Banking Analysis: Porter's Five Forces SME Banking

Chapter 9. Porter’s Five Forces SME Banking Analysis

It is very important for any new business to understand not only the market but also the industry dynamics in which the co. wants to operate in. It is the industry that influences the market and not just one or two companies. Industry may in turn get influenced by a multitude of factors. It becomes ever more essential for a bank to study the market and industry conditions due to the riskiness involved in lending. Some banks are systemically important too and can affect the economy as a whole.

Porter’s analysis would help in analyzing the level of competition and help in developing the business strategy that would help a new entrant to establish itself in the market. The established banks

Since, these relationships involve money (and may also affect continuity of business), that’s why customers maybe conservative to switch to new banks due to high foreclosure / pay offs to close the existing liabilities with other banks.

Chapter 9.4. Bargaining Power of Suppliers (Medium)

Banks are dependent on capital and post the crisis, the regulators have made strict regulations for banks to ensure they maintain a decent Capital Adequacy Ratio. With these new criteria in place, banks must maintain some cash reserves for any contingency purpose. Banks depend on the capital that in turn depends on:

1. Fee Income. This may not be the main source of capital for the bank but banks welcome this income as this adds to the profitability. However, depending on customer and competition, many banks do waive off this fee thereby increasing the bargaining power

2. Bank Deposits / Corporate Deposits / Balances in the A/c. Banks require huge amounts of capital to run the business and makes profit. Banks source these funds from their own funds and also from deposits from the public . This way rotation of money takes place and bank uses these funds to lend, however, they are still obliged to repay these liabilities to their

Economy: The economic conditions play a huge role in influencing the bargaining power of suppliers. If the economy is on a downturn, then customers may not have much confidence to deal with banks.

Chapter 9.5. Bargaining Power of Customers (Low)

Banks depend on customers for their profitability. However, there is large presence of banks in the UAE catering to a low population. As mentioned earlier, currently 40-45 banks cater to the SME segment. Also, the approval rates are generally low and this makes it difficult for customers to avail credit. Thus, it can be said that bargaining power is low due to stringent lending criteria.

In the absence of a credit bureau, banks generally depend on customer documents like bank statements, business verification, audited financials etc. These in turn depend on market conditions, seasonality of business cycle etc. Further to this, banks depend on skills of its staff that underwrite or source these applications. Since, it is mostly customer and staff oriented, banks tighten their lending policies especially since this is a more dynamic segment as compared to the salaried segment where monthly incomes (depending on the employer) are quite