What is the MSME opportunity with non-financial services?

By Tascha Terblanche | Financial Services Strategy

Closing the huge MSME credit gap in Africa has been the focus of many development and private sector initiatives in recent years. Despite these efforts, MSMEs continue to face unique challenges compared with their larger counterparts.?

?Apart from a lack of access to credit, micro, small and medium enterprises have limited access to inputs, markets, education, training and networks. This limits their ability to operate and grow their businesses, and compromises the business case for banks to service these MSMEs. However, given the size and economic contribution of MSMEs in Africa, ignoring this segment can be a missed opportunity.?

Across Africa, banks have begun to recognise this opportunity and established dedicated MSME units that provide tailored products for those enterprises. However, recent experience by banks shows that a “product led” approach to meeting MSME needs is insufficient. Instead, a “customer-value-proposition approach” is recommended. This combines access to financial services with critical non-financial services (NFS) such as information, education and networking opportunities as part of a bundle of products and services. It enables a need-based, holistic and sustainable approach towards financing MSMEs and tapping into the significant opportunity this presents.?

Developing a holistic “MSME package” requires a clear strategy that considers both the unique needs of MSMEs and the bank’s business fundamentals.

To successfully offer NFS, financial institutions must consider a number of factors including:

Strategic Fit:?The appropriate NFS will depend on which MSME segment the bank prioritises.?

Profitability:?The bank needs to have a clear understanding of the cost of different NFS strategies and how this is recovered through better growth/lower churn on customers.?

Relevance:?Financial institutions should invest in research to develop a good understanding of the support required in their market segment and the most appropriate channels for the delivery of this support before launching a suite of NFS services.

?The table below highlights some of the trade-offs:?

NOTE:?Relevance and suitability of NFS/channel for the corresponding MSME segment increases from?light green?shade to?green?shade to?dark green?shade.

Do you need help designing a NFS strategy??We have extensive experience in MSME market analysis, complemented by our understanding of behavioural economics and human-centred design thinking. Our expertise in this area spans primary and secondary research, including focus group discussions and in-depth interviews with MSMEs to understand the perspective and experience of those on the ground.?