When Standard Bank first started lending money to small and medium enterprises (SMEs) in Africa, its biggest concern was that these business owners would not be able to repay their loans. While there are certainly some defaults, it turned out that a bigger challenge for the bank is that these customers repay their loans too fast.

“If I take for example a typical 12 months loan, our average repayment period on a loan like that is five to seven months. So our biggest concern … is not that they don’t repay, but they repay too fast at this point in time,” said Amrei Botha, Standard Bank’s head of SME Banking Africa, in an interview with How we made it in Africa.

The Standard Bank Group is based in South Africa, but has operations in 18 countries on the African continent.

To service Africa’s small businesses, Standard Bank has introduced a product called SME Quick Loan that offers unsecured loans of between US$300 and $30,000. SME Quick Loan was piloted and launched in Kenya, Ghana, Nigeria and Tanzania. The product has, however, been expanded into a number of other African countries.

Large numbers of Africans are self-employed, running small owner-managed businesses. From a hawker selling bottled water in the streets of Lagos to a shoe trader in downtown Nairobi, these informal businesses are responsible for a significant part of economic activity in Africa. “With a lack of formal job opportunities, more and more people are currently self-employed and we see that in the future more and more people will move into self-employment. If you take a country like Nigeria, for example, in their census survey it shows that 65% of the population are self employed. In Ghana more than 60%; in Mozambique more than 54% are self-employed,” Botha explained.

Many of these businesses are also more established than they might seem. “Even though they are operating from informal looking structures – they have actually been in business for 10 to 15 years,” Botha said.

Lending to SMEs in Africa is notoriously low, largely because banks find it difficult to determine the risk profile of businesses that are not registered and have no financial statements, credit histories and collateral. However, when given access to loans, African SMEs are often able to take advantage of new business opportunities. “What we’re seeing across Africa is that a lot of these small business owners are able to access additional business opportunities … and so if it wasn’t for the funding, they wouldn’t have these opportunities,” noted Botha.

So how does Standard Bank manage the risks associated with lending to African SMEs? The bank has introduced some innovative risk assessment and application processes. “We have tried to really deepen and expand our lending capability. And by way of an African solution and innovation, we have come up with a philosophy and an idea, which basically says [that] a person’s ability to repay a loan is not about whether he/she has a job, or has had bank account for five years. It is about whether he or she is a good person … So we have developed a [test] … which assesses: is this person likely to repay or not repay the loan? Is he or she a good or a bad person? On the strength of that we have dramatically increased our unsecured lending …” said Clive Tasker, CEO of Standard Bank Africa, at a conference earlier this year.

“So essentially what we are trying to assess where an informal business applies for a loan is first of all whether they have the willingness to repay the loan, then second of all, whether they have got the ability to repay the loan,” said Botha.

While lending to SMEs has its challenges, Standard Bank believes it is important to play in this segment. “If we want to be a relevant bank in Africa, we have to look to banking people who are self-employed and running small businesses,” she added.