SMS Financing by banks in East Africa:Taking stock of regional developments

Abstract

The banking sector in East Africa has evolved considerably over the last 10-15 years with the regional expansion of African banks, coupled with financial innovationsand regulatory changes. As a result, the banking landscape is marked by the co-existence of several types of banks: global banks from developed countries, emergingbanks (mainly from Asian countries), foreign regional African banks and domestic African banks. Given the difficulty of access to credit experienced by SMEs, in acontext of low transparency and information on borrowers, the expansion of regional African banks could have an important impact on the financial and economicdevelopment of the region. Indeed, if these regional banks are better able to evaluate SME credit risk than global banks, they might offer more loans to SMEs, thusfostering a sector which is the backbone of East African economies. In a constrained institutional setting, with a large unbanked population and little informationavailable on borrowers, how do foreign and domestic banks screen and monitor borrowers? To what extent do regional African banks’ lending practices andperception of the business environment differ from that of domestic African banks and of global banks? What is the impact of the regional expansion of Africanbanks on SME financing?