Interview: Henri-Claude Oyima
How can interest rates be lowered to aid funding to small and medium-sized enterprises (SMEs)?
HENRI-CLAUDE OYIMA: To fix the interest rate attributed to companies, including SMEs, banks base their evaluation on two criteria: the cost to access their own resources and the risk linked to project financing. Unfortunately, both of these factors remain rather high in emerging markets. With respect to financial resources, collection of deposits is expensive and still insufficient, even though banks’ liquidity resources are quite large and stable, and even though the growing banking penetration rate starts to capture most of it. Refinancing is performed through the money and bond markets, although the common over-assessment of the risk linked to our economies impacts the access cost of external financing. On the other hand, with regard to risk, the projects proposed by entrepreneurs and SMEs are frequently unfeasible because of their low capacity to generate cash and weak resources. There is far too little working capital. For instance, they usually have high initial investments but limited stable resources. Objectively, to reduce the share of the premium risk in the establishment of lending interest rates, SMEs should give focus to business plans and banks should have access, through a credit bureau, to customers’ behaviour records.
In what way can regulators encourage more credit lending within the local market?
OYIMA: Banking regulations require compliance with a capital adequacy ratio/liquidity ratio minimum of 8%. Basically, this prudential rule requires banks to have minimal capital requirements, depending on their exposure to credit risk. In other words, the growth of credit activity is conditioned by holding equity. However, the development of credit is a key driver of growth in emerging economies. In that sense, the increasing competition in our sector – due to the establishment of international banks – is likely to have a positive impact. But this is only true if they actually manage to finance the local economy. Undeniably, regulation is required to balance the need to finance the economy with the need to have enough liquidity, especially for the numerous local banks. The criterion of critical bank size is a key element in ensuring both the granting of credit to businesses and security for savers.
To what extent can new technologies increase the banking penetration rate in rural areas?
OYIMA: The ICT sector offers an alternative to the regular development of banking networks through physical branches in rural areas. For instance, mobile banking is a chance for isolated populations to have access to finance. Furthermore, mobile phone penetration in Africa is spectacular, and while fixed internet lines decrease, 3G phone networks will take over.
The de-materialisation of money is a primary step for our society to take. However, partially because the informal sector occupies a large share of our economy, many people are still strongly attached to cash. Thus, it takes time to change mentalities and old habits; overall, however, ICT services like mobile banking are becoming increasingly important to banks.
How can access to capital markets provide a solution to private companies’ development schemes?
OYIMA: Access to capital markets has several advantages for a private company. The main one is the ability to diversify its sources of funding and to have direct access to a large volume of capital to finance improvements. The issuance of marketable securities helps to attract investors, both institutional and private, interested in the opportunity to invest in a business, while keeping the door open to the secondary market.
But a listed company must ensure its transparency. The company will also increase the overall efficiency of its organisation and its sustainability by adhering to solid financial and management practices. Additionally, market presence increases the reputation of the company. If well managed, financial reporting imposed by regulations can have positive commercial impacts.
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