Interview with GBRW Director Mike Coates


So, Mike, tell me a little bit about your project – what are you trying to achieve?

GBRW is working with an African development bank to refocus its portfolio towards financing SMEs, rather than large enterprises. Specifically, we are both reengineering the credit process to suit SMEs and developing a suite of Enterprise Development Services, with a view to improving the business values and behaviours of prospective SME borrowers.

What are the key challenges that your client faces?

The client, like many development finance institutions, has a complex mix of stakeholder objectives. Not only are they expected to extend the risk appetite of the commercial banking sector, they are simultaneously expected to do so with no risk to capital (i.e. public money). Managing these conflicting objectives makes managing a development bank a considerably more complex (and interesting) challenge than the purer focus on shareholder value found in private sector banks.

Another unexpected challenge is the extension of subsidised credit lines. What may sound like a sensible idea can often lead to a perverse incentive for the borrowers to on-lend or invest the borrowed amounts rather than use the proceeds for the original purpose of the loan – that is, to expand production capacity. This means the due diligence on the customer and the compliance process needs to be pretty exhaustive. The credit process must focus heavily on the purpose of the loan, not simply the customer’s ability to repay.

What’s the most effective thing that you implemented, and why?

One of our most promising initiatives is the development of a SME credit rating model.

Moving into SME lending means higher loan volumes. Our client’s credit analysis processes needed to evolve to adapt to this new situation. Therefore, we were tasked with delivering a new framework that could cope with volume at pace whilst maintaining the quality of the portfolio – and deliver it with limited resources. Together with our client, we are implementing an expert judgement method which blends micro-economic analysis of industry sectors with a standardised approach to assessing financial performance and individual business risk. The use of a model allows us to speed up this assessment while ensuring the process is still robust.

What didn’t work so well?

It has been difficult to convince the bank to reduce its reliance on collateral when deciding whether to approve a lending decision. We argue strongly that a highly-rated customer should benefit from less stringent terms and conditions, particularly when it comes to requirements to pledge security. However, we do understand why the emphasis on collateralisation has developed and are seeking to embed this appropriately into the new operating model.

My bank wants to move into SME lending - where should we start?

I think the first step is to really focus on developing a rank order credit rating tool, and to build trust in the model before attempting to radically adjust terms and conditions.

We have learnt that there are very strong reasons why subsidised credit to SMEs in emerging markets comes with stringent collateral requirements. However, we are optimistic that an ‘evolutionary’ approach to improving the terms for stronger SME credits will lead to a virtuous circle of repeat business with customers who increasingly adopt improved norms of financial and general management.