending, while also offering corresponding training for credit staff and introducing appropriate processes and procedures. This enables us to ensure that all the necessary functions and processes are in place to allow for successful, efficient and sustainable financing of small enterprises. The central component of our projects largely comprises the introduction of IPC’s credit technology, which we have developed as the best possible solution to address the needs of small businesses and account for the risks associated with lending to this target group. A further aspect is the development and implementation of largely standardised credit products, as well as continual and rigorous monitoring of transaction costs in the new business area.
The traditional SME financing models implemented in stable market environments, based on reliably documented company data, have proven to be largely unsuitable for banks operating in highly informal economies. Although many banks in these countries are generally interested in SME clients, the actual growth of their SME portfolios often fails to meet expectations. Likewise, entrepreneurs express almost constant disappointment with the poor quality of services available for SMEs.
In our opinion, the main reason for this dilemma is that the SME client segment comprises an extremely heterogeneous group with very different types of businesses. We therefore implement an approach that is oriented towards both individual customers and an appropriate analysis of the credit risks associated with SME clients. More than with any other client group in banking, the “Know Your Customer” principle should be applied when dealing with SMEs. By using a credit technology based on the analysis of company data, we are able to identify and evaluate the true financial needs and risks of SMEs. We also aim to establish efficient front-office structures at the branch level of our partner banks, as well as a centralised risk management function (in line with Basel standards). In this manner, we ensure that SME finance can become a true core business area for our partner banks.
Lending to agricultural businesses
Our approach to financing agricultural MSMEs takes into consideration the risks inherent in this sector (especially the volatility of prices for agricultural products) and the potentially higher transaction costs of providing good customer service. As with enterprises in other sectors, our main focus is on the borrower’s economic situation and existing level of debt, as these aspects allow us to evaluate the creditworthiness and individual debt capacity of the business.
In general, all of the financial data about an agricultural business or farmer can be generated and calculated in the same way as with other sectors. However, we also provide support in an additional area, namely the financing of agricultural value chains. Our approach makes it possible to specifically address the financing needs of regionally active agricultural businesses based on findings from the analysis of value chains, thus allowing partner institutions to mobilise additional demand for credit.