Lending in developed markets has stagnated. In real terms, private sector bank lending in the world’s top economies increased by just 0.1 percent last year, according to UHY, an international accountancy network. Flagging top-tier lending stands in contrast to the influx of private sector money established emerging markets like Brazil and China are seeing, where since 2009 private sector lending jumped by 115 percent and 122 percent respectively. Demand for loans, particularly SME, trade and corporate, has increased across all emerging regions.
Room to grow
A report on emerging market banking trends by EY identified 11 nations – including Kenya, Vietnam, Malaysia, Mexico and South Africa – as the next wave of rapid growth markets. The GDPs of these nations has expanded almost 50 percent since 2008. Compare that to the UK and Eurozone that are only just approaching a GDP at levels seen pre-financial crisis and the United States’ has grown by only single digits in the same time frame. Fast growth also makes emerging markets extremely volatile. Growth could be slowed by any number of non-economic factors. Political and social upheaval is as troublesome as the fiscal position of the government. Despite the volatile conditions, banks have seen returns on equity in the mid-teens. Those already serving these markets are optimistic. Eighty-eight percent told EY they expect the financial performance of their institution to improve.
Widening gap between supply and demand
Despite all of the opportunity and interest, there is still a funding gap for SMEs in emerging economies. Estimates from the EY report count 17 million businesses among those with unmet financing needs; a credit deficit between $900 billion and $1.1 trillion. Experts expect the demand to continue, with 81 percent seeing demand for SME loans continuing to grow. Why the gap if there are banks looking to enter into growing markets and businesses in need? Businesses seeking funding often have just exited the informal sector and lack the credit history and collateral needed for traditional loans. The high-risk nature makes it difficult to price loans for many lenders preferring to serve better-established businesses. Proven successful in multiple emerging markets, alternative approaches to qualifying applicants can help banks better decide which businesses to serve. Psychometric testing, an alternative screening method that assesses creditworthiness through personality testing, is experiencing a surge in popularity. Entrepreneurial Finance Labs, which began at Harvard University, told the Financial Times that lenders using the assessment saw their default rates cut in half.
Lenders looking to capitalize in emerging markets should take the long view. The middle class in these nations will continue to grow; as they do they will demand businesses that better serve them. Some estimate (http://www.pwc.com/en_GX/gx/banking-capital-markets/pdf/banking2050.pdf) the top emerging economies dwarf the current G7 economies by 25 to 75 percent by 2050, depending on the measure used.