Very Small Businesses and Start-ups

Banking Growth: Beyond Microfinance

This panel explored key adaptations to systems and processes required for banks to lend to very small businesses and start-ups.

Key Points

  • Very small businesses are businesses that have graduated out of microfinance and are moving up the growth curve.
  • Whether male or female, small business clients are all faced with similar obstacles. This segment can be viewed as undesirable and a lot of banks stay away from it. Some of these obstacles include:
    • remoteness,
    • lack of financial records,
    • lack of collateral,
    • low revenue per customer,
    • high cost to serve,
    • business activities are numerous, so it is difficult for credit analysts to analyze their businesses to understand their credit capacity.
  • Women’s proportion of business ownership tends to decrease as business size increases. Women prefer to like to work near their families and need more flexibility. As SMEs grow, many times women share responsibilities with their sons and daughters.
  • Legal barriers can also restrict the amount a bank can lend based on the equity of the borrower. This can disproportionately impact women.
  • There are no standard definitions for this segment. Loan sizes are typically between US$3,000 and US$20,000.
    • Some banks use revenues for segmentation. This is a complicated variable to use because many business owners are not able to track it.
    • Number of employees is sometimes used, with micro being 1-4 employees and small 5-10 employees. But the use of family members as employees by these businesses adds complexity.
    • Beyond revenues, banks also use sector-specific definitions to provide certain products and services. For instance, TEB flags tech entrepreneurs so that they can receive particular products and benefits, as well as be assessed by RMs that know the sector.
    • Start-ups are also segmented separately by quantifying the age of the business, and TEB has adapted credit policies to their needs.

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  • This segment is an area of the market where a lot of women business owners tend to be. When looking at a bank’s portfolio, you can see that women represent the majority of the bank’s microfinance portfolio, but they decline as a percent of the total once you move up to small businesses.
  • Women in particular tend to comprise more retail businesses and accumulate more assets, but are less profitable. Men tend to be more in the business-to-business sector and build up their balance sheets.
  • Women tend to borrow smaller amounts in this segment — they are often at 50% to 60% of what the men borrow.
  • If you look at traditional credit methodologies, across the board these segments are disadvantaged, and there are important ways to try to solve some of the issues:
    • Value chain finance offers finance based on corporate clients and takes away some of the risk by using the Purchase Order (PO) as collateral.
    • Focus on specific clusters based on sectors.
    • Use a retail approach to drive down costs.
    • Use partnerships and correspondents — such as agents or digital channels.
    • Use non-financial services in a cost-effective manner.
    • Banks need to be close to the customers — most enterprises are family enterprises and family issues take priority. Every RM has to visit customers to verify inventory and assets, as well as to check relationships with customers and suppliers.
    • Psychometric testing can provide a new method to test a customer’s capacity to pay based on his/her character, where collateral is not required. However, psychometric testing is only intended for very small enterprises where there is only one person making the decision.
    • Use flexible collateral, such as gold.
    • Train RMs, not just on the financials but also on issues related to the business of the client. This allows RMs to understand client risk better and provide advice to customers on their businesses.
    • Take a 360-degree ecosystem approach — understand flows and velocity of funds.

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Senior Banking Specialist, International Finance Corporation, World Bank Group

Global Risk Officer, Banco Pichincha
Presentation (members only)

Marketing Director, TEB
Presentation (members only)


“Whether male or female, small business clients are all faced with similar obstacles. … This segment is viewed by most bankers as the least desirable, and a lot of banks steer well clear of it.”
— Andrew McCartney

“In Ecuador, most of the enterprises are family enterprises. If a child is sick, your customer doesn’t pay you, as they have to pay the doctor over their credit.”
— Maria Belen Sanchez Valdivieso

“We want to be the consultant bank of clients, and we need to understand the mind set of the start-up.”
— Simla Unal

“The beauty of this is they [TEB] have grabbed market share on the back of this [consultant bank] strategy and developed a scalable small business banking model.”
— Andrew McCartney

“Do we need to [segment] and define them in so many ways? Yes, as their risk and needs are different. The main underlying approach can be the same, but there may be different policies for them.”
— Simla Unal

“We provide information not just on their finances, but also on their lives. For instance, in agriculture services they use fertilizers without wearing masks, even if they are asking their children to wear them.”
— Maria Belen Sanchez Valdivieso