Have you ever applied for a bank loan? What was your experience? Most people seem to have a harrowing experience trying to access financing from banks.
One of the key reasons that are blamed for slow development of enterprise and entrepreneurs is the challenge of accessing finance. It has killed many businesses of great potential.
Granted, the problem is two-sided. Many of our small businesses have issues that inherently emasculate their ability to access credit.
These mostly stem from an underdeveloped business culture which fails to incorporate business values, principles and practices that undermine these enterprises.
These are symptomatic in poor record keeping, weak managerial capacity (I will employ my brother/sister/ cousin as they are the only one I can trust instead of developing proper verification and internal control systems that ensure accuracy in decision-making).
These practices, especially lack of records, often block businesses from borrowing because there is no credit history. Take, for example, restaurants and specifically bars.
Stock is bought in the morning and this comes from previous night’s sales. The practice is that once reconciliation has been done in the morning, purchases are made and then what is left over, if any, is banked or, most of the time, put in the safe.
This practice, much as it seems sensible, hides the truth about the performance of this business to the bank. The owner cannot defend their claim to a booming business even if it was.
Mercifully, this practice is improving thanks to all the sensitisation work going on. Now the banks must change.
To effectively build entrepreneurship and enterprise so as to achieve Vision 2020 with five short years remaining something has to happen in the banking sector and it has to happen fast. Here are a few of the things that must change;
Obsession with collateral: Rwandan banks are way too focused on collateral. In truth, it is unlikely that any of the banks that lend to small businesses ever focus primarily on the business case. It is always about the poor businessman or woman’s land, house, car or some other security.
The dialogue begins and ends with collateral, it seems. If the prospective debtor has no acceptable collateral, as the norm with new entrepreneurs, no loan comes and another potentially big business goes under.
While it is a fact that the banks must conduct due diligence in their lending and be risk averse; there needs to be fresh thinking around the lending policy.
Is it not possible for the banks to work towards educating their customers and ensuring that they appreciate fully the whole financing business and are, thus, less likely to default?
Guarantors such as the Business Development Fund (BDF) are another avenue that most banks should take very seriously and build on.
Traditional approach: Conventional banking firms have always been multinationals that originated from the West. Their approach has traditionally been to focus on corporates.
Unfortunately, our corporations are very few and far in between. Despite this, banks seem to be stuck in this ‘corporate rut’. There is a need to shift focus and thought to the SME’s sector beyond a few slogans on plaques in the banking hall.
Banks need to take time to understand small business if they are to work with them effectively. They must take this initiative seriously.
Low loan limits and slow graduation to higher amounts: SME’s complain that bank loans are too low relative to their needs. After repayment of the same, it takes too long to increase the amounts they can borrow significantly. Banks, are you listening?
Slow turn-around times: you walk to the bank with an intention to borrow. You ask for and are given the requirements. You are told that it will take a few days to complete the process, normally 72 or so hours. You return the forms and fulfill all the requirements only to meet a new setback. Cycle continues for sometimes up to a month. I have never understood this part of banking…is it paranoia?
While it is important for banks to think seriously about risks; it is also imperative that they think about it twin; returns. This would make them more proactive so that they can play their role more effectively. It is just good business.
The writer is a Project Management and Entrepreneurship Development Consultant based in Kigali.