Why banks are now  focusing on smes
The writer

Why banks are now focusing on smes

In recent years, the global economic environment has shifted dramatically, with banks increasingly focusing on Small and Medium-sized Enterprises (SMEs).

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SMEs are critical to the growth and development of economies across the world. 

Because of their importance to job creation, innovation and general economic stability, they are frequently regarded as the backbone of many countries' economies. 

Banks have realised the enormous potential of supporting SMEs in light of these contributions and numerous other aspects. 

This shift in emphasis is the result of a confluence of economic, technical and social forces that have altered the financial industry. 

When compared to major companies, SMEs, or Small and Medium-sized Enterprises, are firms that fall within a specified size range, which varies by nation but is often characterised by their relatively small personnel, restricted turnover and assets. 

In this article, I examined why banks are favouring SMEs, the reasons for this strategy shift, and how SMEs may best position themselves to gain from banks' goods and services.

Reasons why banks are now concentrating on SMEs

Profitable Industry Sector

One of the primary reasons banks are aggressively chasing SMEs is the profitability connected with this business. 

Small and medium-sized enterprises (SMEs) usually require a wide range of financial products and services, including loans, credit lines and cash management solutions. 

While individual SMEs may not be as large as major corporations, the collective demand from this sector provides banks with a profitable market opportunity. Small and medium-sized businesses (SMEs) commonly maintain business accounts with banks, which offer a consistent and predictable source of deposits. 

These deposits can be used by banks to support lending and investment operations, enhancing their profitability. Banks may offer several lending options to SMEs, such as working capital loans, equipment financing and company growth loans. 

These loan alternatives generate interest income and fees for the bank, which helps the bottom line. Small and medium-sized firms (SMEs) commonly require financial services at various stages of their life cycle, from initial capital through growth finance and succession planning. 

Economic growth and job creation

SMEs are well-known for their ability to provide job opportunities and promote economic growth. Banks know that by assisting SMEs with their financing requirements, they may help to create jobs and promote local and national economies. 

This is consistent with their corporate social responsibility goals, as well as their long-term commercial interests. Serving SMEs entails more than just standard lending. 

Banks may increase their income streams by cross-selling a variety of financial goods such as credit cards, merchant services, insurance and wealth management solutions. 

Aiding SMEs in their expansion efforts leads to economic stability and employment development. Banks may spread their risk by diversifying their portfolios by assisting SMEs. 

A single SME failure, unlike large corporate clients, is less likely to have a substantial influence on a bank's overall financial soundness.

Significant technological advancement

The growth of technology, particularly in financial services (FinTech), has made catering to SMEs more cost-effective and efficient for banks. 

Digital banking platforms, automation and data analytics have simplified the loan process while lowering the risks involved with serving small businesses. 

Without the requirement for physical branches, online banking systems and mobile applications enable SMEs to access a wide range of financial services. 

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SMEs may execute banking transactions and access financial information at any time and from any location, eliminating the need for SMEs to visit bank offices during business hours. 

This decreases the overhead expenses connected with physical sites. SMEs may execute banking transactions and access financial information at any time and from any location, eliminating the need for SMEs to visit bank offices during business hours.

Online lending platforms make loan origination easier for SMEs by decreasing paperwork and administrative costs.

This reduces the cost of loan application processing. Electronic payment solutions, such as online payment gateways and digital wallets, enable SMEs to take payments more efficiently and securely, lowering the costs associated with dealing with cash or checks.  

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Risk reduction and diversification

SMEs can play a crucial role in helping banks diversify and mitigate the risks associated with their operations. Banks are diversifying their portfolios to reduce dependence on large corporations and to spread risk.

SMEs represent a diverse range of industries, reducing concentration risk for banks. Furthermore, the failure of a large corporate client can have a more significant impact on a bank's balance sheet than multiple SMEs.

SMEs span a wide range of industries, from manufacturing and retail to technology and services. By providing financial services to SMEs across diverse sectors, banks can reduce their dependence on any single industry, thereby mitigating industry-specific risks.

When lending to SMEs, banks might use risk-mitigation measures such as collateral restrictions and personal guarantees. In the event of a loan failure, collateral, such as real estate or inventory, can act as a source of recovery, lowering credit risk.  Banks may use modern risk assessment tools and credit scoring algorithms to analyse the creditworthiness of SMEs properly. 

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Customer Loyalty

Building ties with SMEs early on can lead to long-term client loyalty. As SMEs develop, so do their financial demands, and banks who have helped them from the beginning are more likely to keep their business and profit from their expanded financial activity.

Banks may obtain a better knowledge of SMEs' individual financial requirements and issues by interacting with them on a personal level.

This enables banks to provide personalised solutions and assistance, proving their commitment to assisting SMEs in their growth.

Trust is built through consistently offering dependable and quick service to SMEs. SMEs are more inclined to stick with a bank that they know will satisfy their financial demands and give prompt assistance when needed.  

Conclusion

Banks' increased attention to SMEs is a favourable trend for both these companies and the financial institutions themselves.

SMEs are critical components of any economy and supporting them not only promotes economic growth but also stimulates innovation and job creation. Banks gain from more diverse portfolios, more profitability and greater client connections.

As banks continue to prioritise SMEs, it is obvious that this collaboration will fuel economic development and prosperity for years to come.

Establishing a good credit history, recognising financial requirements, exploring alternative lenders, using technology and building connections are some of the ways SMEs may position themselves to profit from banks.

The writer is a lecturer/SME industry coach University of Professional Studies Accra

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