Designing a new approach to MSME lending
Micro, small and medium enterprises (MSMEs) make an important contribution to growth and employment creation in developing markets. However, this contribution is constrained by MSMEs’ limited access to formal finance.
While a lack of collateral and low transactional visibility from banks make MSMEs a risky group to lend to, the banking industry’s lack of understanding of the nature and needs of MSMEs contribute significantly to the problem. This has resulted in the offering of vanilla products that do not fully satisfy MSME requirements.
Genesis Analytics partnered the IFC on its Nigeria MSME programme to help a large commercial bank develop an MSME strategy.
We began with an internal evaluation of the bank’s existing MSME portfolio and product offerings. Working closely with management, Genesis developed a new MSME identification methodology based on client loan exposures and product uptake. This identified that the bank had fewer MSME clients than it had initially thought and that these clients concentrated their use in only four products out of the many on offer.
Next we carried out a comprehensive external analysis of the Nigerian MSME landscape. Using Genesis’ experience in the market and financial modelling capabilities, we sized the opportunity in the MSME lending market and carried out a detailed competitor analysis along product offerings and brand positioning. Despite MSME lending expanding rapidly (though from a low base), we identified that there was little product differentiation in the market.
Equipped with a proper MSME identification methodology and view of the MSME lending market, we recommended a new organisational design that used a segment-driven approach as opposed to the bank’s initial product-driven approach.
The segment-driven design promotes nurturing a relationship between the MSME banker and the client in an attempt to serve the customer needs in full, and provide direction towards product development. This new approach required product and channel strategies to be refreshed. Although out of the scope of this project, we identified the decisions that management would need to make regarding its product strategy to assist the bank differentiating itself from its competitors.
These organisational design and decision recommendations were organised into a roadmap detailing the steps for the bank to make the necessary changes. We provided a resident adviser based at the bank for two years to help with implementation.