REPORTS AND RESEARCH

Case studies of how a cashflow based lending product, developed in partnership between KCB Bank Goup, Women’s World Banking and Argidius, is transforming the missing middle of SME finance.

The world’s emerging economies do not generate enough formal jobs. Unable to find proper employment, over a billion people remain in poverty. Growth-orientated Small and Medium Sized Enterprises (SMEs) hold the most potential for creating the formal jobs needed.

In developed countries SMEs receive support to address their needs and encourage their growth. However, in developing countries SMEs lack access to finance. The IFC estimates the finance gap for formal SMEs outside OECD countries to be $700-850 billion.

The lack of financial resources in particularly acute amongst women-led SMEs. For example in Kenya women access only 9% of available credit despite running 25% of the countries’ SMEs.

The NGO Women’s World Banking, with support from Argidius, undertook a field study to better understand the problem in Kenya, constraints that have prevented or limited banks from better serving SMEs, and identify and assess opportunities for a bank to better meet the financial needs of women SMEs. The study found:

• Lack of understanding about SME customers’ needs and gaps. Very limited customer research has been done and no banks track gender-disaggregated data.
• Fragmented business model for service the SME sector: SME customers are commonly served by multiple points of contact at a bank.
• Limited lending products exclude SMEs without collateral, especially women. Women may have strong SMEs with sufficient cash flow, but very often lack collateral. Womin in Kenya individually hold only 1% of registered land titles, increasing to just 5-6% for those jointly held with their husbands.

In response, Argidius supported Women’s World Banking in a 3-year project to provide strategic technical assistance to Kenya Commercial Bank (KCB)- the country’s largest to improve its SME offer. The intervention:

• Better segmented the SME market through market research and an assessment of KCB
• Developed a relationship management model which enabled KCB to foster relationships with SMEs, especially women-led SMEs.
• Implemented a more accessible SME financing product by developing a new cash flow-based credit assessment methodology
• Transformed KCB’s business member club into an effective provider of non-financial business support services to meet additional SME needs.

Key figures

• KCB Kenya’s SME loan portfolio:
  • $4million in 2017
  • $98 million via 3,700 loans in 2019
  • $500 million via 13,000 loans in 2022
  • $2 billion – KCB’s commitment by the end of 2027
• New cashflow & relationship based lending product performance in pilot branches:
  • Non-performing loan ratio of 1.5
  • SME lending to women-led businesses increased from 20% to over 50%
  • Net promoter score grew from +3 to +36
  • Median loan size $40k
• Typical client size
  • Between $5k and $500k annual revenues, and between 1-20 employees
• Client growth
  • Median annualized growth rate of 10%
  • Median employment growth from 5 to 8.5

Results

• Leveraged $500 million as of 2022 in new finance, much of which for women-led SMEs. These enterprises are growing and creating employment.
• Project is central case study for IFC’s flagship report, and a new operating possibility for the IFC to apply to other banks around the world
• New knowledge generated and shared on how to support banks to develop and implement effective SME strategies that can be sustainably rolled out.
• Lessons are being applied to projects working with a further 6 financial institutions in East Africa and Latin America, including working through two of Africa’s largest banking groups

Lessons learned

• Huge leverage potential working with Banks
• Segmentation is key
• Product design follows key segment identification
• Banks operate surprisingly ancient systems. implementation likely to need enhanced CRM
• Must align with the strategic interest of the institution
• Its challenging - traditional bank and microfinance models are not set up for lending to Small and Medium Sized Enterprises (SMEs)

Downloads

• Technical KCB case study by CCX
• 2019 Evaluation of Women’s World Banking’s support to KCB
• 2022 KCB impact and lessons case study for Porticus
• The project features as a central case study in the following publications:
  • 2019 IFC FMO Non Financial Services- the key to unlocking the growth potenital of women led SMEs for banks
  • 2021 GIZ Women’s Financial Inclusion Toolkit
  • 2021 CGAP Technical Guide Gender Norms

Photo copyright: Gloria Mwaniga