Access to Finance: An Emerging Opportunity for SMEs

A Presentation by Akintunde Oyebode Head, SME Banking Stanbic IBTC Bank June 6, 2013

Africa: Nigeria provides Africas largest SME opportunity ex South Africa

Thousands

5,000

2
4,2m
7.3%

35 30

4,000

3,5m

6.1%

3
3.7% 3.7%

25 20 15

3,000

Tier 2 countries
2,1m
2.3%

2,0m

2,000
0.1% 0.2% 0.1%

Separate scale

0.8%

0.1%

1,3m

10 5 N/A 0

1,000 434k 71k 0

97k

7
75k

69k

Sources: Country Statistics Bureaux, indicates the number of self-employed individuals per country (based on a % of each population)

Millions

5,2m

9.2%

Tier 1 countries

66.4%

38m

= % of total opportunity

40

Nigeria: GDP growth will be driven by a virile SME segment

12%

6%

Corporate/Commercial
SME

3%

2012

2013

2014

2015

2016
2

2017

Section 1: The Challenge

The Traditional View of SMEs is bearish

In the world of banking dealing with SMEs are like dealing with the Ants of business

Ants might be small but they build large Anthills over time with industry

When it comes to lending theyre a pest

theyre small and all over the show

mainly because SMEs are More Likely to Fail in First 5 Years

Failure Rate / Time Frame Country

Australia Ireland UK Africa South Africa Nigeria 75% 85% 70-80% Undocumented, but ostensibly higher than more developed countries in the short term, and comparable to the SA/Africa average in the long term

0-3yrs
33% 30% - 40%

3-5yrs

Undefined

Source: Exploding the Myth of SME Failure Rates, Peter Switzer (5/10/2007); SME Support in Britain, Anthony Stark, ADB workshop on SME Financing and Credit Guarantee Schemes (21/6/2001; Challenges Facing SMEs, by Mihe Gaomab, president Namibia Economic Society (28 Nov, 2004); Stanbic Analysis 5 6

Section 2: Capturing The Opportunity

The most attractive SMEs leverage value opportunities with high growth and margins to become an attractive target for lenders

How big do you think your business can become? Focus on high margin segments price sensitive segments threaten revenues

THE VISION STRATEGIC DIRECTION

Segments
Focus on the sectors that maximize potential for profitable growth

Sectors

Offerings (Products / Services)

Focus on profitable growth offerings; compete on differentiation: Innovation Operational Excellence Cost Leadership

COMPETITIVE ADVANTAGES OPERATING MODEL

Best of breed operating model: Operational excellence Best people Effective enterprise-wide risk management Strong corporate governance

Key competitive advantages: Distinctive capabilities People Brand recognition

Focus on Value Opportunities with High Growth Margins

The Fundamentals of Lending

Optimizing the Funding Structure

Purpose

Knowledge of the Business Dynamics Credibility of the Entrepreneur

Balance Sheet
Source of Repayment

Cash Flow Revenue Assurance

SECTORS: Lenders will focus on the ten sectors that maximize potentials for profitable growth
Ten Sectors Offer Attractive Lending Prospects High
Power Infrastructure Transport Infrastructure Real Estate Telecoms Retail & Trade FI

Key
Growth Potential High: >9% Moderate: 6-9% Low: <6%

Building & Construction

Growth Potential

Education Healthcare Mining

Size
Technology Hospitality Oil & Gas Agric

High: Constitutes > 10% GDP Moderate: Constitutes 110% of GDP Low: Constitutes <1% of GDP

Low Low Size1 Less Attractive High

Highly Attractive

Moderately Attractive

10

Access to Finance + Advisory are key game changers for SMEs in Nigeria

SMEs in Nigeria are Unusually Challenged, Especially In terms of Access to Finance and Information
SMEs are Faced with Key Business Challenges
Lack of access to finance High levels of unskilled workforce Lack of information Business environment Infrastructure gaps(road, power, port delays, etc) Corruption Poor security

Banks are a Key Sources SMEs go to For Advice

Key Sources of Advice

Banker External accountant Others in the industry Peers

Access to Finance is Especially an Issue for SMEs, Even in Comparison to Global Peers

Source: IFC SME Map of Nigeria conducted by World Bank Group in 2001, and updated in 2002; The potential impact of accessing advice on SME failure rates, a paper for the small enterprise association of Australia and New Zealand , by Prof John Watson (1/10/2003); SME: Issues, Challenges and Prospects 7 (Financial Systems Strategy 2020), by Prof Banji Oyelaran-Oyeyinka;,

Finance: SMEs can explore various funding options to grow their businesses

1. Equity

2.Debt

Owner usually cedes some control to investor(s) Investment could be VC or mezzanine Might offer benefits of complementary skills Investor usually participates in the risk Usually has appetite for early stage businesses

Owner retains control of the business Might not offer benefit of complementary skills Lender does not participate in the risk Usually focused on mature businesses to limit losses

3. Guarantees

4. Others

Usually involves government Guarantees limit the losses of lenders to a percentage First loss guarantees means a counterparty takes upfront risk making lenders more confident.

Family Finance and Savings Business Angels Peer 2 Peer Finance Public Grants Tax Credits and Incentives

Source: Management representations

Advisory: How to optimize the business opportunity

Company Registration Separate your business from your person Accounting Prepare periodic management and audited accounts Corporate Governance Constitute a Board of Directors and adhere to acceptable governance structures

Build Structures

Understand your business and its funding needs Ensure your business records and accounts are up to date Keep supply and sales records receipts and buyer receipts Maintain a good borrowing history Ensure the business is well capitalized

Finance

Business Management

SME
Technical Assistance/ Compliance Mentoring/ Monitoring

Business Training Use Boot camp/toolkits to improve your management skills Advisory Have periodic strategy and business review meetings to ensure goals are achievable Business Planning Be disciplined about the planning process

Insurance mitigates operational risks: Fire/Theft/Accident/ Workmen injury etc. Tax Advisory Ensures compliance with regulations HR Recruitment/Payroll /Pension Operate with the necessary licenses/approvals: NAFDAC/NOTAP/DPR etc.

Find a mentor that brings relevant skills/experience Review goals/milestones to align strategy and performance Ensures accountability

Questions

10