Article


By Mark Ford

For commercial reasons, banks across the world are taking a fresh look at the small- and medium-sized enterprise (SME) sector. The World Bank's description of SMEs as "real engines for growth" underlines the positive view taken by development banks of this growing sector.

In several instances, providing smaller businesses with an attractive letter of credit offering appears to be critical to the strategies of both commercial and development banks when it comes to pitching for SME business.

Asia

Asia is one part of the world where interest in the SME sector is growing. In November 2006, Thailand's Kasikornbank set itself an ambitious target for loan growth at 8-13 per cent for 2007, with a focus on the SME sector. In the same month, South Korea's Kookmin Bank also said it was going to focus on supporting cash-hungry SMEs and make good profits for the bank.

Targeting the SME sector is not being left to the smaller banks either. Citigroup India announced in September 2006 that it would invest USD 3 billion over the next three years with the aim of capturing part of a market where it sees scope for "immense growth".

Recognizing potential in the SME sector is not new. HSBC has been working hard at this market for years. In Asia, the bank discerned a value in incorporating L/Cs in its e-commerce offering to smaller businesses some years back.

HSBC Malaysia launched an e-commerce- enabled storefront and gateway service for smaller businesses in April 2001 and enhanced it in 2002 by introducing a system allowing SMEs to prepare, exchange, manage and archive electronic trade documents using the bank's own IT infrastructure.

Electronic L/C advice notification and Internet banking services were then added, and in February 2003 the bank, in collaboration with DHL, provided document tracking services for customers to track and trace export bills and L/Cs via SMS and email status updates or through HSBC's website. SMEs were specifically targeted in HSBC's £6 million "Difference in Business" global campaign that ran until November 2006. Unusually, this campaign targeted large corporates and SMEs side-by-side.

New approaches

During 2006, several banks announced new facilities incorporating L/Cs designed to capture SME business. In June, Standard Chartered in Dubai said it would feature cut-price L/Cs in a package designed to win business from UAE-based SMEs doing business with China. The bank said it would create a special trade corridor between the UAE and China through its services to this group.

In August, Bahrain-based SMEs heard that a business division specifically geared to their needs had been created by BankMuscat International. The division would make a range of services available to SMEs, including L/Cs, and would be taking a fresh look at how lending decisions are made for smaller businesses. BankMuscat said it was launching the new division because of the importance of the SME sector to Bahrain's economy. According to Bank- Muscat's acting general manager, Abbas Al Derazi, the bank "considers the SME segment as a very crucial and increasingly important component in the country's development". Derazi also maintains that SMEs form "a unique segment that requires ... customized solutions." The bank said that instead of concentrating on the risk associated with the segment, it would evaluate the current performance of developing businesses and calculate true funding and borrowing requirements by mutual consent.

Major development banks

Development banks have long extolled the important role SMEs play in economic development, particularly in emerging markets. Over recent years, some of the most successful development bank interventions to encourage cross-border trade have incorporated L/Cs.

The International Finance Corporation (IFC) has made some very substantial investments in SMEs in emerging markets, one of which is specifically involved in guaranteeing trade finance - including L/C transactions - and recently it has been doubled in size. The IFC can now support trade finance up to a total amount of USD 1 billion on a revolving basis.

By guaranteeing L/Cs and other trade transactions as small as USD 7,000, the IFC says it is aiming to support the trade of consumer goods, intermediate goods, smaller machinery and commodities that are needed by the SME sector. In just 14 months of operation, the programme has notched up some impressive achievements. It has issued USD 527 million of guarantees to support 560 transactions, of which 65 per cent were for banks in Africa and 80 per cent were SME transactions.

At the same time as boosting the SME sector, the programme also bolsters banks' trade finance capabilities in emerging markets. By the nature of its operations, the programme builds a global network of partnerships among issuing banks and confirming banks that can tap risk mitigation for trade on an as needed, per transaction basis.

Participating banks in the programme include 87 international commercial banks acting as confirming banks. They also serve as potential trading partners for the 42 local issuing banks in IFC client countries participating in the programme so far.

Another development bank, the European Bank for Reconstruction and Development (EBRD), has a successful Trade Facilitation Programme (TFP) that has been used to foster international trade with Central and Eastern Europe as well as the countries of the former Soviet Union.

Established in 1999, the TFP supports trade to, from and within the EBRD's 29 countries of operations. Under the programme, the bank has facilitated more than 5,400 trade deals worth nearly USD 3 billion. For 2006, the programme expects to report business volumes up on 2005's total of more than USD 500 million. The programme now includes more than 100 issuing banks in the region, with limits exceeding USD 1 billion in total, and 600 confirming banks globally.

In December 2006, the operator of the pioneering TFP said it would be able to "increase substantially" its trade activities across the CIS after a group of international insurance underwriters agreed for the first time to back a multi-million dollar EBRD trade programme for the region. The new USD 183 million EBRD-led trade facility will be underwritten by ACE Global Markets (AGM), which is leading the group of insurers, and by Catlin Syndicate 2003, XL Syndicate 1209 and Kiln Syndicate 510 at Lloyd's of London.

Other similar initiatives include the Trade Finance Facilitation Programme (TFFP) operated by the Inter-American Development Bank, which targets companies and banks in Latin America. The Asian Development Bank similarly provides its own TFFP specifically to SMEs in around ten developing countries in the Asia/Pacific region. In all of these programmes, the development bank will essentially provide guarantees for L/Cs issued by smaller banks in emerging markets with the aim of boosting trade flows and improving bank capabilities and trade finance provision in those markets.

Smaller development banks

Smaller development banks are also looking to improve SMEs' access to L/Cs. Malaysia's aptly named SME Bank recently said it had reached agreement with one of Malaysia's largest financial services groups, CIMB Bank. SME Bank says it will provide L/C guarantees through CIMB Bank.

CIMB Bank expects to grow its SME financing portfolio by eight to ten per cent in 2007 according to its executive vice president, Tan Leng Hock. He was speaking to reporters after the launch of Skim Jaminan SME Bank, a strategic collaboration between SME Bank and CIMB Bank.

The SME Bank - or Bank Perusahaan Kecil & Sederhana Malaysia Berhad - began operating in October 2005 as a development bank focused on meeting SMEs' needs in Malaysia. SME Bank chairman, Datuk Gumuri Hussain, said that the scheme was designed to provide more financing options for Malaysian SMEs according to their needs. "Depending on the client's needs the facility can be offered under conventional banking or Islamic banking in the form of overdrafts, L/Cs, trust receipts and bills purchase," he said.

Elsewhere in the world, more SME initiatives incorporating L/Cs are waiting in the wings. Global Trade Finance (GTF), promoted by the Export-Import Bank of India (Exim Bank India) to provide factoring and forfaiting services, says it will branch out into providing L/C facilities for SMEs in 2007.

GTF is currently 40 per cent owned by Exim Bank India, while Malta's FIMBank and India's Bank of Maharashtra have shareholdings of 38.5 per cent and 9 per cent respectively. The IFC has a 12.5 per cent share of GTF, but is expected to divest this next year if the factoring and forfaiting specialist goes for an anticipated initial public offering.

Mark Ford's email is markford@gotadsl.co.uk