Breaking Credit Access Barriers for SMEs: The Dynamic Role of Banking Competition in the CEMAC Zone

Dr. Wirajing Muhamadu Awal Kindzeka

Executive Summary

Small and Medium-sized Enterprises (SMEs) contribute significantly to the global employment creation and economic diversification. In the CEMAC zone, however, their potential remains significantly constrained by persistent barriers to accessing formal bank credit. This policy brief examines how the structure of the CEMAC banking sector influences access to credit for SMEs. The analysis highlights that although the region presently has more than 50 banks operating across the 6 member states, the market remains highly concentrated, with a small number of dominant banks controlling a large share of deposits and lending activities. This reduces competitive pressures and encourages conservative lending practices that prioritize assets with low risk, such as government securities over private-sector investments. In 2023, the World Bank’s statistics show that credit to the private sector in the CEMAC zone averages approximately 12.35% of GDP, with Cameroon at about 14.06% and Chad at around 7.48%, far below the levels observed in several Franc zone economies. In contrast, Senegal records around 29.4% and Côte d’Ivoire approximately 19.03%, reflecting more dynamic financial intermediation in the West African region. This illustrates how structural inefficiencies continue to restrict credit access for SMEs in the CEMAC zone. The study recommends the following policy actions to address these challenges: In the short run, regulators should strengthen credit-support mechanisms such as credit guarantee schemes targeting SMEs. In the medium and long term, regulatory reforms should promote greater competition by encouraging fintech innovation and developing alternative financing channels such as venture capital, leasing, and capital markets.

Key messages

• Banking sector concentration and risk-averse lending incentives remain the most binding constraints to SME credit access in CEMAC.
• Credit allocation is skewed toward government securities, crowding out private-sector and SME financing.
• Weak financial infrastructure and limited competition further constrain inclusive financial intermediation.
• Limited SME financing reduces innovation, employment creation, and structural transformation.
• A sequenced policy approach combining credit support, competition reforms, and financial market deepening is essential.

1. Introduction

Considering the importance of SMEs in economic development, their access to finance remains one of the most critical issues facing policymakers in developing economies today. These enterprises contribute significantly to job creation, innovation capacity building and economic diversification in developing economies. In many African countries, micro & SMEs account for a large share of employment and provide an important pathway for inclusive growth and development. Despite their economic importance, SMEs frequently encounter substantial barriers in accessing formal financial services. This is a worse scenario in less competitive banking sectors where few dominant large banks control financial activities. These dominant large banks consider micro and SMEs as high-risk borrowers due to the inability to provide acceptable collateral together with their weaker financial records. Due to this perception, many of these SMEs remain excluded from formal credit markets and are forced to rely on informal financing mechanisms. Entrepreneurs consider these informal sources to be very costly and insufficient for long-term projects. These challenges are particularly pronounced in the Economic and Monetary Community of Central Africa (CEMAC), which includes Cameroon, Congo Republic, Central African Republic, Gabon and Equatorial Guinea. While the region has witnessed a gradual expansion in the size of its banking sector since in the 21^st century, banking levels competition and innovation becomes very low with highly concentrated large banks When financial systems are highly concentrated with limited competition like the case of CEMAC, the incentives to extend credit to smaller and riskier firms start to diminish. This guides the study’s objective to investigate how the banking sector’s structure affects SMEs access to finance in the CEMAC zone.

2. Context and Recent Trends in SME Financing

The CEMAC banking sector is highly concentrated, with a limited number of large banks dominating financial activities. These types of markets with a low competitive structure promote conservative lending behaviours, where banks tend to favour low-risk assets such as government securities and large corporate clients over SMEs demands. Although the CEMAC zone has more than 50 licensed banks across its six member states, the financial system remains relatively small and concentrated when compared with other African markets. For instance, Kenya alone hosts approximately 38 banks, while Nigeria and Ghana each operate more than 20 banks with relatively more bank branches and higher fin-tech penetration rates, reflecting larger, more competitive and innovative financial systems. More importantly, the depth of financial intermediation remains limited in terms of the sector’s influence and volume of activities. In 2023, credit to the private sector investments averages just about 12.35% of GDP across the CEMAC zone, significantly lower than in several comparable Franc zone economies. Within the region, Cameroon records about 14.06%, while Chad stands at approximately 7.48%, illustrating the uneven distribution of financial resources. In contrast, Franc zone countries such as Senegal and Côte d’Ivoire record private sector credit levels of approximately 29.4% and 19.03% of GDP respectively. This reflects stronger financial intermediation and more developed regulatory and institutional frameworks in the West African Economic and Monetary Union (WAEMU). These disparities highlight the structural challenges affecting SME financing in Central Africa. As a result, limited credit allocation to productive sectors such as the SMEs has slowed the development of entrepreneurial ecosystems and constrained the region’s ability to promote inclusive economic development.

3. Banking Competition and Credit Allocation

In competitive financial systems, banking firms have stronger incentives to expand their customer base, develop innovative lending products, and improve risk assessment mechanisms, all of which aim to attract new clients. However, when a small number of institutions dominate the market, as is the case in the CEMAC banking sector, competitive pressures tend to weaken as their concentration shapes the demand and supply trends of financial services. Large commercial banks that are out to maximize profit and minimize risks, may usually prefer to concentrate on relatively safe and profitable lending opportunities rather than expanding credit to smaller firms that require more intensive monitoring without a proper guarantee of contractual fulfilment. In the CEMAC region, several factors reinforce this conservative lending behavior: First, the increasing government revenues in recent years have offered banks attractive investment opportunities through treasury bills and government bonds. This creates a crowding-out effect, where banks reallocate liquidity toward government instruments due to their relatively stable returns with lower perceived risk, compared with lending to SMEs. Second, the limited reliable financial information about small businesses increases the cost of credit evaluation for banks. Without strong credit registries and reliable financial statements, banks may find it difficult to assess the creditworthiness of smaller firms. Third, regulatory and institutional constraints may also limit financial innovation. Prudential regulations designed to preserve financial stability sometimes unintentionally discourage risk-taking by banks, particularly in markets where supervisory capacity is still developing. As a result, credit allocation becomes skewed toward large firms and government borrowers, leaving SMEs with limited access to formal financial services.

4. Implications for Entrepreneurship, Innovation, and Employment

Restricted access to finance primarily affects SMEs through reduced investment capacity, which directly limits credit access, firm growth, innovation, and employment generation..

Limited credit availability: Limited credit reduces the growth potential and the impact of SMEs in the region. Without access to investment capital, many firms remain small and unable to expand their productive capacity or adopt new technologies while others quit the market.

Weak financial inclusion slows innovation: Entrepreneurs often require external financing to invest in research, technology adoption, and new product development. When such financing is unavailable, innovation ecosystems remain underdeveloped.

Low employment generation capacity: Credit access barrier reduces employment generation capacity, especially in regions with low financial literacy. SMEs typically play a critical role in absorbing labor, particularly among young populations entering the workforce. Credit constraints therefore weaken the ability of the private sector to create sufficient job opportunities.

Barriers to accessing formal financing: Finally, persistent barriers to formal financial services contribute to the growth of the informal sector. Firms unable to obtain formal credit often rely on informal financial arrangements, which tend to be less efficient, insufficient and limit productivity. As a consequence, these four dynamics weaken the link between entrepreneurship, financial development, and structural transformation in the region.

5. Structural Factors Behind Limited SME Financing

Beyond market concentration and banking industry’s competition, the following structural factors contribute to the persistent financing gap faced by SMEs in the CEMAC region.

Weak development of financial infrastructure: The CEMAC banking sector has poor infrastructures with limited credit information systems, weak collateral registries, and poor financial reporting standards. This complicates things and makes it difficult for banks to accurately assess borrower risk, especially for small businesses.

Weak institutional frameworks: The region has a weak legal and institutional framework governing lending and contract enforcement. Lengthy judicial processes and difficulties in recovering collateral increase the perceived risk associated with SME lending.

Increasing government borrowings from domestic banks: In addition, government borrowing from domestic banks has expanded in recent years, absorbing a large share of available liquidity. This phenomenon, often described as “crowding out,” reduces the resources available for private-sector lending.

Limited financial innovation: The sector’s low competitive nature has weakened the incentives to innovate within the banking sector which remains an important structural barrier that limits SMEs access to finance. This has slowed the development of alternative financing instruments that could support SMEs development.

6. Policy Recommendations

Based on the study’s analysis, improving access to finance for SMEs in the CEMAC region requires a comprehensive policy strategy. The policies are orientated towards improving banking competition and reducing the structural financial constraints to credit access, structured in short, medium and long-term policy actions.

Short-Term Policy Action: The study recommends regulators including COBAC, BEAC and national governments to strengthen targeted credit-support mechanisms for SMEs. This includes credit guarantee schemes which can help to reduce the risk faced by banks when lending to smaller firms and also encourage financial institutions to expand their SME portfolios.

Medium-Term Policy Action: The study recommends the establishment of regulatory reforms aimed at promoting competition within the banking sector. This involves facilitating the entry of new financial institutions, including digital banks and fin-tech firms that can provide innovative financial services to underserved businesses. In addition, this requires strengthening regulatory capacity to supervise digital financial services and ensure consumer protection while maintaining financial stability.

Long-Term Policy Action: As a long-run strategy, the study recommends financial institutions in the CEMAC zone to diversify beyond traditional bank lending. This will permit to develop alternative financing instruments such as venture capital funds, leasing markets, and capital markets that would provide SMEs with additional sources of funding. This will require prior development of legal frameworks, investor protection mechanisms, and deeper capital markets to ensure the viability and sustainability of these instruments.

7. Conclusion

The analysis highlights that limited banking competition, coupled with structural financial inefficiencies, continues to restrict access to credit for micro and SMEs in the CEMAC zone. Despite the expansion of the banking sector, financial intermediation remains very limited while credit allocation continues to favour low-risk borrowers over productive entrepreneurial activity. This questions the function of a banking industry as the engine of growth or provider of resources for development. Addressing these challenges requires coordinated policy efforts aimed at improving competition, strengthening financial infrastructure, and expanding credit finance opportunities to boost SMEs’ finance access. Without such reforms, the region risks maintaining a system that prioritizes fiscal financing at the expense of private-sector growth.