Why Big Banks are Bad for Small Businesses in Tanzania (and the World)
Size Matters: Big vs. Small in Financing
When it comes to financing small businesses, size matters.
Big banks are doing a bad job financing small businesses, in Tanzania (and the rest of the world), and smaller financial institutions are doing better, but not well.
The purpose of this post is to examine why big banks are failing small businesses now that they need financing more than ever, and explore some smaller alternatives to big bank financing that can help meet small business capital needs at present.
Big banks in Tanzania are the focus of this post, but the conclusions drawn are applicable to big banks financing small businesses in other countries around the world, especially though not limited to developing countries.
Let’s begin by identifying the biggest banks in Tanzania and surveying the financial services they provide small businesses.
What are the Big Banks in Tanzania and What do they do for Small Businesses?
Tanzania has dozens of registered banks, but five stand out as the biggest and supposedly best in the country. These “Big Five” can serve as examples (good or bad) for the rest. Indeed, as we will see, competition between the Big Five has led them to offer strikingly similar financial products and services, further limiting the financing choices of small businesses.
The five biggest and baddest – for small businesses – banks in Tanzania are: CRDB, NMB, NBC, Exim and Azania. Each of them position themselves as the leader in small business financing in the country, and each of them fail small businesses in similar or different ways. Here, an overview of what the Big Five do for small businesses is followed by an exposition of why this is not helping, but hurting Tanzanian small businesses.
We will not be looking at financial products and services the big banks provide individuals. Unlike offerings for entrepreneurs, these offerings for individuals are robust and there is an air of oligopoly about them. They include personal loans, mortgage or housing loans, refinancing loans, credit cards and, of course, bank accounts of different kinds. Some of these products and services, like bank accounts, are mirrored for small businesses. If small businesses were as well served by big banks as entrepreneurs as they are as individuals, there would be no need for critique. But this is, unfortunately, not the case.
The names of the game in big bank financial services for small businesses are loans, loans, and more loans. In this dominance of loans and their precarious processes, the Big Five all show striking similarities to each other, shared shortcomings that hurt small business just as they are seeking help. Since loans are the primary financial service that the big banks offer, let us take the time to examine them more closely.
Trials and Troubles: Big Bank Loans to Small Businesses
The first and one of the biggest problems with big bank loans is that they are usually lumped together as “MSE Loans” (Micro, Small, and Emerging Enterprise Loans), or “SME Loans” (Small to Medium Enterprises). CRBD’s MSE Loans offering is a case in point. The issue here is that, as stated above, size matters when it comes to financing. The financing needs of microbusinesses are not the same as those of medium sized companies, and lumping loans together for them all overlooks these important differences.
Another difficulty with big bank loans is the criteria required to be met to even apply for a loan, let alone successfully secure one. For example, to obtain a small business loan from CRDB, applicants need to be at least 18 years old, have at least six months of experience (up to three years for other banks) in the same business, be located within the vicinity of a branch, demonstrate a steady cash flow, and have a business premise. A valid business license or permit is also required, and applicants need to maintain a business account. It is as though big banks are not trying to help small businesses, but put them on trials that threaten their very existence.
The size of the loans is somewhat problematic as well. NMB, for example, offers a minimum of TZS 50,000,000 to a maximum of TZS 1,500,000,000. This is an issue, not so much for average small business financial needs, but for companies at either extreme of the financing spectrum. For microbusinesses, the lowest amount is too high, and for larger small businesses, the highest amount is too low. In financing, catering to the average helps ensure bank returns; however, many small businesses are left out because of this practice.
Aside from application requirements and size of loans, the very terms of the loans can cause distress to small businesses. Most banks claim they provide working capital and long term loans, but most really want to invest in machinery or land they can resell if the borrower defaults. Most services businesses do not fall into this category, and they make up the majority of small businesses in Tanzania. Also of note are the repayment terms, which generally range from 6 months to 60 months depending on the credit purpose, purpose and anticipated cash flows. The flexibility displayed by big banks in these terms is betrayed by their rigidity in enforcing them.
As if small business loans weren’t bad enough, most big banks, like NMB, propose that small businesses can “graduate” to bigger corporate loans if they jump through all the required hoops all over again. This is a lot like saying if you take more poison on top of the poison you’ve already taken, you will be healthy again and even stronger. In reality, it may kill you.
To their credit, some big banks have begun offering financial services targeted to underrepresented or disenfranchised groups. In this they are following the lead of some microlenders; better late to the party than never showing up. One example is CRDB’s Malkia Proposition (Women’s Loans), which aims to support women entrepreneurs. Another is NMB’s Agribusiness Loans,which provide seasonal loans for farmers. Here we see the big banks beginning to open their eyes to the wide world of small businesses in Tanzania.
It doesn’t make sense to criticize apple trees for producing apples, but it does when it comes to judging the qualities of the apples. When big banks realize that small businesses as a group are worthy of more targeted financial services, Tanzania’s financing landscape will become more competitive, to the benefit of small businesses.
The Big Five’s Top Three Failings for Small Businesses
We are not the first to stress how bad big banks are for small businesses. Indeed, the fact that so many writers have elaborated on this fact already goes to show how serious the situation is. Here are the five most common complaints about big banks’ offerings to small businesses in no particular order.
- High Fees and Costs: Small businesses have tight margins, and big banks seem to delight in making them even tighter. Their fees for services like checking accounts, transaction processing, and even for maintaining a balance make being a small business even more difficult than it already is. Larger corporations can more easily absorb these fees, which big banks seem to overlook. Then there are the many “hidden” charges and penalties that can also add to the cost of doing business with big banks.
- Limited Products and Lack of Flexibility: As we have seen, big banks’ financing products for small businesses revolve around loans. But they offer other services and products as well, such as overdrafts and credit cards. However, these products may not be suited for the specific needs of small businesses. This primarily has to do with the stage of the small businesses, as an idea or startup has very different financial needs than that of a business in growth stage, a tremendous oversight by big banks.
- Impersonal Service and Little Relationship-Building: Big banks often take pride in their automated services, but this is rarely what small business entrepreneurs really want. Rather, entrepreneurs look for the personal touch when it comes to meeting their financing needs, which means building relationships. This is hardly the case at big banks, which treat small businesses as a low priority compared to larger clients, leading to delayed responses on important matters and little understanding of small business clients’ operations.
These three sets of discouraging facts represent some of the major shortcomings of big banks towards small businesses, but they are not the only ones. Luckily for small businesses, there are small alternatives to big banks that can better serve them, to which we turn in conclusion below.
Rejection and Fear: The Psychology of Financing
The problems small business entrepreneurs face when dealing with big banks is not only those of financial services, it is also about self-worth and recognition, meaning there is a psychology of financing that needs to be considered to improve financial services to small businesses.
The rejection rate for loans for small businesses is high, and each time an entrepreneur is rejected it raises existential questions for them: Am I good enough? Is my business worth it? Should I stop wasting my time? On the flipside, some entrepreneurs are so fearful of rejection that they do not apply in the first place. Fear and rejection are two strong negative forces governing entrepreneurs’ relationships with big banks, but they can be overcome.
Often, after being rejected by a big bank, entrepreneurs lose hope and give up because they do not know where else to turn for financing and support. This is not the fault of big banks, which are “just doing their jobs;” rather, small financial intuitions are to blame for not making themselves more available. Imagine the economic and social growth that could happen if every small business received the financing and support it deserves.
Conclusion: Smaller Alternatives to Big Banks
Small businesses need not totally despair when it comes to securing financing in Tanzania. Indeed, there is hope, if not with big banks. There are alternatives to big banks that do a much better job of catering to small businesses’ financial needs. In conclusion, then, here is an overview of four of them.
Regional and Local Banks: Sometimes bigger is better, and sometimes smaller is better. When it comes to financing small businesses, smaller is better. Regional and local banks are more attuned to local markets, can provide the relationships small businesses need as they grow, and sometimes offer better terms on financial products than big banks.
VICOBAs and SACCOs: Village Community Banks (VICOBAs) and Savings and Credit Co-Operative Societies (SACCOs) are two types of lending institutions that cater exclusively to small businesses. They offer advantageous terms and lower barriers to application, as well as deeper relationships and lower fees.
Microlenders: This category of financial organizations comprises both Tanzanian and foreign companies which specialize in lending to small businesses. They tend to focus on the smaller end of the spectrum, but often have extensive experience in providing financing to small businesses.
Angel Investors: This is a relatively new category of financing for small businesses in Tanzania, although angel investing is quite established in other countries. Generally, unlike lenders, angel investors do not lend money but rather take an equity stake in a company in exchange for capital.
As stated in the introduction above, this post is primarily concerned with big banks and small businesses in Tanzania. However, it is important to note that the situation in Tanzania is similar in other countries around the world, especially developing countries. Big banks are failing small businesses, and small financial institutions are doing better, around the world. In this, Tanzania can be taken as an example and cautionary tale.