INTRODUCTION
Rationale for the MRR
Seychelles financial market has witnessed a sea change post IMF-backed macroeconomic reform program launched in November 2008. The country, which was blacklisted by multi-lateral agencies and international banks until November 2008 due to its repeated financial defaults over the years, did a quick turnaround and has been granted a B- Rating Positive Outlook by Fitch (International Credit Rating Agency) in March 2010 [1] . Foreign exchange reserves have crossed USD 168 million as at 29th April 2010 [2] from as low as USD 41 million reported in June 2008 [3] while the inflation rate has dipped to 0% from as high as 60% in November 2008.
Foreign exchange which was considered a scarce and precious commodity until November 2008 is freely available with local commercial banks. The foreign exchange black market which was thriving earlier is now a thing of the past.
The Seychelles Banking Industry is quite small and consists of 6 commercial banks with a network of 24 branches spread over 3 main islands of the country. All banks conduct traditional commercial banking activity of accepting deposits and granting loans. There is no market for sophisticated financial instruments such as futures, swaps, derivatives. There is no stock exchange in the country and therefore no avenues for investment banking, mutual funds etc.
The country also has a non-commercial bank, the Development Bank of Seychelles (DBS), engaged in project financing and granting long term loans mainly to five sectors namely agriculture, fishery, manufacturing, tourism and service (including finance to existing SMEs and start up venture). However, as the DBS procures its funds from the Government of Seychelles and other multilateral agencies by way of grant and loans, its lending capacity is limited as compared to other commercial banks.
Apart from the above, another budget-dependent governmental organization that targets SMEs in a limited manner is the Credit Concessionary Agency (CCA), which sometimes provides even interest-free loans to small entrepreneurs.
The subject company namely the Seychelles Savings Bank (SSB) is a commercial bank owned entirely by the Government of Seychelles. It caters mainly to the salaried class, pensioners and few businesspersons. It has the largest customer base (46,000 accounts in a population of 85,000 approximately).
SSB, however, is a relatively small player in the Seychelles Banking Industry in terms of the amount of Deposits, Advances and Net Profit. It ranks 5th in terms of the size of its Balance Sheet in a community of 6 commercial banks.
Historically, SMEs have been neglected by Seychelles banking industry due mainly to high default-risk associated with such entities as well as overall lack of supply of required foreign exchange. However, the sweeping fiscal and monetary reforms launched in late 2008, the privatization policy of the government and the economic turnaround have triggered renewed economic activity in all sectors of the economy especially in tourism, manufacturing, wholesale and trading.
The current buoyant economic situation of the country, therefore, presents much needed opportunities to the existing small and medium enterprises (SMEs) to expand their business.
This study will provide an insight to the characteristics of the SME market and its potential value and long-term benefits to the SSB. It will spell out strategies (short and long term) for nurturing them so that they (SMEs) prosper and become high-value account relationships for the Bank in the future.
Objectives of the MRR
The main objective of the study is to
Understand the SME market in the Seychelles
Evaluate the market potential for SMEs for the Banking industry
Evaluate the potential SME market for SSB
Provide short and long term strategies for the SSB to target SMEs
Provide action plan in terms of marketing, operations, human resources and finance for the proposed strategy
Scope and Limitations of the MRR
Scope of the Study
The following fall within the scope of the study:
An analysis of the SME market potential and key success factors
An analysis of the external environment in which the SSB operates with emphasis on demand-supply and industry competition.
An internal analysis of the SSB, highlighting its competences, capabilities and any existing program in relation to SMEs.
Generation of strategic options and recommendations.
Action plan highlighting milestones with milestones in terms of marketing, operations, human resources and finance.
Limitations
The scope of the study is limited to the Republic of Seychelles. It will be conducted strictly with the view of targeting existing SMEs and does not analyse any other existing or potential types of clients or banking products.
The study is limited to providing short-term (one year) and long term strategies (maximum of three years) and an execution plan for those strategies.
Historical financial data of the SSB used for this study is limited to the audited income statement and balance sheet for the past three years.
All research material, facts and figures are limited to the period January 2008 to April 2010.
APRROACH/METHODOLOGY
ANALYSIS
Information gathered during the study will be analysed both quantitatively and qualitatively. Quantitative analysis will be performed using statistical tools, financial ratios and other metrics used by the SSB in measuring performance.
Qualitative analysis will be based on both judgment calls of management as well as benchmarking with other industry players.
DATA GATHERING
Data gathering will involve interviews, research and a study of the financial statements of the SSB for the past 3 years. Public information, financial and otherwise, about competing banks is also required. The responsibility of the SSB will be to refer an appropriate staff member who can assist in gathering the above information.
SURVEY
A survey will be conducted involving at least 50 SMEs for the purpose of profiling as well as determining their usage, attitude and image attributes in relation to bank loans. The results of this survey will be extrapolated onto the entire population of SMEs in the Seychelles.
STUDY
The Asian Institute of Management's library has an extensive collection of MRRs. Related MRRs over the past 5 years will also be studied and relevant learning (if any) from those MRRs will be incorporated into this study.
INTERVIEW
Interviews will involve key personnel of the SSB, the external auditors of the SSB, the Seychelles Licensing Authority (SLA), the Seychelles Chamber of Commerce and Industry (SCCI), Central Bank of Seychelles (CBS), Development Bank of Seychelles (DBS) and the Credit Concessionary Agency (CCA).In this regard, the responsibility of the SSB is to provide reference to appropriate personnel in the above organizations.
RESEARCH
Research performed will be through SSB's financial statements and their periodical reports submitted to the CBS, publications by National Statistics Bureau, the Seychelles Investment Bureau, the Ministry of Finance, the International Monetary Fund as well as interviews with the key personnel of CBS, CCA Managing Director and DBS key personnel.
OTHERS
The study may also involve site visits to Praslin and La Digue islands to perform the survey of SMEs as well as to visit branches. The SSB's responsibility is to facilitate these visits.
CH 1.1 CURRENT AVAILABLE SOURCES OF FINANCE FOR SMEs
Small and medium enterprises represent about 90% of all businesses in Seychelles. The main sources of financing for such enterprises are friends and family and government organisations set up to promote business development in the country specifically, the Development Bank of Seychelles (DBS) and the Credit Concessionary Authority (CCA). Commercial banks have normally avoided financing SMEs due to the perception of high default risk normally associated with them.
The DBS was established as a development finance institution with a specific mandate to assist in the economic development of the Seychelles, mainly for financing economically viable projects in the sectors of Agriculture, Fisheries, Industry, Tourism and Service [4] .
The DBS has recently cut its loan interest rates by 5% from 15% to 10% (effective April 1st 2010) [5] , in response to the President's call to cut interest rates to promote economic development in the country.
The CCA is another government organisation that aims to provide funding for small and medium entrepreneurs. Its interest rates range from 0% to 4%.
The main problems faced by SMEs in obtaining finance from the DBS and CCA are:
The loan approval process is long and cumbersome and since the DBS and CCA both have annual lending budgets, there is higher competition (as compared to commercial banks) amongst SMEs for funding.
These organisations only deal in term loans, and do not provide other financial products such as overdraft facility, letter of credits and revolving credit lines, which are quick and convenient means of generating short-term finance.
Commercial Banks in the Seychelles have historically avoided lending to SMEs unless the business owner has a proven track record and even then the terms and conditions have been unfavourable with regards to interest rates and flexibility in loan amount offered. SMEs normally have no choice but to avoid commercial lending and have sometimes had to sacrifice expansion opportunities due to the general lack of available funding.
CH 1.2 THE MARKET POTENTIAL FOR SMES
Rationale for Targeting SMEs
To understand the rationale for targeting SMEs an analysis is presented below highlighting the pre and post IMF reform economic scenario in Seychelles:
Pre-2008 IMF reforms:
The restriction on foreign exchange convertibility served as a barrier against new entrants and limited the growth of existing small and medium businesses. Incumbent large businesses were able to afford foreign exchange from the black market and pass on the costs to the customer as they enjoyed monopoly conditions. Large businesses were more influential and could also bargain for a better rate in the black market.
Seychelles is an Island country and is highly dependent on imports. The demand for imported goods far outweighs the demand for locally produced goods due to the perception of the better quality. Therefore Foreign exchange is a major component of conducting business in the Seychelles.
Small and medium entities as such either did not have access to foreign exchange or had a severe cost disadvantage in procuring the same.
SMEs suffered significant cost disadvantages in relation to large industry incumbent which severely affected their ability to compete in the market and expand.
Post-2008 IMF reforms:
In November 2008 due to the IMF reforms, restrictions on foreign exchange convertibility were lifted and the black market became extinct. Newer avenues for foreign exchange conversion opened up such as independently operating bureaus of exchange.
As such, there was no more discrimination in the foreign exchange market. All businesses had complete access to foreign exchange at competitive cost irrespective of size.
Thus the environment has become more conducive for small and medium enterprises to compete with larger industry players.
Aggregate demand in the economy is increasing due to rising buying power of the Seychelles population illustrated by graphs below (Source: Central Bank of Seychelles Website). IMF forecasts a real GDP growth rate of 4% [6] in 2010 which represents further increase in aggregate demand for the economy.
Conclusion
The Aggregate demand in the country has increased and there is a high probability that it will continue to increase (IMF forecast GDP growth of 4% in 2010).
SMEs require funding to expand and meet this higher demand for their product/service (fact confirmed by Survey). Due to the higher demand, the business risk of SMEs is lower, considerably lowering their credit risk and thus providing commercial loans to SMEs is a viable option in the current business environment.
Market Description, Segmentation and Primary Target Market:
For the purpose of this study it is very relevant to define what an SME is. Unlike other developed nations, the Seychelles does not have any specific definition of SMEs. In consultation with the SSB management, we have agreed to define small entities as those having a maximum of 5 employees and medium entities as those having between 5 to 25 employees.
There are approximately 2,000 businesses registered in the Seychelles (estimates by SENPA and concurred by SCCI). For the purpose of analysis, the Seychelles Chamber of Commerce and Industry (SCCI) register of members has been used, which comprises 600 members (approximately a 30% sample of the business population).This sample is considered statistically representative of the entire population of businesses in Seychelles.
As per SCCI membership analysis (Exhibit 3), 90% of the members fall within our definition of small and medium sized entities.
Figure 1.2.1 represents break up of SMEs as per SCCI membership.
Figure 1.2.1
Extrapolating SCCI sample analysis on population of all registered businesses:
Small and medium enterprises represent 90% of all registered businesses in Seychelles or a total of 1,800 businesses approximately.
Following is the estimated sector-wise classification of SMEs:
Primary Target Market:
Construction, financial services, fisheries and manufacturing are high risk and do not meet the risk profile of the SSB.
The primary target market therefore consists of SMEs in Retail and Wholesale, Commercial Services and Tourism Industry which comprise 87% of all SMEs or an estimated 1,566 SMEs in absolute terms.
Competitor Analysis & Market Shares of Financial Institutions Targeting SMEs
Table 1.2.1 below represents the estimated market shares of financial institutions in the Seychelles targeting SMEs as potential borrowers.
TABLE 1.2.1
Financial Institution Profiles (Refer Exhibit 4 for Comparative Income Statements and Comparative Balance Sheets)
Development Bank of Seychelles (DBS): DBS was formed in 1977 with the mandate of economic development in Seychelles. Offer loans at interest rates normally below commercial lending rates (www.dbs.sc).
Barclays Bank (BB) - BB is the only commercial bank in Seychelles which has a SME Loan Department that exclusively caters to their requirements. Interest rates and other charges are usually very high (Interest income per interest bearing assets of 17% as per Exhibit 4), but this Department offers extremely quick processing of loan applications, usually within two business days.
Credit Concessionary Authority (CCA): CCA is a government body with the objective of providing subsidized loans to start up entrepreneurs. Interest rates range between 0% to 4%. This agency is not able to compete effectively due to a tight annual budget which pales in comparison to the lending capacity of commercial banks.
The agency assists startup businesses only and those seeking finance for expansion are referred to a commercial bank
Mauritius Commercial Bank (MCB), Seychelles Savings Bank (SSB) and Bank of Baroda (BOB) - These banks provide normal commercial loans at prime rate close to 12% + additional spread depending on credit risk assessment. These banks compete with each other and customers take decisions on the basis of quality of service and interest rates offered by respective banks. None of them consider SMEs as a market worth pursuing, thus they do not have tailor-made products for them.
Nouvobanq (NVB) - NVB is another Government controlled bank which is partly owned by the Standard Chartered Bank, London. It has a prime rate close to 12% but normally has a higher spread than other banks. NVB doesn't have any SME specific products.
Habib Bank (HB) - HB normally has higher interest rates and stiffer conditions on loans compared with other banks (as estimated by SSB management). This fact could not be confirmed by survey as the surveyor was not able to find any SMEs having commercial banking relationship with Habib Bank.
Demand and Supply Conditions:
Demand Analysis:
50 SMEs were surveyed for the purpose of this study (refer Exhibit 1 for Sample Survey and Exhibit 2 for Key Survey Results). As per the survey, 72% of the respondents have current financing needs for business expansion.
Table 1.2.2 below has been extracted from Exhibit 2 - Key Survey Results. The table demonstrates the key drivers of value for SMEs in considering sources of finance on a scale of 1-5.
Table 1.2.2
Supply Analysis:
Lack of supply of commercial lending is apparent from the market share shown in table 1.2.1 on page 12. Only 32% of the total SME market share belongs to all 6 Commercial Banks.
Table 1.2.3 extracted from Exhibit 2 below represents the historical banking experience scores on a scale of 1-4.
Table 1.2.3
This clearly demonstrates a gap in the market and the fact that the needs of SMEs have not been met. Interest rate offered which was given the highest priority as per Key Survey Results was given the lowest score by the respondents in terms of historical banking experience.
CH 1.3 EXTERNAL ANALYSIS
POLITICAL, ECONOMIC, SOCIAL & TECHNOLOGICAL (PEST) FACTORS
Politics & Government:
The Government of Seychelles is promoting self employment and is urging commercial banks to lower their interest rates to promote the development of small and medium enterprises.
A recent article on Virtual Seychelles quotes President James Michel, "Today the Government is managing the economy in a transparent manner and is controlling its expenses while the Central Bank is carrying out its role as monetary regulator, but other partners like the commercial banks should also play their part and improve their performance. Across the world today, interest rates on loans are far lower than in Seychelles, where prime rates are 12%. This is not acceptable, with the present economic stability; interest on loans should have a prime rate of around 7% to 8%." [7]
The Seychelles Savings Bank and Nouvobanq are both owned by the Government of Seychelles and it can indirectly influence their policy decisions via their respective Board of Directors.
The DBS is also owned by the Government of Seychelles and it has recently slashed its interest rates to 10% (compared to average commercial lending rates of 15%).
Economic Indicators
Interest rates:
The current economic environment is characterized by extremely high average commercial lending rates ranging from 14% to 15% per annum (refer graph 1.3.1).
Bank Reserve Requirements:
In 2008, the Central Bank of Seychelles decreased reserve requirement from 58% to 10%.p.a( all commercial banks are required to keep 10% of their deposits with in current account with Central Bank) This has caused banks to have excess liquidity.
Low T-Bill Rates:
The Government of Seychelles has slashed T-Bill rates to as low as 2.6% (refer graph 1.3.1), further increasing the attractiveness of commercial lending.
Foreign Exchange:
Foreign exchange is now more freely available making SMEs more competitive against large industry incumbents.
Inflation:
Month on month and year on year inflation both are now close to 0% and 12 month average inflation is on a declining trend (refer graph 1.3.2). The purchasing power of the general population is increasing causing an increase in aggregate demand in the economy.
GRAPH 1.3.1 (Source: Central Bank of Seychelles website)
GRAPH 1.3.2 (Source: Central Bank of Seychelles website)
Social Factors
The GOS encourages self-employment and is providing enabling environment through monetary and fiscal measures.
Banks carry a bad image of making exorbitant profits at the cost of their customers.
There is a general preference for imported goods over local goods.
Customers generally stick to their Banks and require major incentives to shift accounts.
Seychellois love to gossip which may go in favor or against a bank.
Technological Factors
Use of technology in banking industry limited to account maintenance only, which suffices for the SME market.
Seychelles has a manual clearing house function and therefore inter-bank electronic funds transfer facility is non-existent.
PORTER'S FIVE FORCES
SEYCHELLES SME BANKING INDUSTRY
The Porter's Five Forces Analysis is based on discussions with Management of Seychelles Savings Bank and is represented below:
Threat of New Entrants: High Threat by Existing Banks, Low Threat from New Banks
Historically SMEs have been considered a risky market and commercial banks in Seychelles are still showing reluctance in directly tapping this market, aiming instead for high value clients. Even so, threat of new entrants is considered high as any existing commercial bank can easily enter the SME market.
Seychelles is a small market with 5 commercial banks already. As per SSB management, it would be difficult for a new commercial bank to set up in Seychelles as the government would need strong business case by such a bank to set up in Seychelles. Threat of new banks to enter the Seychelles Banking Industry is low.
Buyer power: Low Buyer Power
Buyers would be Small and Medium Enterprises. Due to lack of other financing options and the fact that most commercial banks are more inclined towards larger business partners, it is quite difficult for SMEs to switch or refinance their loans from other commercial banks.
Supplier power: Low Supplier Power
The banking industry is flooded with liquidity (due to decrease in reserve requirement in 2008) and deposit rates are therefore at an all time low. Due to this increased liquidity in the banking system, the commercial banks do not see the need to attract more depositors by offering higher interest rates. Thus supplier power is considered to be low.
Threat of substitutes: Low Threat of Substitutes
Substitutes like friends and family are very poor substitutes for commercial lending and venture capital activity is non-existent in Seychelles.
Organisations like the CCA may be considered as substitutes as they do not have a profit motive but are present for the purpose of economic development and sometimes provide loan at zero interest rate. But the CCA is constrained by an annual budget which pales in comparison to lending capacity of depository institutions like commercial banks. Threat of substitutes is considered to be low.
Competitive Rivalry: Medium
Competitive rivalry is at an all time high and poaching of high value clients by offering lower interest rates is becoming increasingly prevalent. Although there is competition in the banking industry overall, none of the banks except Barclays Bank Seychelles are targeting SMEs per say. Competitive rivalry is this considered to be medium.
Verdict: The SME banking industry is attractive for both new entrants and existing players.
CH 1.4 KEY SUCCESS FACTORS FOR TARGETING SMEs
The Key Success Factor (KSF) matrix describes the logic of the industry and how existing players are competing in the SME commercial loans market. In the KSF matrix below, the scores of the various players were assigned based on observation as well as in consultation with Management of the SSB.
Customised Products: Customised products refer to the level of customization offered to SME customers. A high score means products are customized for individual clients. In the case of Barclays, customization is at the level of offering SME specific loan programs, which also increases processing speeds as programs are pre-determined. In the case of DBS, customization is at individual client level which has resulted in lower processing speed. Other banks have low scores as they do not directly target the SME customers.
Quick Processing: SMEs normally need loans and overdraft facilities at short notice and therefore quick processing is also very important. For example, Barclays has a loan application processing time of only 2 business days. Quick processing and level of customization have an inverse relationship.
Low Interest Rate: SMEs are normally very cost conscious and low cost of financing would be key to attracting them as prospective customers.
Flexible Terms: SMEs value flexibility in terms of maximum loan amount and loan term.
CH 1.5 CONCLUSIONS FROM MRR 1
The Aggregate demand in the country has increased and there is a high probability that it will continue to increase (IMF forecast GDP growth of 4% in 2010).
SMEs require funding to expand to meet this higher demand for their product/service (fact confirmed by Survey). Due to the higher demand, the business risk of SMEs is lower, considerably lowering their credit risk and thus providing commercial loans to SMEs is a viable option in the current business environment.
As per the 5 Forces Analysis, the SME Banking Industry is very attractive for both existing and new players and on average, companies offering products targeting SMEs should be quite profitable.
As per the KSF Matrix, the key determinants of market share are Customized SME Products, Quick Processing, Low Interest Rates and Flexible Terms.
Most commercial banks are very weak in terms of Customized SME Products, Quick Processing and Lower Interest Rates and will have to concentrate on these aspects to gain market share in the short term as these are the KSFs with the highest weights.
In the long term, as competition increases, commercial banks will have to concentrate on competing on Flexible terms to maintain market share.
CH 2.1 MISSION & VISION
Mission Statement:
The Stated Mission of the Seychelles Savings Bank is to:
"Fully and sufficiently meet all the banking needs of its customers, small and big and in doing so excels in customer care. It also endeavours to actively participate in the development of Seychelles by being the most customer focused bank."
The bank has more of a social cause of providing access to finance at low cost (which is subsidised by the Government of Seychelles). By providing commercial loans to SMEs, the SSB will contribute towards the economic development of Seychelles by providing owners of SMEs a means to expand their business and capitalise on business opportunities that would otherwise have been unavailable.
Vision:
The Bank does not have an explicit Vision, but from discussions with the Management of the SSB and the mission statement, I propose the following Vision Statement:
"Within the next three years, to become the preferred banking partner to the business community in Seychelles (SMEs and Small to Medium Corporate clients) by improving existing products and introducing eye-catching innovative banking products at most competitive terms (interest rates/charges/tenure) that bring acceptable returns on capital to the Shareholder and play an active role that enhances the effectiveness and efficiency of the Seychelles Financial Market."
CH 2.2 LONG TERM OBJECTIVES
Strategic Objective:
To be the lowest cost provider of commercial banking services and make banking services available to the common man who would normally have difficulty in obtaining such services.
Financial Objective:
Stated in Financial terms, the objectives of the SSB are to:
Increase Utilization of Lendable Funds
As per Exhibit 5, only 38% of deposits were utilized for lending purposes, the core business of the bank. The SSB aims to increase this to more than 70% within the next 3 years.
Increased average loan size
Currently, average loan size is approximately SCR 145,000 as per Exhibit 6 (excluding Mortgage Finance Department Loans). The SSB aims to increase average loans size to more than SCR 250,000 within the next three years.
Decrease in Non Performing Loans as a percent of total loan portfolio
As per Exhibit 6, Non Performing Loans represent 22.43% of total loan portfolio. SSB aims to reduce this to less than 10% within the next 3 years.
CH 2.3 INTERNAL ANALYSIS - THE 7 S MODEL
Strategy:
The SSB was formed as a bank for the common man. The bank's purpose is not to make profit for the Shareholders (the Government of Seychelles) but to sustainably provide banking services to lowest class of the society. The bank targets small and medium sized customers and makes a moderate profit in the process.
The SSB meets those aims currently by providing low cost, customer-friendly services to its target customer segments that would normally find it difficult to obtain funding from other commercial banks and; aims to be cost effective by using its large customer base to spread its cost.
The Bank already has about half of the country's population as its account holders (46,000 accounts in a population of 85,000). The Bank retains its customers by offering low cost unsecured loans (up to SR 50,000) against assignment of their Salaries. SSB is an Agent of Money Gram International which transmits money worldwide in a matter of minutes.
In terms of dealing with competitive pressure, the SSB continuously monitors market trends in terms of interest rates both on Deposits and Loans as well as Bank charges/fees and aligns them to retain customers and attract new ones.
SSB's objective of 10% NPL rate within the next three years will not be sustainable and they should aim to decrease it even further, possible to a 5% NPL rate.
Structure:
The organization structure is as per figure 2.3.1 below:
FIGURE 2.3.1 SSB Organization Structure
Board of Directors (BOD): The top body is the Board of Directors appointed by the President of the country headed by a non-executive Chairman who is responsible for developing the mission and strategy, and setting the corporate values of the bank and approve Annual Business plan/ Budget of the Bank and setting Management Remuneration.
Audit Committee: Composed of two non-executive board members and the internal auditor, the Audit Committee ensure that bank's operations are conducted as applicable laws, banking guidelines and procedures, CBS guidelines and any deficiencies pointed out by the Internal Audit department are rectified. It reports directly to the Board of Directors.
Internal Audit: Headed by the Audit Manager, is responsible for the audit of the entire Bank so as to detect any deficiencies in the day to day operations and suggests improvements. It reports of findings are submitted to respective departments/ branches for rectification of deficiencies/ shortcomings mentioned therein. It presents consolidated Internal Audit reports directly to the Audit Committee in the presence of the Managing Director, who is available to answer questions by the Audit Committee.
