SME Banking   SME Banking by Timetric

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The majority (95 percent) of firms operating around the world are, in fact, SME's with European and Chinese SME’s contributing 99.8 percent of the total. According to the World Bank, the SME sector can contribute to the GDP of high income countries by as much as 51 percent as opposed to middle and low income countries, where SME's produce up to 39 percent and 16 percent of local GDP. Moving to emerging Eastern economies, Indian SME output represents 45 percent of industrial production and 40 percent of total exports. Even more staggering is the contribution of Chinese SME’s to the creation of the national taxable profit, 40 percent of total production. Judging from these figures, obstacles to funding means forcing SME's to downsize their businesses and ultimately exert a major influence on their country’s wealth.

European and US SME’s are still relatively well served (only between 12-14 percent of the high-income OECD countries are underserved or financially constrained), but economic conditions for businesses are getting tougher. SME’s from emerging markets are equipped with more solid growth-driven potential. This growing involvement in new SME markets will, based on country specific evidence, contribute substantially to a bank’s revenue. For example, Malaysian banks with a significant SME portfolio are expecting higher revenue growth due to a set of government projects deployed across the country to boost the economy.

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    SME Banking




    Published: April 2012

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EXECUTIVE SUMMARY
Small and medium enterprises (SMEs) across the world are urging the banking system to find solutions to the
lack of alternative forms of finance, exacerbated by the persisting banking crisis. SMEs seem to be receiving
less than enthusiastic support from banks; the latest available figures released by the US Office of Advocacy
show that, between 2008 and 2010, small business lending declined by 8.3 percent, from $711 billion to $652
billion. In 2010 alone, these reductions amounted to $43 billion. Even more alarming is the fact that US small
enterprise loans (as a share of total business loans) declined by more than 12 per cent, from 81.7 percent in
2003 to 68.9 percent in 2010.

In the UK, the long-awaited Merlin agreement between the government and the five major banks (Barclays,
HSBC, Lloyds Banking Group, Royal Bank of Scotland and Santander) – expected to lead to an increase in
SME lending – showed that banks missed the £38 billion half-year target by 0.7 billion. In a similar vein, the
ECB reported that the poor 3 percent increase in the availability of bank loans in favour of SMEs within the euro
area regarded solely as relating to specific sectors such as secondary industry.

Therefore, rather than adopting newer strategies aimed at overcoming the structural financial constraints
characterising these enterprises, banks are being much more conservative in their allocation of funds to this
segment compared with how they were behaving pre-banking crisis. How big are SMEs? SMEs can be defined
according to a variety of criteria that change across countries. Although banks from all over the world adhere to
numerous criteria to identify their local SME spectrum, a number of World Bank studies conducted on a wide
range of countries show that most banks define SMEs in terms of sales volume (85 percent and 71 percent of
banks located in developing and developed countries respectively).

Despite a historically stable economic and banking system throughout the US and Europe, the financial sector
is failing SMEs. In 2010, about 37 percent of UK SMEs seeking funding were denied financial support. As a
result, 37 percent experienced ongoing financial concerns, 29 percent missed growth opportunities, whilst 16
percent had no choice but to downsize their investment plans. US SMEs have been facing similar issues since
2008, and the onset of tighter credit conditions has meant that only 40 percent of US small business owners
attempting to borrow in 2009 had all of their credit needs met.

Unless the value of lending increases, there will be serious repercussions on the Western economic system in
terms of contribution to GDP and employment figures. The majority (95 percent) of firms operating across the
world are, in fact, SMEs with European and Chinese SMEs contributing to 99.8 percent of all firms. According
to the World Bank, the SME sector can contribute to the GDP of high income countries’ by as m
								
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