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SME finance for inclusive growth

Inclusive growth requires that the benefits of progress and development be broad-based across sectors, and that means making opportunities equally available to majority of the labor force, poor and middle class alike. Since the main focus is on people contributing to and benefitting from economic growth, inclusive growth requires a very strong micro dimension that leads to economic diversification and the creation of jobs.

Equal opportunity in terms of access to markets and resources for businesses and individuals requires the finance sector to make available outlets for small businesses equivalent to what it has for the big business market. The main instrument for sustainable and inclusive growth is productive employment, which the finance community must enliven.

Banks must enter the small business space in proportion to the small business potential respondents that are there. Debt is a useful means to get money where it is most needed from creditors with an excess of it to borrowers who are short of it. Estimates of the small business credit demand-supply gap run as high as P60 to P100B in the Philippines.

Many banks publicly claim that they try to serve small business owners, but the actual record of lending is inadequate. Lenders by their nature typically prioritize mid-size and larger companies, which they find more profitable and rewarding. There is a disconnect between the pronouncements on small business servicing and reality. In banks where the account officers can do both big and small accounts, one will not be surprised that the larger ones are prioritized. Given a portfolio choice, the account officer will naturally prefer big-ticket clients and de-emphasize smaller accounts. The absence of focus harms customer service and the quality of customer experience, opening up the possibility of unserved markets.

Small business banking is a mission a truly responsible bank does, not just because it is the right thing to do. A disciplined approach to small business lending supports the bottom line and sustainability of the bank. However, it is an end, which requires undivided attention. The traditional corporate banking or investment banking approach cannot be transplanted to the small business lending arena. The segment is also often compromised by overstaffing or the wrong staff, poor sales management processes and improper segmentation.

Banks have to avoid the trap of insufficient market differentiation and must address the challenges of properly segmenting the market and implementing appropriate policies. In short, the serious bank aiming for inclusive growth will build a service unit that will exclusively service the small business segment. If well executed, segmentation strategy will ensure the greatest leverage possible from each bank unit and which sells more products and services to each customer. Initiatives to implement segmentation decision must not be derailed by resistance to change of turf owners and management’s lack of resolve. Senior management must follow through on its decision lest its own credibility be undermined.

In order to serve the small business segment well, the institution must demonstrate strong commitment and consistency. The resolve must be executed well with a long-term view. The bank must be very clear on its coverage area, and should avoid the trap of moving in and out of the market just because of fleeting external contingencies. Otherwise, its credibility will be tagged together with its desired market impact.

Small business lending requires the bank to develop specialized skills, a clear set competencies, and communication acumen addressing the needs of the segment. Even compliance processes need adjustments. This may be costly initially but should serve as a rewarding investment in due time. One cannot approach this space with the mindset of a generalist lender, the consequence of which will only be sub-par returns, uneven loan book quality and customer frustration.

A bank that is able to build a market reputation around the small business segment will find customers naturally flocking to its side. And this competency based differentiation strategy, once delivered consistently and predictably, will even allow some premium to be earned. By delivering a desired level of customer experience, the bank will not only build a lucrative small business loan book, it will serve the country’s need for inclusive growth.


(Benel D. Lagua is Executive Vice-President for the Development Banking Sector at the Development Bank of the Philippines (DBP). He is an active FINEX member. Feedback and comments are welcome at