SME investment can be proftable

The good news is that the importance of SMEs in terms of a country’s economic growth has now begun to be recognized by the formal banking sector. Spurred by increasing competition in their traditional businesses, banks are now looking to the largely untapped SME segment, which now presents a lucrative opportunity. When traditional banks downscale their operations to serve the SME market, higher transaction costs and undefined risk management strategies are seen to be a major obstacle. However, the profitability of SME banking, if it is served effectively by creative business models, has been proven by various case studies. The graph below shows that Return on Assets (ROA) of SMEs is higher than the ROA of the total portfolios of the sample banks. So it looks like this is one trend that banks would do well not to ignore.

ROA SME vs Bank Total

Source: SME Banking Best Practices – Benchmarking, International Finance Corporation