Enhancing smE financing in acp countries - ACP Business Climate
Enhancing smE financing in acp countries - ACP Business Climate
Enhancing smE financing in acp countries - ACP Business Climate
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<strong>Enhanc<strong>in</strong>g</strong> sme <strong>f<strong>in</strong>anc<strong>in</strong>g</strong><br />
<strong>in</strong> <strong>acp</strong> <strong>countries</strong><br />
Towards a private sector<br />
enabl<strong>in</strong>g environment<br />
A Facility f<strong>in</strong>anced by<br />
the European Union through<br />
the European Development<br />
Fund<br />
May 2012<br />
<strong>ACP</strong> Bus<strong>in</strong>ess <strong>Climate</strong> - A programme of the <strong>ACP</strong> Secretariat funded by the European Union
Towards a private sector<br />
enabl<strong>in</strong>g environment<br />
A Facility f<strong>in</strong>anced by<br />
the European Union through<br />
the European Development<br />
Fund<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
Based on reports prepared by :<br />
Mr. Michel Cramer<br />
Mr. Charles Vuylsteke<br />
A project implemented by Safege<br />
This report has been produced with the f<strong>in</strong>ancial assistance of the European Union. The views expressed here<strong>in</strong> can <strong>in</strong> no way be<br />
taken to reflect the official op<strong>in</strong>ion of the European Union nor that of the <strong>ACP</strong> Secretariat.
Design: www.mazygraphic.be
Florence Béal-Nénakwé<br />
She’s the one it is about.<br />
Everyth<strong>in</strong>g is orig<strong>in</strong>al <strong>in</strong> her: her<br />
personality, her language, her<br />
spirit and, of course, her pa<strong>in</strong>t<strong>in</strong>g.<br />
Yes, her pa<strong>in</strong>t<strong>in</strong>g. Affirm<strong>in</strong>g its<br />
African roots through her art, the<br />
artist Florence Beal-Nénakwé<br />
pa<strong>in</strong>ts the rem<strong>in</strong>iscences of her<br />
childhood <strong>in</strong> Cameroon. She<br />
gives us a pictorial work full<br />
of rich colors: those of Africa.<br />
Florence does not copy, she imitates noth<strong>in</strong>g or nobody. The<br />
<strong>in</strong>ternal energy from her native Cameroun and her personal<br />
life are enough to make her express this cheerfulness and this<br />
hope on a canvas. All images of her childhood, the sun, nature<br />
and humanity arise now with an astonish<strong>in</strong>g maturity: the<br />
beauty of the forms, the playful sensuality as well as the pure<br />
expression of colors.<br />
flo.beal@wanadoo.fr<br />
www.beal-nenakwe.com
Table of contents<br />
SUMMARY 7<br />
1. INTRODUCTION 8<br />
1.1 Rationale of the Study 9<br />
1.2 Objectives 9<br />
1.3 Methodology 7<br />
2. SMES IN THE <strong>ACP</strong> CONTEXT 10<br />
3. ACCES AU FINANCEMENT : CIRCUITS, INSTRUMENTS ET ROLES ACTUELS 12<br />
3.1 Worldwide 13<br />
3.2 In the <strong>ACP</strong> Countries 13<br />
Commercial f<strong>in</strong>ancial channels 13<br />
Development F<strong>in</strong>ance Institutions active <strong>in</strong> the <strong>ACP</strong> Regions 14<br />
Selected SME Access to F<strong>in</strong>ance Initiatives underly<strong>in</strong>g the Study 15<br />
4. THE SME FINANCING GAP: CAUSES 16<br />
4.1 SME constra<strong>in</strong>ts (demand side) 17<br />
4.2 Constra<strong>in</strong>ts of banks and f<strong>in</strong>ancial <strong>in</strong>termediaries (supply side) 17<br />
Commercial banks 18<br />
Other <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> sources 18<br />
4.3 Constra<strong>in</strong>ts <strong>in</strong> the bus<strong>in</strong>ess environment 19<br />
5. CLOSING THE FINANCING GAP: OPTIONS & OPPORTUNITIES 20<br />
5.1 SME capacity for access<strong>in</strong>g f<strong>in</strong>ance 21<br />
5.2 Motivat<strong>in</strong>g banks and <strong>in</strong>creas<strong>in</strong>g bank SME penetration 21<br />
5.3 Non-bank<strong>in</strong>g <strong>in</strong>stitutions and <strong>in</strong>struments 21<br />
Mezzan<strong>in</strong>e loans and equity f<strong>in</strong>ance 21<br />
Leas<strong>in</strong>g and factor<strong>in</strong>g 22<br />
Supplier credit and trade credit 22<br />
5.4 Role of the State <strong>in</strong> <strong>ACP</strong> Countries 22<br />
Incentives 22<br />
Regulatory environment 23<br />
F<strong>in</strong>ancial <strong>in</strong>frastructure 23<br />
Secured transactions framework 23<br />
Dispute resolution 23<br />
4<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
6. IMPLICATIONS FOR THE EIB INVESTMENT FACILITY AND THE EC 24<br />
6.1 Outreach of the <strong>ACP</strong> Investment Facility for SME f<strong>in</strong>ance 25<br />
F<strong>in</strong>ancial support 25<br />
Non-f<strong>in</strong>ancial support 25<br />
6.2 <strong>Enhanc<strong>in</strong>g</strong> EIB/IF outreach 26<br />
Reach<strong>in</strong>g the lower SME segments 26<br />
Guarantees and credit enhancement 26<br />
Grant fund<strong>in</strong>g for SME capacity build<strong>in</strong>g 27<br />
7. RECOMMENDATIONS 30<br />
7.1. Recommendations to the <strong>ACP</strong> Countries and their public <strong>in</strong>stitutions 31<br />
7.2. Recommendations to the EIB and the European Union 31<br />
7.3. Recommendations to the EIB 32<br />
7.4. Recommendations to the EU Member States controll<strong>in</strong>g the IF 32<br />
8. POSSIBLE IF ALTERNATIVES AND ROADMAP FOR SME SUPPORT 34<br />
8.1. Impact on SMEs 35<br />
8.2. Risk Mitigation 35<br />
8.3. Technical Assistance 36<br />
8.4. Relative IF Devolvement 37<br />
8.5. Outl<strong>in</strong>e of a Possible Roadmap 38<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
5
Def<strong>in</strong>itions & Acronyms<br />
<strong>ACP</strong><br />
ADR<br />
AfDB<br />
AfD<br />
AMSME<br />
AsDB<br />
ATI-ACA<br />
BIO<br />
BOAD<br />
Cotonou<br />
EBRD<br />
EC<br />
ECOWAS<br />
EDFI(s)<br />
EIB<br />
EIF<br />
EU<br />
EUR or €<br />
The Group of African, Caribbean and Pacific States (established by the Georgetown Agreement)<br />
Alternative Dispute Resolution Mechanism<br />
African Development Bank<br />
Agence française de Développement<br />
Africa Micro, Small and Medium Enterprise (F<strong>in</strong>ance Programme)<br />
Asian Development Bank<br />
African Trade Insurance Agency<br />
Belgian Investment Company for Develop<strong>in</strong>g Countries<br />
Banque ouest-africa<strong>in</strong>e de développement<br />
Cotonou Partnership Agreement<br />
European Bank for Reconstruction and Development<br />
European Commission<br />
Economic Community of West African States<br />
European Development F<strong>in</strong>ance Institution(s) (the 15 Member Institutions of the EDFI Group)<br />
European Investment Bank<br />
European Investment Fund<br />
European Union<br />
Euros<br />
FIEG F<strong>in</strong>ancial Inclusion Experts Group of the G-20<br />
FMO<br />
IADB<br />
Nederlandse F<strong>in</strong>ancier<strong>in</strong>gs-Maatschappij voor Ontwikkel<strong>in</strong>gslanden N.V. (Netherlands<br />
Development F<strong>in</strong>ance Company)<br />
Inter-American Development Bank<br />
IF<br />
IFC<br />
IFI<br />
MIF<br />
MS<br />
MSME<br />
NIP<br />
OECD<br />
OECS<br />
PROPARCO<br />
RIP<br />
SME<br />
USAID<br />
WAEMU<br />
<strong>ACP</strong> Investment Facility<br />
International F<strong>in</strong>ance Corporation<br />
International F<strong>in</strong>ancial Institution<br />
Multilateral Investment Fund<br />
EU Member States<br />
Micro, Small and Medium Enterprise<br />
EU National Indicative Programme<br />
Organisation for Economic Co-operation and Development<br />
Organisation of Eastern Caribbean States<br />
Promotion et participation pour la coopération économique (AFD Group)<br />
EU Regional Indicative Programme<br />
Small and Medium Enterprise<br />
United States Agency for International Development<br />
West Africa Economic and Monetary Union<br />
6<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
SUMMARY<br />
This study aims to explore ways of improv<strong>in</strong>g the <strong>f<strong>in</strong>anc<strong>in</strong>g</strong><br />
of SMEs as well as small States <strong>in</strong> the <strong>ACP</strong> regions, particularly<br />
with regard to their access to the Investment Facility (IF) run<br />
by the EIB and through the possible devolution of the IF to<br />
regional f<strong>in</strong>ancial bodies. The report presents the f<strong>in</strong>d<strong>in</strong>gs<br />
and recommendations drawn from two technical studies,<br />
two High-Level Meet<strong>in</strong>gs of stakeholders, four country visits<br />
and related desk work and exchanges with the EIB. The<br />
Report proceeds from the SME status and <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap to<br />
the major <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> constra<strong>in</strong>ts, the best remedies and the<br />
specific implications for the IF as well as the EU.<br />
Bank reluctance to lend to SMEs appears to be a major<br />
constra<strong>in</strong>t, though to a lesser degree <strong>in</strong> some Caribbean<br />
<strong>countries</strong> than <strong>in</strong> Sub-Saharan Africa. Credit risk <strong>in</strong> the SME<br />
sector is high, and coupled with weak collateral capacity, leads<br />
to low motivation to serve SMEs and/or to high provision<strong>in</strong>g<br />
requirements for banks <strong>in</strong> addition to costly process<strong>in</strong>g<br />
of small loans for SMEs. Risk mitigation under guarantee<br />
schemes is one of the ma<strong>in</strong> remedies to this situation, and<br />
needs to be developed to a greater extent. Other f<strong>in</strong>ancial<br />
<strong>in</strong>struments such as leas<strong>in</strong>g and equity funds need support,<br />
and local currency <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> is needed to a greater extent.<br />
With few exceptions however, equity <strong>in</strong>vestment funds tend<br />
to concentrate on larger and safer enterprises.<br />
In all <strong>ACP</strong> regions, SMEs face huge capacity constra<strong>in</strong>ts<br />
related ma<strong>in</strong>ly, but not only, to their management and ability<br />
to present bankable dossiers and service loans regularly.<br />
Major opportunities to <strong>in</strong>crease SME demand do exist, but<br />
need to be supported by grant fund<strong>in</strong>g, of which EIB has<br />
very little. This is a field where potential EC grant fund<strong>in</strong>g<br />
support, blended with EIB/IF <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>, must be developed.<br />
EIB/IF has not fully developed its guarantee <strong>in</strong>strument -<br />
guarantees offered have had a very low take-up rate. New<br />
solutions are required, bear<strong>in</strong>g <strong>in</strong> m<strong>in</strong>d that the ma<strong>in</strong> bank<br />
portfolio guarantee l<strong>in</strong>es from other sources that have worked<br />
<strong>in</strong> Sub-Saharan Africa were partly subsidised schemes. This<br />
aga<strong>in</strong> po<strong>in</strong>ts to a further need for blend<strong>in</strong>g EC concessional<br />
or grant fund<strong>in</strong>g with EIB/IF <strong>in</strong>struments.<br />
Similarly, local currency <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> by the IF needs to be<br />
expanded, as SMEs cannot withstand the foreign exchange<br />
risk prevail<strong>in</strong>g <strong>in</strong> many <strong>countries</strong>. Interest subsidies under<br />
Cotonou are also not aimed at bank lend<strong>in</strong>g to SMEs,<br />
although they contribute higher employment.<br />
The Recommendations result<strong>in</strong>g from this study conta<strong>in</strong>s<br />
various proposed steps to be taken accord<strong>in</strong>g to the<br />
responsible party, i.e.:<br />
• Recommendations to the <strong>ACP</strong> <strong>countries</strong>, relat<strong>in</strong>g to the<br />
bus<strong>in</strong>ess environment and the f<strong>in</strong>ancial <strong>in</strong>frastructure<br />
(e.g. credit bureaus and collateral realisation);<br />
• Recommendations to the EIB and the European Union<br />
(EU), relat<strong>in</strong>g to a larger allocation of grant fund<strong>in</strong>g for<br />
SME access to f<strong>in</strong>ance, both for capacity build<strong>in</strong>g and for<br />
the creation of new <strong>in</strong>struments call<strong>in</strong>g for blend<strong>in</strong>g of<br />
grant resources with commercial f<strong>in</strong>ance;<br />
• Recommendations to the EIB, relat<strong>in</strong>g to the size of SMEs<br />
targeted, and the development of several <strong>in</strong>struments,<br />
<strong>in</strong>clud<strong>in</strong>g guarantees;<br />
• Recommendations to the EU Member States controll<strong>in</strong>g<br />
the IF <strong>in</strong> terms of IF priorities and possibly the IF<br />
susta<strong>in</strong>ability requirement.<br />
The implications for the EIB-managed IF are numerous.<br />
First, the governance of EIB’s <strong>ACP</strong> activities coupled with its<br />
extremely limited human resources dedicated to the <strong>ACP</strong>s<br />
rema<strong>in</strong>s an obstacle to the smaller and riskier operations.<br />
Sub-contract<strong>in</strong>g additional expertise <strong>in</strong> the SME sector could<br />
alleviate this constra<strong>in</strong>t, <strong>in</strong>clud<strong>in</strong>g <strong>in</strong> terms of field presence.<br />
The SME segment reached is, under many operations, the<br />
higher end of the SME spectrum, except under microf<strong>in</strong>ance<br />
operations. EIB/IF may need to provide l<strong>in</strong>es of credit<br />
contractually dedicated to the so-called “Miss<strong>in</strong>g Middle”<br />
(smaller SMEs), and controlled <strong>in</strong> terms of the size of SMEs<br />
reached. Equity <strong>in</strong>vestment funds, with a few exceptions, are<br />
also aimed at larger enterprises, and novel approaches with<br />
different risk tolerances and profitability requirements are<br />
needed.<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
7
1<br />
Introduction<br />
8<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
1<br />
Introduction<br />
1.1 Rationale of the Study<br />
The study was prompted by <strong>ACP</strong> States’ concerns relat<strong>in</strong>g<br />
to a perceived low level of access to f<strong>in</strong>ance by SMEs <strong>in</strong> the<br />
<strong>ACP</strong> States, small projects, and projects <strong>in</strong> small <strong>countries</strong> to<br />
the <strong>ACP</strong> Investment Facility (IF) created under the Cotonou<br />
Agreement and managed by the European Investment Bank<br />
(EIB). These concerns were embodied <strong>in</strong> a Resolution of the<br />
<strong>ACP</strong> Council of M<strong>in</strong>isters of November 2010.<br />
1.2 Objectives<br />
This Study was launched by BizClim on behalf of the<br />
<strong>ACP</strong> Secretariat with the aim of f<strong>in</strong>d<strong>in</strong>g solutions to the<br />
perceived limited SME access to f<strong>in</strong>ance. The result<strong>in</strong>g<br />
recommendations are also expected to present options for a<br />
better SME outreach of the IF.<br />
• •identify constra<strong>in</strong>ts faced by SMEs <strong>in</strong> the <strong>ACP</strong> <strong>in</strong> access<strong>in</strong>g<br />
f<strong>in</strong>ance, and remedies and options for improved access to<br />
f<strong>in</strong>ance;<br />
• focus on the level of SME access to f<strong>in</strong>ance from the IF<br />
(placed also <strong>in</strong> the context of the IF Cotonou endowments<br />
not be<strong>in</strong>g yet fully committed);<br />
• review the subsidiary question of access to the IF by small<br />
projects and smaller States. This review is expected to<br />
lead to practical recommendations for enhanc<strong>in</strong>g access<br />
to IF f<strong>in</strong>ance.<br />
F<strong>in</strong>ally, the observations made, and the recommendations<br />
endorsed by the participants at the 13-14 October 2011 <strong>ACP</strong><br />
High-Level Meet<strong>in</strong>g organised by the <strong>ACP</strong> Secretariat have<br />
been essential <strong>in</strong> determ<strong>in</strong><strong>in</strong>g the f<strong>in</strong>al orientation of this<br />
study.<br />
The study is organised with a view to tackl<strong>in</strong>g:<br />
• •What SMEs need most <strong>in</strong> the <strong>ACP</strong> context;<br />
• What is available <strong>in</strong> terms of SME support: vehicles and<br />
<strong>in</strong>struments;<br />
• Constra<strong>in</strong>ts: what is miss<strong>in</strong>g - the credit gap and beyond;<br />
• ... of which weak SME capacity for access<strong>in</strong>g f<strong>in</strong>ance is a<br />
central po<strong>in</strong>t; and<br />
• ... of which the weak <strong>in</strong>terest of commercial banks for<br />
SMEs, and what can be done about it, is an overrid<strong>in</strong>g<br />
concern;<br />
• Remedies, options and opportunities to overcome the<br />
constra<strong>in</strong>ts;<br />
• What the EIB-managed Investment Facility can do,<br />
beyond its current role, for better outreach and support<br />
to SMEs.<br />
Alternatives are compared, and the possible result<strong>in</strong>g<br />
roadmap is tabled to conclude the study.<br />
The EIB provides <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> the <strong>ACP</strong> not only from the IF,<br />
but also from its own resources, and thus the Study would<br />
often consider the whole of EIB’s current and potential<br />
<strong>in</strong>terventions <strong>in</strong> the <strong>ACP</strong> Countries target<strong>in</strong>g SMEs and the<br />
f<strong>in</strong>ancial sector.<br />
1.3 Methodology<br />
Concerns, views and recommendations of a large crosssection<br />
of stakeholders <strong>in</strong> the <strong>ACP</strong> <strong>countries</strong> were gathered<br />
at two high level meet<strong>in</strong>gs organised by the <strong>ACP</strong> Secretariat<br />
<strong>in</strong> support of this study.<br />
F<strong>in</strong>d<strong>in</strong>gs are based on a desk review of studies on the<br />
subject of SME access to f<strong>in</strong>ance, relevant experiences of<br />
development f<strong>in</strong>ance <strong>in</strong>stitutions, an exam<strong>in</strong>ation of the EIB<br />
portfolio of operations through f<strong>in</strong>ancial <strong>in</strong>termediaries, and<br />
the Mid-term Evaluation of the Investment Facility and EIB own<br />
resources operations <strong>in</strong> <strong>ACP</strong> <strong>countries</strong> and the OCTs (2010) 1 .<br />
Additionally, as part of this study work, two African <strong>countries</strong><br />
(Ghana and Togo) and two Caribbean <strong>countries</strong> (Dom<strong>in</strong>ican<br />
Republic and Grenada) were visited for a stronger sampl<strong>in</strong>g<br />
of the SME fabric, SME needs and available f<strong>in</strong>ance.<br />
But, foremost, the study focuses on important issues that were<br />
tabled by participants at the High-Level Meet<strong>in</strong>g convened<br />
by the <strong>ACP</strong> Secretariat on 15 July 2011. The Proceed<strong>in</strong>gs of<br />
that meet<strong>in</strong>g are available and conta<strong>in</strong> the key themes that<br />
were addressed.<br />
1 http://ec.europa.eu/europeaid/how/evaluation/evaluation_reports/2010/1285_docs_en.htm<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
9
2 Smes <strong>in</strong> the <strong>acp</strong> context<br />
10<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
2<br />
Smes <strong>in</strong> the <strong>acp</strong> context<br />
Small and medium-sized enterprises (SMEs) are the<br />
backbone of all economies and a key source of economic<br />
growth, dynamism and flexibility <strong>in</strong> advanced <strong>in</strong>dustrialised<br />
<strong>countries</strong>, as well as <strong>in</strong> emerg<strong>in</strong>g and develop<strong>in</strong>g economies.<br />
SMEs constitute the dom<strong>in</strong>ant form of bus<strong>in</strong>ess organisation,<br />
account<strong>in</strong>g for over 95% and up to 99% of enterprises<br />
depend<strong>in</strong>g on the country. They are responsible for between<br />
60-70% of net job creations <strong>in</strong> OECD <strong>countries</strong> 2 .<br />
The High-Level Meet<strong>in</strong>g of 15 July has requested that targeted<br />
enterprises for the purpose of this study be the SMEs <strong>in</strong><br />
the context of <strong>ACP</strong> Countries, as specified by the Terms of<br />
Reference. For this purpose, the study uses as sources ma<strong>in</strong>ly<br />
Development F<strong>in</strong>ance Institution (DFI) databases as well as<br />
country visits.<br />
For the purpose of reach<strong>in</strong>g an adequate def<strong>in</strong>ition, the SME<br />
classifications <strong>in</strong> the four <strong>countries</strong> visited are representative.<br />
These are thresholds generally equivalent or higher to<br />
those reta<strong>in</strong>ed by banks, whose activities are often divided<br />
between wholesale (larger corporate borrowers) and retail<br />
(which <strong>in</strong>cludes SME lend<strong>in</strong>g). In Grenada, an enterprise<br />
with net assets above €278,000 is no longer considered an<br />
SME, whereas <strong>in</strong> the Dom<strong>in</strong>ican Republic the threshold is<br />
€780,000. In Ghana, the threshold is €694,000 <strong>in</strong> net assets,<br />
whereas <strong>in</strong> Togo the threshold is €1,140,000 <strong>in</strong> total assets for<br />
<strong>in</strong>dustry and €381,000 for other sectors. Such typology led<br />
to the def<strong>in</strong>ition of a category of SMEs that are <strong>in</strong> need of<br />
particular attention <strong>in</strong> terms of access to f<strong>in</strong>ance, def<strong>in</strong>ed as<br />
the “Miss<strong>in</strong>g Middle”.<br />
Reach<strong>in</strong>g an adequate def<strong>in</strong>ition of the SME fabric <strong>in</strong> a given<br />
country must be done by field analysis. The new approach of<br />
the World Bank Group, <strong>in</strong>clud<strong>in</strong>g pr<strong>in</strong>cipally the IFC, consist<strong>in</strong>g<br />
of def<strong>in</strong><strong>in</strong>g SMEs on a country basis may be helpful <strong>in</strong> the<br />
<strong>ACP</strong> context. Indeed, Development F<strong>in</strong>ance Institutions have<br />
veered away from a global def<strong>in</strong>ition of SMEs <strong>in</strong> develop<strong>in</strong>g<br />
<strong>countries</strong> to adopt a country based approach 3 .<br />
2 Sources of <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> for EU-based SMEs: http://www.oecd.org/dataoecd/53/27/37704120.pdf<br />
3 Among many sources, the follow<strong>in</strong>g describes this new approach. MSME def<strong>in</strong>itions are given per Country, together with the structure of the MSME sector and MSME participation <strong>in</strong> the<br />
economy.<br />
• Small and medium enterprises across the globe : a new database, Volume 1:<br />
http://econ.worldbank.org/external/default/ma<strong>in</strong>?pagePK=64165259&theSitePK=477872&piPK=64165421&menuPK=64166093&entityID=000094946_0309160409277<br />
• IFC: The SME Bank<strong>in</strong>g Knowledge Guide (2006): http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/SMEBank<strong>in</strong>gGuidebook/$FILE/SMEBank<strong>in</strong>gGuide2009.pdf<br />
• WB/IFC Excel Database per Country: “Micro, Small, and Medium Enterprises: A Collection of Published Data” http://rru.worldbank.org/Documents/other/MSMEdatabase/msme_database.htm<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
11
3<br />
Access to f<strong>in</strong>ance: current channels,<br />
<strong>in</strong>struments and roles<br />
12<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
3<br />
Access to f<strong>in</strong>ance: current channels, <strong>in</strong>struments and roles<br />
3.1 Worldwide<br />
In most parts of the world, Governments and the commercial<br />
sector support SME access to f<strong>in</strong>ance <strong>in</strong> recognition of the fact<br />
that the SME sector is the largest segment of the economy <strong>in</strong><br />
terms of productivity and employment.<br />
Micro, small and medium-sized enterprises represent 99% of<br />
all enterprises <strong>in</strong> the EU. They provide around 90 million jobs<br />
and contribute to entrepreneurship and <strong>in</strong>novation 4 .<br />
In emerg<strong>in</strong>g/develop<strong>in</strong>g <strong>countries</strong>, SMEs play a major role <strong>in</strong><br />
economic development. Studies <strong>in</strong>dicate that formal SMEs<br />
contribute to 45% of employment and up to 33% of GDP<br />
<strong>in</strong> develop<strong>in</strong>g economies; these numbers are significantly<br />
higher when tak<strong>in</strong>g <strong>in</strong>to account the estimated contributions<br />
of SMEs operat<strong>in</strong>g <strong>in</strong> the <strong>in</strong>formal sector 5 . It is estimated<br />
that there are close to 365-445 million MSMEs <strong>in</strong> emerg<strong>in</strong>g<br />
markets, of which 80-100 million are formal MSMEs and 285-<br />
345 million are <strong>in</strong>formal enterprises (of which 45-55 million<br />
have no access to f<strong>in</strong>ance - not even bank<strong>in</strong>g overdrafts 6 ).<br />
The role and weight of SMEs needs little elaboration, and is<br />
widely evidenced by authoritative studies, both world-wide<br />
and <strong>in</strong> develop<strong>in</strong>g Countries. Quot<strong>in</strong>g an OECD Report 7 :<br />
“SMEs and entrepreneurship are now recognized world-wide<br />
to be a key source of dynamism, <strong>in</strong>novation and flexibility <strong>in</strong><br />
advanced <strong>in</strong>dustrialized Countries, as well as <strong>in</strong> emerg<strong>in</strong>g and<br />
develop<strong>in</strong>g economies. They are responsible for most net job<br />
creation <strong>in</strong> OECD <strong>countries</strong> and make important contributions<br />
to <strong>in</strong>novation, productivity and economic growth. If the SME<br />
sector does not have access to external funds for <strong>in</strong>vestment,<br />
the capacity to raise <strong>in</strong>vestment per worker, and thereby<br />
improve productivity and wages, is seriously impaired.” Such<br />
views need, however, to be strongly qualified <strong>in</strong> some Sub-<br />
Saharan environments; the same OECD Report also provides<br />
an analysis of the SME sector <strong>in</strong> Africa, and concludes that:<br />
“In Nigeria, SMEs (about 95% of formal manufactur<strong>in</strong>g activity)<br />
are key to the economy, but lack of security, corruption and poor<br />
<strong>in</strong>frastructure prevent them from becom<strong>in</strong>g motors of growth.”<br />
OECD <strong>countries</strong> therefore actively promote their SME sectors.<br />
In the EU, numerous structural support <strong>in</strong>struments exist to<br />
foster access to f<strong>in</strong>ance by small bus<strong>in</strong>esses. The European<br />
Investment Fund (EIF) 8 , part of the EIB Group, supports<br />
several EU structural <strong>in</strong>itiatives.<br />
Numerous organisations also support SME development <strong>in</strong><br />
emerg<strong>in</strong>g economies and develop<strong>in</strong>g <strong>countries</strong>. National<br />
support programmes exist alongside the commercial bank<strong>in</strong>g<br />
sector, and non-bank<strong>in</strong>g credit <strong>in</strong>stitutions, and some venture<br />
capital sources. To a more limited extent (particularly <strong>in</strong> <strong>ACP</strong><br />
<strong>countries</strong>) capital markets also contribute to SME f<strong>in</strong>ance<br />
through the creation of <strong>in</strong>termediate list<strong>in</strong>g possibilities 9 on<br />
stock exchanges for smaller enterprises to access domestic<br />
and <strong>in</strong>ternational sav<strong>in</strong>gs. Non-traditional mechanisms have<br />
also emerged, such as “Peer to Peer <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> (P2P)”.<br />
Numerous non-f<strong>in</strong>ancial support schemes have been<br />
developed, such as “bus<strong>in</strong>ess angels” <strong>in</strong>itiatives and enterprise<br />
<strong>in</strong>cubators. Outside of high-<strong>in</strong>come <strong>countries</strong>, the SME<br />
Bus<strong>in</strong>ess Advisory Services (BAS), run <strong>in</strong>dependently by the<br />
EBRD, stands out as one of the best-rated regional schemes 10 .<br />
It provides worthwhile SMEs not with direct technical<br />
assistance, but with part-grant fund<strong>in</strong>g for outsourced<br />
technical assistance. In this way, it does not underm<strong>in</strong>e the<br />
local consultancy profession and can ma<strong>in</strong>ta<strong>in</strong> m<strong>in</strong>imum<br />
overheads, which attract multiple donors <strong>in</strong>clud<strong>in</strong>g the EU<br />
and USAID. S<strong>in</strong>ce its <strong>in</strong>ception <strong>in</strong> 1993 <strong>in</strong> the Baltic States, it<br />
has assisted about 10,000 SMEs <strong>in</strong> 20 <strong>countries</strong>.<br />
To the extent that comprehensive surveys exist, they will<br />
be found <strong>in</strong> authoritative reports such as those of the SME<br />
F<strong>in</strong>ance Sub-Group of the G20 F<strong>in</strong>ancial Inclusion Expert<br />
Group (FIEG) 11 supported by the IFC and co-chaired by<br />
Germany and South Africa. The latest <strong>in</strong>-depth stock-tak<strong>in</strong>g<br />
and survey by this Group is conta<strong>in</strong>ed <strong>in</strong> Scal<strong>in</strong>g-Up SME<br />
Access to F<strong>in</strong>ancial Services <strong>in</strong> the Develop<strong>in</strong>g World (2011) 12<br />
presented at the Seoul G20 Summit <strong>in</strong> October 2010. This<br />
survey spans all regions, <strong>in</strong>clud<strong>in</strong>g the <strong>ACP</strong> region.<br />
3.2 In the <strong>ACP</strong> Countries<br />
In the <strong>ACP</strong> <strong>countries</strong>, SMEs are equally important <strong>in</strong> terms<br />
of economic growth, employment, and overall productive<br />
capacity. However, there are three ma<strong>in</strong> differences with<br />
OECD <strong>countries</strong>. Firstly, relevant SMEs are of smaller sizes,<br />
as noted above. Secondly, access to f<strong>in</strong>ance by <strong>ACP</strong> SMEs<br />
is very severely constra<strong>in</strong>ed, for the reasons <strong>in</strong>dicated <strong>in</strong><br />
the follow<strong>in</strong>g Chapter V. The SME F<strong>in</strong>anc<strong>in</strong>g Gap: Causes.<br />
Thirdly, f<strong>in</strong>ancial markets rema<strong>in</strong> less developed and depend<br />
substantially on external long-term resources, as summarized<br />
below.<br />
Commercial f<strong>in</strong>ancial channels<br />
The commercial f<strong>in</strong>ancial channels <strong>in</strong>clude commercial banks,<br />
venture capital funds, capital markets, as well as (and not to be<br />
neglected) supplier credits and trade <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>, <strong>in</strong> particular<br />
for cross-border SME transactions. Whilst major differences<br />
4 http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-def<strong>in</strong>ition/<strong>in</strong>dex_en.htm<br />
5 G-20 F<strong>in</strong>ancial Inclusion Expert Group’s (FIEG) SME F<strong>in</strong>ance Sub-Group http://www.biia.com/wp-content/uploads/2011/03/Scal<strong>in</strong>g-up-SME-Access-to-F<strong>in</strong>ancial-Services-<strong>in</strong>-the-Develop<strong>in</strong>g-<br />
World1.pdf<br />
6 Study by IFC and McK<strong>in</strong>sey- same source as above<br />
7 OECD- The SME F<strong>in</strong>anc<strong>in</strong>g Gap- Volume I: Theory and Evidence (2006) http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=624<br />
8 http://www.eif.org/ EIF is a public-private partnership whose tripartite sharehold<strong>in</strong>g structure <strong>in</strong>cludes the European Investment Bank (EIB), the European Union represented by the European<br />
Commission and 25 f<strong>in</strong>ancial <strong>in</strong>stitutions from the European Union Member States, plus Turkey and Croatia<br />
9 E.g. WAEMU. Although promis<strong>in</strong>g, this <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> source is not further discussed here as it could address only a few larger SMEs <strong>in</strong> the medium term.<br />
10 See: http://www.ebrd.com/pages/work<strong>in</strong>gwithus/tambas/results.shtml , http://ww.icmci.org/download/?id=12609868 and http://www.ebrd.com/downloads/research/factsheets/tambas.pdf.<br />
11 See: http://www.biia.com/wp-content/uploads/2011/03/Scal<strong>in</strong>g-up-SME-Access-to-F<strong>in</strong>ancial-Services-<strong>in</strong>-the-Develop<strong>in</strong>g-World1.pdf<br />
12 See: http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEF<strong>in</strong>anceStocktak<strong>in</strong>g/$FILE/G20_Stocktak<strong>in</strong>g_Report.pdf<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
13
3<br />
Access to f<strong>in</strong>ance: current channels, <strong>in</strong>struments and roles<br />
exist between <strong>ACP</strong> regions <strong>in</strong> terms of commercial bank SME<br />
penetration, traditional banks typically target only a small<br />
fraction of the market - except <strong>in</strong> several Caribbean <strong>countries</strong>,<br />
notably the Dom<strong>in</strong>ican Republic, as well as <strong>in</strong> Mauritius and<br />
South Africa. In the bulk of Sub-Saharan Africa, commercial<br />
banks prefer to focus on less risky market segments, such<br />
as Government bonds and projects, hous<strong>in</strong>g and consumer<br />
credit, and larger private corporate clients 13 .<br />
Authoritative reports, <strong>in</strong>clud<strong>in</strong>g the G20 F<strong>in</strong>ancial Inclusion<br />
Experts Group, <strong>in</strong>dicate that SME loans as a percentage of total<br />
bank loans is generally 50% smaller <strong>in</strong> develop<strong>in</strong>g <strong>countries</strong> 14<br />
than <strong>in</strong> OECD <strong>countries</strong>. No detailed data provid<strong>in</strong>g more<br />
detailed reliable regional breakdowns was found, but it is<br />
reported that a key characteristic of Sub-Saharan Africa is<br />
that the stock of bank credit to the private sector (<strong>in</strong>clud<strong>in</strong>g<br />
all categories of enterprises) is very low compared to other<br />
develop<strong>in</strong>g <strong>countries</strong> (except Mauritius, South Africa and the<br />
Seychelles) 15 . Analysis is generally provided by bank surveys<br />
or f<strong>in</strong>ancial regulators. Additionally, Country Visits for this<br />
Report lead to the same f<strong>in</strong>d<strong>in</strong>gs: <strong>in</strong> Ghana, some major banks<br />
provide SME clients with significant credit, as well as some free<br />
tra<strong>in</strong><strong>in</strong>g and advisory services under the grow<strong>in</strong>g practice of<br />
“relationship bank<strong>in</strong>g”. Quoted SME shares of credit portfolios<br />
are 6% or €18.3M with €11,500 per SME at GCB, and 10% or<br />
€12.3M with €6,200 per SME at TTB. The view is different <strong>in</strong><br />
some Caribbean <strong>countries</strong>, and <strong>in</strong> the case of the Dom<strong>in</strong>ican<br />
Republic, SME lend<strong>in</strong>g represents vastly larger shares of total<br />
enterprise lend<strong>in</strong>g.<br />
Several <strong>in</strong>stitutions, strongly aware of the particular situation<br />
of the bank<strong>in</strong>g sector <strong>in</strong> Sub-Saharan Africa, have created<br />
the “Mak<strong>in</strong>g F<strong>in</strong>ance Work for Africa Partnership” (MFW4A) as<br />
an <strong>in</strong>itiative to support the development of African f<strong>in</strong>ancial<br />
sectors. This is a platform for African governments, the private<br />
sector, and development partners to coord<strong>in</strong>ate f<strong>in</strong>ancial<br />
sector development <strong>in</strong>terventions across the cont<strong>in</strong>ent,<br />
avoid<strong>in</strong>g duplication and maximiz<strong>in</strong>g developmental impact.<br />
The MFW4A Secretariat is hosted at the African Development<br />
Bank. MFW4A reports 16 that bank<strong>in</strong>g data clearly shows that<br />
African banks have significant development opportunities<br />
compared with banks <strong>in</strong> other develop<strong>in</strong>g regions. Indicators<br />
such as liquid liabilities to GDP (measur<strong>in</strong>g the monetary<br />
resources mobilized by banks) and private credit to GDP<br />
(measur<strong>in</strong>g the credit extended by banks) are considerably<br />
lower <strong>in</strong> Africa than anywhere else <strong>in</strong> the world. In addition,<br />
the region’s bank<strong>in</strong>g system has low <strong>in</strong>termediation ratios<br />
(measur<strong>in</strong>g the deposits <strong>in</strong>termediated <strong>in</strong>to the private<br />
sector) which are ma<strong>in</strong>ly expla<strong>in</strong>ed by difficulties <strong>in</strong> assess<strong>in</strong>g<br />
creditworth<strong>in</strong>ess and enforc<strong>in</strong>g creditors’ rights.<br />
Development F<strong>in</strong>ance Institutions active <strong>in</strong> the<br />
<strong>ACP</strong> Regions<br />
Instruments developed and applied by the DFIs and<br />
International F<strong>in</strong>ance Institutions (IFIs) are varied and widerang<strong>in</strong>g.<br />
They <strong>in</strong>clude:<br />
• Loans: senior loans; mezzan<strong>in</strong>e f<strong>in</strong>ance;<br />
• Local currency loans;<br />
• Credit enhancement <strong>in</strong>struments such as guarantees,<br />
some of which may be geared to the mobilisation of<br />
domestic sav<strong>in</strong>gs and diaspora funds;<br />
• Venture capital/equity; seed money;<br />
• Trade f<strong>in</strong>ance and documentary credit guarantees<br />
(target<strong>in</strong>g export<strong>in</strong>g SMEs);<br />
• Other f<strong>in</strong>ancial sector efforts: lease f<strong>in</strong>ance; receivables<br />
<strong>f<strong>in</strong>anc<strong>in</strong>g</strong> (factor<strong>in</strong>g).<br />
To the extent that they apply to SMEs, these <strong>in</strong>struments are<br />
generally channelled through local <strong>in</strong>termediaries.<br />
A wide variety of non-f<strong>in</strong>ancial <strong>in</strong>struments are also applied,<br />
and the follow<strong>in</strong>g stand out for purposes of this Study:<br />
• Capacity build<strong>in</strong>g for SMEs (see particularly under<br />
Chapter VI, Section 6.1 below); and<br />
• Support to export<strong>in</strong>g SMEs (such as <strong>in</strong> respect of safety,<br />
environmental and other ISO standards).<br />
The ma<strong>in</strong> DFIs and IFIs active <strong>in</strong> the <strong>ACP</strong> <strong>countries</strong> with impact<br />
on SME f<strong>in</strong>ance comprise, but are not limited to:<br />
• The EC and EIB/IF<br />
• African Development Bank (AfDB) Group<br />
• Inter-American Development Bank (IADB) and its<br />
International Investment Corporation (IIC) and the<br />
Multilateral Investment Fund (MIF) with a larger focus on<br />
SME f<strong>in</strong>ance<br />
• Caribbean Development Bank (CDB)<br />
• Asian Development Bank (AsDB)<br />
• Banque Ouest Africa<strong>in</strong>e de Développement (BOAD) and<br />
other regional development banks<br />
• Several bilateral <strong>in</strong>stitutions such as the seventeen<br />
Member Institutions of European DFIs (EDFIs) 17<br />
focus<strong>in</strong>g specifically on private sector f<strong>in</strong>ance, as well<br />
as Agence Française de Développement (AFD) and KFW<br />
Bankengruppe (KFW).<br />
Other non-commercial actors <strong>in</strong>clude national development<br />
banks, which are more present <strong>in</strong> the Caribbean and the<br />
Pacific than <strong>in</strong> Sub-Saharan Africa.<br />
13 Although no relevant, global statistics seem to be available, these three types of credit beneficiaries were stated as the major ones by bankers <strong>in</strong>terviewed <strong>in</strong> Ghana and Togo, <strong>in</strong> the same rough<br />
order of importance.<br />
14 World Bank and OECD analysis reported <strong>in</strong> : G-20 F<strong>in</strong>ancial Inclusion Expert Group’s (FIEG) SME F<strong>in</strong>ance Sub-Group http://www.biia.com/wp-content/uploads/2011/03/Scal<strong>in</strong>g-up-SME-Accessto-F<strong>in</strong>ancial-Services-<strong>in</strong>-the-Develop<strong>in</strong>g-World1.pdf<br />
15 Access to Bank Credit <strong>in</strong> Sub-Saharan Africa: Key Issues and Reform Strategies http://www.chatama.netau.net/bankcredit.pdff<br />
16 http://www.mfw4a.org/bank<strong>in</strong>g/bank<strong>in</strong>g.html<br />
17 http://www.edfi.be/members.html<br />
14<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
3<br />
Access to f<strong>in</strong>ance: current channels, <strong>in</strong>struments and roles<br />
Selected SME Access to F<strong>in</strong>ance Initiatives<br />
underly<strong>in</strong>g the Study<br />
The follow<strong>in</strong>g <strong>in</strong>itiatives have thus been reviewed for the<br />
purposes of this study:<br />
• AfDB: African Guarantee Fund for Small and Mediumsized<br />
Enterprises 18<br />
• IADB/MIF: a $100 million facility to support lend<strong>in</strong>g to<br />
SMEs <strong>in</strong> Lat<strong>in</strong> America and the Caribbean 19 ; and IADB-<br />
Credit Guarantee Funds for SMEs<br />
• AsDB: Development of SME F<strong>in</strong>anc<strong>in</strong>g Support System 20<br />
• BOAD: More than 50 credit l<strong>in</strong>es to West African banks,<br />
with an SME content of 9% and allocation ceil<strong>in</strong>gs of<br />
about € 310,000<br />
• CDB<br />
• AFD: ARIZ Guarantee Funds 21 ; AFD guarantee operation<br />
<strong>in</strong> Namibia<br />
• BIO 22 (one of the EDFIs): BIO is a DFI 100% concentrated<br />
on SME f<strong>in</strong>ance<br />
• FMO: strong SME focus; strong capacity build<strong>in</strong>g focus 23<br />
• IFC: extensive SME research & novel approaches; Africa<br />
Micro Small Medium Enterprise F<strong>in</strong>ance Program<br />
(AMSME); risk-shar<strong>in</strong>g models (see IFC cum SIDA). IFC:<br />
Global Trade F<strong>in</strong>ance Program (GTFP) 24 ; Bank SME tra<strong>in</strong><strong>in</strong>g<br />
2011 25 ; IFC Approach to SME Development <strong>in</strong> Africa 26<br />
• African Trade Insurance Agency (ATI-ACA) 27 : documentary<br />
credit guarantees<br />
• USAID- Development Credit Authority (DCA) Loan<br />
Portfolio Guarantee 28<br />
As an example of a national public sector <strong>in</strong>itiative, the<br />
Small Enterprise Development Agency (SEDA) is an agency<br />
of the South African Department of Trade and Industry. It is<br />
mandated to implement the government’s small bus<strong>in</strong>ess<br />
strategy; to design and implement a standard and common<br />
national delivery network for small enterprise development;<br />
and to <strong>in</strong>tegrate government-funded small enterprise<br />
support agencies across all tiers of government 29 . SEDA<br />
provides loans, guarantees and a seed capital fund for SMEs.<br />
18 AfDB description: In particular, the provision of guarantees complemented by development of bank’s capacity to engage <strong>in</strong> SME lend<strong>in</strong>g seems to be one of the most effective policy <strong>in</strong>struments<br />
for eas<strong>in</strong>g the access to credit for SMEs. The Africa Commission <strong>in</strong> 2009 called for the establishment of an African Guarantee Fund (AGF) for SMEs. The AfDB, the Danish Government (Danida)<br />
and the Spanish Government (AECID) are currently implement<strong>in</strong>g this <strong>in</strong>itiative. The AGF will be a permanent regional conduit for channell<strong>in</strong>g guarantees and technical assistance to f<strong>in</strong>ancial<br />
<strong>in</strong>stitutions <strong>in</strong> Africa with the objective of generat<strong>in</strong>g enhanced growth <strong>in</strong> the SME sector<br />
http://www.afdb.org/en/topics-and-sectors/<strong>in</strong>itiatives-partnerships/african-guarantee-fund-for-small-and-medium-sized-enterprises/<br />
19 http://www.iadb.org/en/news/news-releases/2011-05-19/facility-support<strong>in</strong>g-sme-lend<strong>in</strong>g-<strong>in</strong>-lat<strong>in</strong>-america,9376.html<br />
20 http://www.adb.org/Documents/Reports/Dev_SME_F<strong>in</strong>_System/default.asp<br />
21 ARIZ has been <strong>in</strong> existence for some time as a guarantee scheme for facilitat<strong>in</strong>g access to f<strong>in</strong>ance by SMEs, ma<strong>in</strong>ly <strong>in</strong> Africa. In EURO or local currency . It applies both to loans, but also mezzan<strong>in</strong>e<br />
and equity <strong>in</strong>vestments.<br />
22 http://www.bio-<strong>in</strong>vest.be/<br />
23 http://www.fmo.nl<br />
24 http://www.ifc.org/ifcext/globalfm.nsf/Content/GTFP<br />
25 http://www.iobf.org/Conferences.aspx?Id=31&lang=en<br />
26 http://www1.ifc.org/wps/wcm/connect/REGION__EXT_Content/Regions/Sub-Saharan+Africa/Advisory+Services/SME+Initiatives/<br />
27 http://www.ati-aca.org/<strong>in</strong>side.php?id=37<br />
28 These guarantee agreements are designed to encourage lenders to extend <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> to new sectors and regions, or to improve loan terms. Loan portfolio guarantee is a guarantee on a<br />
portfolio of loans that a f<strong>in</strong>ancial <strong>in</strong>stitution makes <strong>in</strong> an identified sector. The DCA portfolio of 267 guarantees spans 64 <strong>countries</strong>. Through DCA, 87,000 borrowers have accessed credit from<br />
191 f<strong>in</strong>ancial <strong>in</strong>stitutions. http://pdf.usaid.gov/pdf_docs/PNADT028.pdf USAID- Official Loan Support Programs for SMEs (2009) http://pdf.usaid.gov/pdf_docs/PNADT028.pdf<br />
29 http://www.seda.org.za/Pages/Seda-Welcome.aspx<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
15
4 The sme <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap: causes<br />
16<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
4<br />
The sme <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap: causes<br />
Mapp<strong>in</strong>g the SME F<strong>in</strong>anc<strong>in</strong>g Gap <strong>in</strong> <strong>ACP</strong> <strong>countries</strong> is a complex<br />
process. The follow<strong>in</strong>g summary is concentrated on the socalled<br />
“Miss<strong>in</strong>g Middle”, as def<strong>in</strong>ed <strong>in</strong> Chapter III above, i.e.<br />
enterprises which present handicaps that are much stronger<br />
than those faced by larger enterprises <strong>in</strong> the appropriate<br />
<strong>ACP</strong> context. Empirical research shows that SMEs are more<br />
constra<strong>in</strong>ed by <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> and other <strong>in</strong>stitutional obstacles than<br />
large enterprises, exacerbated by weaknesses <strong>in</strong> the f<strong>in</strong>ancial<br />
systems of many develop<strong>in</strong>g <strong>countries</strong>. Enterprise surveys<br />
conducted by the World Bank <strong>in</strong> over 120 <strong>countries</strong> show<br />
that smaller SMEs face more severe <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> constra<strong>in</strong>ts than<br />
larger firms, especially <strong>in</strong> lower-<strong>in</strong>come environments.<br />
This analysis covers the question of why there are significant<br />
numbers of SMEs that could use fund<strong>in</strong>g productively if it was<br />
available to them, and why is it not available.<br />
The ma<strong>in</strong> constra<strong>in</strong>ts are weak SME capacity and low bank<br />
motivation. The constra<strong>in</strong>ts are not prioritised, s<strong>in</strong>ce they are<br />
uneven accord<strong>in</strong>g to specific <strong>ACP</strong> regions. Low bank motivation<br />
is a major problem <strong>in</strong> many <strong>ACP</strong> <strong>countries</strong>, <strong>in</strong>clud<strong>in</strong>g <strong>in</strong> Sub-<br />
Saharan Africa, but less so <strong>in</strong> some Caribbean <strong>countries</strong>. On the<br />
other hand, SME capacity shortcom<strong>in</strong>gs are a major constra<strong>in</strong>t<br />
<strong>in</strong> all <strong>ACP</strong> regions, and probably more so where banks have<br />
began penetrat<strong>in</strong>g the SME sector 30 . In Africa, small bus<strong>in</strong>esses<br />
can rarely meet the conditions set by f<strong>in</strong>ancial <strong>in</strong>stitutions<br />
which see SMEs as too risky because of a lack of <strong>in</strong>formation<br />
about their ability to repay loans and the limited guarantees<br />
they can offer.<br />
4.1 SME constra<strong>in</strong>ts (demand side)<br />
It is <strong>in</strong>correct to say that SME demand for f<strong>in</strong>ance is low. But<br />
SMEs face a major challenge <strong>in</strong> their limited ability to articulate<br />
their needs, to present bankable <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> requests and<br />
thereafter to satisfy the monitor<strong>in</strong>g requirements of f<strong>in</strong>anciers.<br />
From a review of authoritative surveys, and as demonstrated<br />
by the Country Visits, the ma<strong>in</strong> constra<strong>in</strong>ts faced by SMEs<br />
encompass:<br />
• Limited collateral capacity (<strong>in</strong>clud<strong>in</strong>g land/property<br />
titl<strong>in</strong>g difficulties and a lack of regulatory recognition of<br />
equipment and mach<strong>in</strong>ery as collateral 31 );<br />
• Lack of transparency and deficient account<strong>in</strong>g. Low levels<br />
of f<strong>in</strong>ancial literacy clearly prevent SMEs from reach<strong>in</strong>g<br />
<strong>f<strong>in</strong>anc<strong>in</strong>g</strong> sources;<br />
• Weak management and limited tra<strong>in</strong><strong>in</strong>g support;<br />
• Lack of <strong>in</strong>formation/knowledge about available f<strong>in</strong>ance<br />
and channels;<br />
• Difficulty <strong>in</strong> present<strong>in</strong>g bankable dossiers;<br />
• Difficult bus<strong>in</strong>ess conditions, <strong>in</strong>clud<strong>in</strong>g cumbersome<br />
official procedures - as repeatedly highlighted by the<br />
“Do<strong>in</strong>g Bus<strong>in</strong>ess” reviews of the World Bank. SMEs mostly<br />
lack the capacity of larger enterprises to navigate the<br />
complexities of regulatory and bureaucratic procedures.<br />
Facilitat<strong>in</strong>g the registration of enterprises usually results <strong>in</strong><br />
larger numbers of formal SMEs;<br />
• Limited own capital resources; unavailability of seed<br />
money;<br />
• The level and arbitrar<strong>in</strong>ess of taxation are considered a<br />
core obstacle to SME formalisation 32 ;<br />
• High cost of <strong>in</strong>puts <strong>in</strong> selected <strong>countries</strong> affect<strong>in</strong>g<br />
competitiveness (accord<strong>in</strong>g to a McK<strong>in</strong>sey/IFC study 33 ,<br />
the factor that SMEs most frequently perceive to be a<br />
major obstacle is electricity, with 52% of SMEs view<strong>in</strong>g it<br />
as a significant obstacle - this obstacle was also reputedly<br />
raised by participants at the 15 July 2011 <strong>ACP</strong> High-Level<br />
Meet<strong>in</strong>g);<br />
• Weak entrepreneurship culture and education, and <strong>in</strong><br />
some <strong>countries</strong> ma<strong>in</strong>ly a “survival” culture;<br />
• Small local markets and undeveloped regional <strong>in</strong>tegration,<br />
coupled with numerous difficulties associated with crossborder<br />
trade;<br />
• Lack of support for export<strong>in</strong>g SMEs <strong>in</strong> product certification<br />
and safety standards;<br />
• Small manufacturers and agricultural producers cannot<br />
access markets and are <strong>in</strong> need of clusters to access<br />
markets;<br />
• SMEs are often estranged from larger projects, while<br />
<strong>in</strong> reality they could constitute small feeder <strong>in</strong>dustries<br />
(examples of this constra<strong>in</strong>t are found <strong>in</strong> several sectors<br />
such as the <strong>in</strong>frastructure and tourism sectors);<br />
High <strong>in</strong>terest rates 34 applied by banks may constitute a<br />
constra<strong>in</strong>t up to a po<strong>in</strong>t, but this constra<strong>in</strong>t is subord<strong>in</strong>ated to<br />
the sheer difficulty of access<strong>in</strong>g f<strong>in</strong>ance for the above reasons.<br />
Like several of the broader constra<strong>in</strong>ts quoted above (e.g.,<br />
<strong>in</strong>frastructure and market sizes), this largely affects larger<br />
enterprises that have access to f<strong>in</strong>ance.<br />
4.2 Constra<strong>in</strong>ts of banks and f<strong>in</strong>ancial<br />
<strong>in</strong>termediaries (supply side)<br />
For the purposes of this Section, the supply side does not<br />
encompass State development banks and <strong>in</strong>ternational and<br />
regional development f<strong>in</strong>ance <strong>in</strong>stitutions. The follow<strong>in</strong>g<br />
observations apply only to commercial <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> sources.<br />
30 E.g. SME-side constra<strong>in</strong>ts are quoted far more often <strong>in</strong> the Dom<strong>in</strong>ican Republic where many SMEs have already been reached than <strong>in</strong> Togo, where even the most reliable SMEs still have no credit<br />
access (Annex 1 – Appendices)<br />
31 A well-function<strong>in</strong>g collateral regime entails a wide range of allowable collaterals, especially movable collaterals, as analysed <strong>in</strong>: G-20 F<strong>in</strong>ancial Inclusion Expert Group’s (FIEG) SME F<strong>in</strong>ance Sub-Group<br />
http://www.biia.com/wp-content/uploads/2011/03/Scal<strong>in</strong>g-up-SME-Access-to-F<strong>in</strong>ancial-Services-<strong>in</strong>-the-Develop<strong>in</strong>g-World1.pdf. This f<strong>in</strong>d<strong>in</strong>g is confirmed by the country visit <strong>in</strong> an even more<br />
advanced <strong>ACP</strong> economy as the Dom<strong>in</strong>ican Republic (DR). In the DR, banks face regulatory constra<strong>in</strong>ts <strong>in</strong> SME lend<strong>in</strong>g, as the bank<strong>in</strong>g prudential authority does not allow them to take mach<strong>in</strong>ery<br />
as recognized collateral.<br />
32 IFC- Design<strong>in</strong>g a tax system for SMEs 2007:<br />
33 http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEF<strong>in</strong>anceStocktak<strong>in</strong>g/$FILE/G20_Stocktak<strong>in</strong>g_Report.pdf<br />
34 As aga<strong>in</strong>st <strong>in</strong>flation. See Appendices to Annex 1.<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
17
4<br />
The sme <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap: causes<br />
Commercial banks<br />
Bank <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> rema<strong>in</strong>s by and large the most important<br />
source of external f<strong>in</strong>ance to SMEs. However, low bank <strong>in</strong>terest<br />
or motivation is considered a major problem <strong>in</strong> most <strong>ACP</strong><br />
<strong>countries</strong>, though this is not uniformly so. Banks and other<br />
commercial <strong>in</strong>termediaries generally face major challenges <strong>in</strong><br />
offer<strong>in</strong>g better access to f<strong>in</strong>ance.<br />
• Credit risk is the ma<strong>in</strong> obstacle, enhanced by deficient SME<br />
account<strong>in</strong>g and weak collateral capacity;<br />
• Particularly <strong>in</strong> those <strong>ACP</strong> <strong>countries</strong> that lack credit bureaus,<br />
uncerta<strong>in</strong>ty acts as a brake to SME lend<strong>in</strong>g. Many <strong>ACP</strong><br />
<strong>countries</strong> either do not possess credit registries, or those<br />
that exist are not found reliable by banks;<br />
• As a result, provision<strong>in</strong>g required by regulators represents<br />
a major cost for banks. The <strong>in</strong>troduction of Basel II capital<br />
adequacy requirements is said to add to the reluctance<br />
of banks to take risks on SMEs, though this is still a highly<br />
debated issue;<br />
• For those banks that have small bus<strong>in</strong>ess units (and not all<br />
commercial banks have the <strong>in</strong>-house capacity to handle<br />
SME f<strong>in</strong>ance), process<strong>in</strong>g and monitor<strong>in</strong>g is considered<br />
very expensive;<br />
• The above three reasons lead banks to take relatively<br />
higher marg<strong>in</strong>s for SME lend<strong>in</strong>g than for wholesale/<br />
corporate bank<strong>in</strong>g;<br />
• Despite high levels of liquidity <strong>in</strong> a number of <strong>ACP</strong> <strong>countries</strong>,<br />
the mismatch between short-term sources of funds and<br />
long-term lend<strong>in</strong>g becomes a problem (depend<strong>in</strong>g of<br />
course on the str<strong>in</strong>gency of regulatory transformation<br />
ratios). Smaller banks have difficulty mobilis<strong>in</strong>g long term<br />
sav<strong>in</strong>gs <strong>in</strong> the local market;<br />
• In some <strong>countries</strong>, banks have far reach<strong>in</strong>g “Social<br />
Responsibility” and their mission statement focuses <strong>in</strong> a<br />
large part on SME support; but <strong>in</strong> other <strong>countries</strong> this is<br />
not the case at all and banks are not focused on the small<br />
bus<strong>in</strong>ess sector;<br />
• Depend<strong>in</strong>g on the macro-economic parameters of a<br />
country, the foreign exchange risk <strong>in</strong> utilis<strong>in</strong>g foreignsourced<br />
hard currency fund<strong>in</strong>g for local currency lend<strong>in</strong>g<br />
adds on to the banks’ risk;<br />
• SME lend<strong>in</strong>g entails high <strong>in</strong>ternal transaction costs, limit<strong>in</strong>g<br />
f<strong>in</strong>ancial <strong>in</strong>stitutions’ ability to reach out to SMEs at more<br />
attractive <strong>in</strong>terest rates.<br />
Other <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> sources<br />
Non-bank <strong>in</strong>termediaries serv<strong>in</strong>g SMEs are <strong>in</strong>sufficiently<br />
developed:<br />
• Guarantee facilities, ma<strong>in</strong>ly bank SME portfolio<br />
guarantees, have mixed results. Some such facilities<br />
have achieved high impact, depend<strong>in</strong>g on how they are<br />
designed. Guarantee schemes with an element of subsidy<br />
<strong>in</strong> risk-shar<strong>in</strong>g appear to have reached their objective<br />
better, while those offered by EIB/IF have had a low takeup<br />
rate. The ma<strong>in</strong> benefits of guarantee facilities lie <strong>in</strong><br />
(i) enhanced risk tolerance, which also results <strong>in</strong> lesser<br />
provision<strong>in</strong>g, and (ii) <strong>in</strong> their resource mobilisation effect.<br />
• Leas<strong>in</strong>g <strong>in</strong>termediaries, as well as factor<strong>in</strong>g, enable SMEs<br />
to improve both their credit risk and cash-flow situation.<br />
While leas<strong>in</strong>g and factor<strong>in</strong>g markets are particularly<br />
useful to SMEs, they are very unevenly developed <strong>in</strong> <strong>ACP</strong><br />
<strong>countries</strong>.<br />
• In some <strong>ACP</strong> <strong>countries</strong>, equity funds (Venture Capital<br />
Funds; Seed Capital Funds) are non-existent. However,<br />
equity <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> is a highly beneficial source for SMEs,<br />
and <strong>in</strong> particular for higher-risk SMEs <strong>in</strong> the early phases<br />
of their life cycle when cash-flow is still irregular. In most<br />
cases, strik<strong>in</strong>g a proper balance between debt and equity<br />
<strong>f<strong>in</strong>anc<strong>in</strong>g</strong> is of utmost importance. Equity f<strong>in</strong>ance <strong>in</strong> itself<br />
<strong>in</strong>creases the capacity of an enterprise to access debt<br />
<strong>f<strong>in</strong>anc<strong>in</strong>g</strong>. In <strong>countries</strong> where equity funds exist, they<br />
generally focus on the high end, and not on real SMEs <strong>in</strong><br />
the country context.<br />
18<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
4<br />
The sme <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap: causes<br />
4.3 Constra<strong>in</strong>ts <strong>in</strong> the bus<strong>in</strong>ess<br />
environment<br />
Basic steps are required to address basic bus<strong>in</strong>ess environment<br />
obstacles. In many <strong>ACP</strong> <strong>countries</strong>, although <strong>in</strong> vary<strong>in</strong>g degrees,<br />
the bus<strong>in</strong>ess environment makes it difficult for SMEs to<br />
develop, and considerably <strong>in</strong>creases the risks taken by banks.<br />
• Governments appear <strong>in</strong>sensitive to possible tax <strong>in</strong>centives,<br />
both for SMEs and for banks expand<strong>in</strong>g SME lend<strong>in</strong>g;<br />
• Procedures for sett<strong>in</strong>g up and register<strong>in</strong>g bus<strong>in</strong>esses are<br />
cumbersome and costly, which together with taxation is<br />
one of the causes of high levels of SMEs operat<strong>in</strong>g <strong>in</strong> the<br />
<strong>in</strong>formal sector;<br />
• Customs duties and procedures constitute an additional<br />
obstacle, at least for those SMEs that import directly;<br />
• Bank<strong>in</strong>g regulators/supervisors are <strong>in</strong>flexible <strong>in</strong> their<br />
treatment of risk by supervised banks, such as <strong>in</strong> the<br />
collateral requirements, and requirements <strong>in</strong> terms of<br />
historic data, cash-flow analysis, and other requirements<br />
are difficult for SMEs to fulfil;<br />
• On the whole, credit risk is accentuated <strong>in</strong> many <strong>ACP</strong><br />
<strong>countries</strong> by a weak f<strong>in</strong>ancial and legal <strong>in</strong>frastructure,<br />
<strong>in</strong>clud<strong>in</strong>g a lack of <strong>in</strong>formation, poor reliability of f<strong>in</strong>ancial<br />
statements, and poor creditor rights (<strong>in</strong>clud<strong>in</strong>g difficulty <strong>in</strong><br />
register<strong>in</strong>g and enforc<strong>in</strong>g collateral, and overall weakness<br />
of the judicial system, which may be slow and unreliable).<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
19
5<br />
Clos<strong>in</strong>g the <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap:<br />
options & opportunities<br />
20<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
5<br />
Clos<strong>in</strong>g the <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap: options & opportunities<br />
5.1 SME capacity for access<strong>in</strong>g f<strong>in</strong>ance<br />
The need to support the demand side is well established. EIB<br />
is aware of this and <strong>in</strong>cluded some capacity build<strong>in</strong>g for SMEs<br />
(though limited due to the scarcity of Technical Assistance<br />
(TA) grant fund<strong>in</strong>g available to EIB) <strong>in</strong> several of its f<strong>in</strong>ancial<br />
sector operations.<br />
SME capacity build<strong>in</strong>g with grant-based TA is a precondition<br />
to enlarg<strong>in</strong>g the SME population that can hope to access<br />
f<strong>in</strong>ance. Capacity support is needed <strong>in</strong> the follow<strong>in</strong>g areas:<br />
• Articulat<strong>in</strong>g and present<strong>in</strong>g bankable dossiers;<br />
• Account<strong>in</strong>g and transparency;<br />
• Management competence;<br />
• Forecast<strong>in</strong>g and market surveys;<br />
• In order to develop feeder SME <strong>in</strong>dustries <strong>in</strong>to larger<br />
projects, a country plan is needed to def<strong>in</strong>e the<br />
participants <strong>in</strong> sectors such as <strong>in</strong>frastructure and tourism,<br />
their potential dynamic effect on the economy, and a<br />
f<strong>in</strong>ancial scheme for start-ups;<br />
• In the agro sector, and <strong>in</strong> certa<strong>in</strong> other sectors, small<br />
producers can be organised <strong>in</strong> clusters such as<br />
cooperatives 35 .<br />
Delivery channels for capacity build<strong>in</strong>g should be partially<br />
(but not exclusively) grant-based, and preferably handled<br />
by private sector actors with the assistance of banks.<br />
Dur<strong>in</strong>g the country visit to Grenada, a bank recommended<br />
that official grant fund<strong>in</strong>g be applied to an SME Support<br />
Centre, possibly regionally based for the Eastern Caribbean.<br />
This Centre could be managed by an ad hoc association<br />
of Chambers of Commerce and Industry, employers’<br />
associations, and commercial banks. As per the above<br />
EBRD-run BAS model, it could mobilize multiple donors and<br />
promote local consultants. Local accountants <strong>in</strong> particular<br />
would be well placed to vet eligible SMEs and build up their<br />
bankable profile.<br />
5.2 Motivat<strong>in</strong>g banks and <strong>in</strong>creas<strong>in</strong>g bank<br />
SME penetration<br />
The other major priority is enhanc<strong>in</strong>g commercial bank<br />
<strong>in</strong>terest <strong>in</strong> SME lend<strong>in</strong>g.<br />
The primary obstacle to higher bank penetration <strong>in</strong> the SME<br />
sector is the perceived risk. Apart from SME capacity and<br />
environment issues, all steps for specifically reduc<strong>in</strong>g the<br />
bank credit risk, or compensat<strong>in</strong>g for it, need to be addressed:<br />
• Guarantee schemes will help the banks with<br />
higher penetration as well as alleviate provision<strong>in</strong>g<br />
requirements. Guarantee schemes may also address the<br />
shortage of collateral that can be offered by SMEs. Such<br />
guarantees can take many forms. They are generally<br />
partial guarantees, and less costly when applied globally<br />
to portfolios of SME loans. These can be self-stand<strong>in</strong>g<br />
guarantees, or be <strong>in</strong> hybrid form when comb<strong>in</strong>ed with<br />
l<strong>in</strong>es of credit 36 . They can be constructed on a pro rata<br />
risk-shar<strong>in</strong>g basis, or on a first-loss basis. The allocation of<br />
guarantees between specific banks can be performance<br />
based;<br />
• Some schemes have been <strong>in</strong> existence for some time, with<br />
high take-up, such as the AFD-ARIZ Funds and the USAID-<br />
Development Credit Authority (DCA) Loan Portfolio<br />
Guarantee, and the credit risk <strong>in</strong>surance scheme provided<br />
by the African Trade Insurance Agency (see Chapter IV,<br />
Section 4.2.3 above for details on such <strong>in</strong>itiatives). New<br />
schemes are currently be<strong>in</strong>g developed, such as the<br />
AfDB-African Guarantee Fund for Small and Mediumsized<br />
Enterprises and the IADB-Credit Guarantee Funds<br />
for SMEs;<br />
• Tax credits to banks expand<strong>in</strong>g their SME portfolio;<br />
• Local currency l<strong>in</strong>es;<br />
• Bank tra<strong>in</strong><strong>in</strong>g and upgrad<strong>in</strong>g <strong>in</strong> various forms should,<br />
when required, accompany DFI f<strong>in</strong>ancial support to<br />
banks.<br />
5.3 Non-bank<strong>in</strong>g <strong>in</strong>stitutions and<br />
<strong>in</strong>struments<br />
Non-bank<strong>in</strong>g <strong>in</strong>struments and <strong>in</strong>stitutions are not only<br />
complementary to bank f<strong>in</strong>ance - for a number of SMEs they<br />
constitute a prerequisite. SME <strong>in</strong>vestments and work<strong>in</strong>g<br />
capital needs cannot be f<strong>in</strong>anced solely by debt. Internal<br />
resources and adequate cash-flow constitute a precondition<br />
for a bank to consider <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>, to the same degree as, for<br />
<strong>in</strong>stance, collateral. A healthy balance between <strong>in</strong>struments<br />
needs to be achieved.<br />
Mezzan<strong>in</strong>e loans and equity f<strong>in</strong>ance<br />
A number of SMEs will be better able to access debt f<strong>in</strong>ance<br />
if their own resources, or non-senior debt liabilities, are<br />
re<strong>in</strong>forced. Banks are most reluctant to f<strong>in</strong>ance new equipment<br />
and mach<strong>in</strong>ery 100% by debt fund<strong>in</strong>g, mean<strong>in</strong>g that equity<br />
f<strong>in</strong>ance <strong>in</strong> the form of seed money for start-ups, and venture<br />
capital from private equity funds need to be put <strong>in</strong> place.<br />
Equity <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> rema<strong>in</strong>s a challenge <strong>in</strong> many <strong>ACP</strong> <strong>countries</strong>.<br />
Venture capital funds do not exist <strong>in</strong> many <strong>ACP</strong> <strong>countries</strong>. In<br />
other <strong>countries</strong>, they do exist, and some are f<strong>in</strong>anced by EIB,<br />
but experience appears to show that these are aimed at the<br />
higher end of SMEs, and larger corporate firms, with strong<br />
market access, management and technology, and a highly<br />
profitable track record.<br />
35 In the Dom<strong>in</strong>ican Republic, such clusters are highly organised for agricultural producers, particularly <strong>in</strong> order to allow for sufficient capacity to become export<strong>in</strong>g <strong>in</strong>dustries. At the 15 July 2011<br />
High Level <strong>ACP</strong> Meet<strong>in</strong>g, Standard Bank highlighted such approaches developed <strong>in</strong> four pilot <strong>countries</strong>.<br />
36 These hybrid schemes have the key advantage of deliver<strong>in</strong>g both products (credit and guarantees) to the same beneficiaries <strong>in</strong> one go. They may entail higher costs or subsidies if there is no<br />
local supervision of the guarantee components.<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
21
5<br />
Clos<strong>in</strong>g the <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap: options & opportunities<br />
The requirements are for dedicated equity funds that will<br />
address smaller SMEs, <strong>in</strong>clud<strong>in</strong>g start-ups. As <strong>in</strong> the case<br />
of credit l<strong>in</strong>es to banks, when DFIs support equity funds,<br />
conditionality should address the less-served segments of<br />
SMEs (or the so-called ‘Miss<strong>in</strong>g Middle’ (see Chapter III above).<br />
The feasibility of sett<strong>in</strong>g up equity funds with lower return<br />
criteria than commonly applied <strong>in</strong> the <strong>in</strong>dustry needs to be<br />
<strong>in</strong>vestigated.<br />
Mezzan<strong>in</strong>e f<strong>in</strong>ance such as subord<strong>in</strong>ated loans will also<br />
strengthen the capacity of an enterprise to obta<strong>in</strong> senior<br />
debt <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> from banks.<br />
Leas<strong>in</strong>g and factor<strong>in</strong>g<br />
Leas<strong>in</strong>g will improve the cash-flow of SMEs that are too weak<br />
to <strong>in</strong>vest heavily <strong>in</strong> equipment, such as trucks and other<br />
mach<strong>in</strong>ery. As stated by the IFC, leas<strong>in</strong>g plays an important<br />
role <strong>in</strong> promot<strong>in</strong>g a strong and susta<strong>in</strong>able private sector <strong>in</strong><br />
emerg<strong>in</strong>g markets, particularly as it supports under-served<br />
markets, such as micro, small, and medium enterprises, to ga<strong>in</strong><br />
access to f<strong>in</strong>ance 37 . The IFC and the EDFIs have extensively<br />
concentrated on creat<strong>in</strong>g, develop<strong>in</strong>g and support<strong>in</strong>g<br />
leas<strong>in</strong>g <strong>in</strong>stitutions and are participat<strong>in</strong>g <strong>in</strong> capacity<br />
build<strong>in</strong>g <strong>in</strong>itiatives <strong>in</strong> this respect. The IFC has published a<br />
Leas<strong>in</strong>g Development Guide for Emerg<strong>in</strong>g Economies 38<br />
that provides sound <strong>in</strong>formation on the conditions for and<br />
approaches to the <strong>in</strong>troduction of leas<strong>in</strong>g. The IFC Africa<br />
Leas<strong>in</strong>g Facility was launched <strong>in</strong> 2008 from Senegal and now<br />
promotes the leas<strong>in</strong>g <strong>in</strong>dustry through advisory services<br />
across 14 <strong>countries</strong> 39 .<br />
The EIB has <strong>in</strong>vested <strong>in</strong> several leas<strong>in</strong>g companies <strong>in</strong> Africa,<br />
<strong>in</strong>clud<strong>in</strong>g Africa Leas<strong>in</strong>g Company <strong>in</strong> Cameroon, DFCU Leas<strong>in</strong>g<br />
Company <strong>in</strong> Uganda, and Mauritius Leas<strong>in</strong>g Company Ltd <strong>in</strong><br />
Mauritius, and supports multilateral <strong>in</strong>itiatives promot<strong>in</strong>g<br />
leas<strong>in</strong>g <strong>in</strong> Africa.<br />
The African Leas<strong>in</strong>g Association, or Afrolease, is the<br />
cont<strong>in</strong>ental body of leas<strong>in</strong>g practitioners and organizations <strong>in</strong><br />
Africa with an <strong>in</strong>terest <strong>in</strong> leas<strong>in</strong>g. It liaises with governments<br />
and <strong>in</strong>ternational agencies to promote the growth of the<br />
leas<strong>in</strong>g <strong>in</strong>dustry <strong>in</strong> Africa 40 .<br />
Factor<strong>in</strong>g, or sales of receivables, represents an important<br />
<strong>in</strong>strument for support<strong>in</strong>g the work<strong>in</strong>g capital requirements<br />
of smaller SMEs. In certa<strong>in</strong> environments, factor<strong>in</strong>g is<br />
considered costly for beneficiary SMEs, but nevertheless<br />
carries important benefits. The IFC has helped set up factor<strong>in</strong>g<br />
houses <strong>in</strong> different <strong>countries</strong>, with a focus on cross-border<br />
receivables. Banco BHD <strong>in</strong> the Dom<strong>in</strong>ican Republic is sett<strong>in</strong>g<br />
up a factor<strong>in</strong>g facility with the support of the IFC.<br />
Supplier credit and trade credit<br />
Supplier credit is a common source of f<strong>in</strong>ance for many SMEs<br />
around the world. Such transactions typically occur between<br />
two bus<strong>in</strong>esses. Trade credit allows bus<strong>in</strong>esses to delay<br />
payment for goods and services purchased and thus also<br />
represents a source of improved cash-flow.<br />
Trade f<strong>in</strong>ance support and trade credit <strong>in</strong>surance/guarantees<br />
are equally an essential <strong>in</strong>gredient of a sound f<strong>in</strong>ancial<br />
<strong>in</strong>frastructure, particularly for export<strong>in</strong>g SMEs.<br />
In terms of trade f<strong>in</strong>ance, two schemes deserve particular<br />
attention, namely the IFC’s Global Trade F<strong>in</strong>ance Program<br />
(GTFP) 41 and the African Trade Insurance Agency (ATI-<br />
ACA) 42 . The ma<strong>in</strong> benefits of these schemes are <strong>in</strong> the field<br />
of recognition of documentary credit. These schemes offer<br />
confirm<strong>in</strong>g banks partial or full guarantees cover<strong>in</strong>g payment<br />
risk on banks <strong>in</strong> the emerg<strong>in</strong>g markets for trade-related<br />
transactions. There is a high take-up of this <strong>in</strong>strument <strong>in</strong><br />
Africa, where it also plays a role <strong>in</strong> generat<strong>in</strong>g resources for<br />
pre-export work<strong>in</strong>g capital <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>.<br />
5.4 Role of the State <strong>in</strong> <strong>ACP</strong> Countries<br />
On the whole, credit risk is accentuated <strong>in</strong> many <strong>ACP</strong> <strong>countries</strong><br />
by a weak f<strong>in</strong>ancial and legal <strong>in</strong>frastructure, <strong>in</strong>clud<strong>in</strong>g lack<br />
of <strong>in</strong>formation, poor reliability of f<strong>in</strong>ancial statements, and<br />
poor creditor rights (<strong>in</strong>clud<strong>in</strong>g difficulty <strong>in</strong> register<strong>in</strong>g and<br />
enforc<strong>in</strong>g collateral, and overall weakness of the judicial<br />
system, which may be slow and unreliable).<br />
As noted <strong>in</strong> section 5.3, certa<strong>in</strong> well-targeted improvements to<br />
the bus<strong>in</strong>ess environment are necessary, <strong>in</strong>clud<strong>in</strong>g actions <strong>in</strong><br />
the fields listed below. Amongst those, some actions are both<br />
important and practical, as highlighted dur<strong>in</strong>g the country<br />
visits and survey bibliography. These <strong>in</strong>clude the sett<strong>in</strong>g<br />
up of reliable credit bureaus and the secured realization of<br />
collateral. Tax <strong>in</strong>centives to banks are also widely advocated,<br />
though these are more delicate to implement <strong>in</strong> practice.<br />
Incentives<br />
• Provide tax <strong>in</strong>centives to banks lend<strong>in</strong>g to SMEs, and<br />
reduce capital ga<strong>in</strong>s taxes on equity exits;<br />
• Provide <strong>in</strong>centives, <strong>in</strong>clud<strong>in</strong>g tax <strong>in</strong>centives, for bus<strong>in</strong>esses<br />
to enter the formal sector.<br />
37 http://www.ifc.org/ifcext/gfm.nsf/Content/Leas<strong>in</strong>g<br />
38 Id.<br />
39 http://www1.ifc.org/wps/wcm/connect/REGION__EXT_Content/Regions/Sub-Saharan+Africa/Regional+Programs/AfricaLeas<strong>in</strong>gFacility/<br />
40 http://www1.ifc.org/wps/wcm/connect/REGION__EXT_Content/Regions/Sub-Saharan+Africa/Regional+Programs/AfricaLeas<strong>in</strong>gFacility/AfricaLeas<strong>in</strong>gAssociation/<br />
41 http://www.ifc.org/ifcext/globalfm.nsf/Content/GTFP<br />
42 http://www.ati-aca.org/<strong>in</strong>side.php?id=37<br />
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<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
5<br />
Clos<strong>in</strong>g the <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> gap: options & opportunities<br />
Regulatory environment<br />
• Adapt the regulatory environment for SME lend<strong>in</strong>g for<br />
banks;<br />
• Make the creation and registration of companies much<br />
easier;<br />
• Adapt customs duties, pr<strong>in</strong>cipally <strong>in</strong> terms of their<br />
transparency and procedures.<br />
F<strong>in</strong>ancial <strong>in</strong>frastructure<br />
• F<strong>in</strong>ancial <strong>in</strong>formation <strong>in</strong>frastructure. Governments and<br />
public authorities such as central banks have a critical<br />
role to play <strong>in</strong> develop<strong>in</strong>g credit registries. Provid<strong>in</strong>g data<br />
to credit registries/bureaus should be made mandatory.<br />
This constitutes one of the elements <strong>in</strong> reduc<strong>in</strong>g credit<br />
risk perception by banks with regard to SMEs;<br />
• Adapt bank<strong>in</strong>g regulatory requirements <strong>in</strong> their<br />
treatment of risk by supervised banks, such as <strong>in</strong> collateral<br />
requirements and requirements <strong>in</strong> terms of historic data,<br />
cash-flow analysis, and other difficult-to-fulfil requirements<br />
for SMEs;<br />
• Account<strong>in</strong>g and audit<strong>in</strong>g standards. A better balance<br />
needs to be achieved between transparency and<br />
regulatory simplicity.<br />
Secured transactions framework<br />
• The value of collateral and other f<strong>in</strong>ancial guarantees is<br />
considerably reduced by weak and complex enforcement<br />
mechanisms. This augments the credit risk for banks and<br />
considerably discourages SME lend<strong>in</strong>g.<br />
Dispute resolution<br />
• A weak, cumbersome, unreliable and sometimes<br />
corrupt judiciary stands <strong>in</strong> the way of small bus<strong>in</strong>ess<br />
development. This is the case for domestic bus<strong>in</strong>ess<br />
disputes, but is even more the case for cross-border trade<br />
and f<strong>in</strong>ancial disputes. A likely remedy is the creation of<br />
effective Alternative Dispute Resolution Mechanisms<br />
(ADRs).<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
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6<br />
Implications for the eib <strong>in</strong>vestment<br />
facility and the ec<br />
24<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
6<br />
Implications for the eib <strong>in</strong>vestment facility and the ec<br />
The mandate given by the <strong>ACP</strong> Secretariat through BizClim<br />
requires that this study review opportunities for <strong>in</strong>creased<br />
SME outreach by the EIB, and <strong>in</strong> particular the EIB-managed<br />
<strong>ACP</strong> Investment Facility (IF).<br />
6.1 Outreach of the <strong>ACP</strong> Investment Facility<br />
for SME f<strong>in</strong>ance<br />
The EIB, out of the IF and its own resources, reaches SMEs<br />
by apply<strong>in</strong>g <strong>in</strong>direct <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>, i.e. through various f<strong>in</strong>ancial<br />
<strong>in</strong>termediaries. The EIB as such “devolves” to both private<br />
commercial <strong>in</strong>termediaries, though devolution to regional<br />
and national development banks is also conducted.<br />
F<strong>in</strong>ancial support<br />
As illustrated below, the IF’s f<strong>in</strong>ancial support from <strong>in</strong>ception<br />
has been spread amongst several <strong>in</strong>struments:<br />
• L<strong>in</strong>es of credit (18%), mostly to banks, <strong>in</strong>clud<strong>in</strong>g a few<br />
l<strong>in</strong>es for leas<strong>in</strong>g (e.g., Cameroon and Uganda) or for<br />
microf<strong>in</strong>ance <strong>in</strong>stitutions (Dom<strong>in</strong>ican Republic). They are<br />
the most relevant as they often refer explicitly to an SME<br />
objective and offer the <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> predom<strong>in</strong>antly used by<br />
SMEs, i.e., bank credit;<br />
• A Framework Agreement with EDFIs (14%), <strong>in</strong>clud<strong>in</strong>g a<br />
m<strong>in</strong>ority of f<strong>in</strong>ancial sector operations (14% by 2009) a<br />
priori not focused on SMEs;<br />
• Direct loans (up to about 44% together with some<br />
subord<strong>in</strong>ated loans and quasi-equity), generally above<br />
€1.5M, mostly for <strong>in</strong>frastructure and large companies<br />
(e.g., m<strong>in</strong><strong>in</strong>g);<br />
• Equity <strong>in</strong>vestments (20%) <strong>in</strong>to large companies (e.g.<br />
tourism) and mostly f<strong>in</strong>ancial <strong>in</strong>stitutions, particularly<br />
microf<strong>in</strong>ance and venture capital funds, for support<strong>in</strong>g<br />
their overall operations rather than specific SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>;<br />
• Guarantees are available, but the IF’s current product<br />
has not succeeded, and EIB is review<strong>in</strong>g its approach <strong>in</strong><br />
depth.<br />
The concern of the <strong>ACP</strong> Secretariat and its Members regard<strong>in</strong>g<br />
the SME segment be<strong>in</strong>g reached by the IF is a legitimate one<br />
for the follow<strong>in</strong>g reasons:<br />
• Apart from broaden<strong>in</strong>g entrepreneurship, the major<br />
advantage of <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> the smaller enterprises is to<br />
generate much more employment, as substantiated<br />
by several surveys. Beyond a threshold of €300,000,<br />
the average <strong>in</strong>vestment cost per job 43 sharply picks up<br />
<strong>in</strong> most low to middle-<strong>in</strong>come <strong>countries</strong> and <strong>in</strong> most<br />
economic sectors;<br />
• As reported also by an <strong>in</strong>-depth study under the SME<br />
F<strong>in</strong>ance Sub-Group of the G-20 F<strong>in</strong>ancial Inclusion Expert<br />
Group (FIEG) 44 , the likelihood of a small firm hav<strong>in</strong>g access<br />
to a bank loan <strong>in</strong> low-<strong>in</strong>come <strong>countries</strong> is about a third of<br />
that for a medium-sized firm, and less than half of that<br />
for larger firms (the reasons for this are expla<strong>in</strong>ed under<br />
“Constra<strong>in</strong>ts” <strong>in</strong> Chapter V, Section 5.1 above);<br />
• <strong>ACP</strong> enterprises that account for most employment and<br />
lack access to f<strong>in</strong>ance are relatively small as compared to<br />
world-wide SME def<strong>in</strong>itions. As emphasized dur<strong>in</strong>g the<br />
High-Level Meet<strong>in</strong>gs, larger enterprises are few and not<br />
considered as SMEs by <strong>ACP</strong> country standards.<br />
Cotonou IF cumulative signatures:<br />
breakdown by f<strong>in</strong>ancial <strong>in</strong>strument<br />
(as of 31/12/2010, from IF 2010 Annual Report)<br />
7 %<br />
18 % 14 %<br />
37 %<br />
20 %<br />
4 %<br />
*: EFP Framework Agreement<br />
Non-f<strong>in</strong>ancial support<br />
Credit l<strong>in</strong>es<br />
Agency agreement<br />
Equity<br />
Guarantee<br />
Senior loan<br />
Subord<strong>in</strong>ated loan and<br />
quasi-equity<br />
The EIB/IF has usefully deployed technical assistance as a<br />
companion component to credit l<strong>in</strong>es, microf<strong>in</strong>ance and<br />
equity <strong>in</strong>vestments for capacity support not only to the<br />
<strong>in</strong>termediaries, but <strong>in</strong>creas<strong>in</strong>gly to beneficiary enterprises<br />
(e.g., Uganda credit and African micro-<strong>in</strong>surance). However,<br />
EIB/IF has access to extremely limited grant resources. Only<br />
€40 million or 10% of the current €400 million “Subsidy<br />
Envelope” of the IF is currently authorised for “project related”<br />
technical assistance. The rest is for <strong>in</strong>terest subsidy for public<br />
projects, and for private projects <strong>in</strong>volv<strong>in</strong>g privatisation<br />
or yield<strong>in</strong>g “clearly demonstrable social or environmental<br />
benefits”.<br />
43 i.e., enterprise’s total net assets/total number of employees.<br />
43 Scal<strong>in</strong>g-Up SME Access to F<strong>in</strong>ancial Services <strong>in</strong> the Develop<strong>in</strong>g World<br />
http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEF<strong>in</strong>anceStocktak<strong>in</strong>g/$FILE/G20_Stocktak<strong>in</strong>g_Report.pdf<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
25
6<br />
Implications for the eib <strong>in</strong>vestment facility and the ec<br />
6.2 <strong>Enhanc<strong>in</strong>g</strong> EIB/IF outreach<br />
The next Chapter (VII) conta<strong>in</strong>s the ma<strong>in</strong> recommendations<br />
result<strong>in</strong>g from this Study, which all aim at enhanc<strong>in</strong>g EIB/IF<br />
outreach with a focus on SME access to f<strong>in</strong>ance.<br />
A prelim<strong>in</strong>ary broad comment is called for with regard to EIB<br />
resource capacity to deepen its impact. EIB does not have the<br />
mandate to be a development agency, and its governance is<br />
not geared to such a role. Recommendations to EIB should<br />
thus be read <strong>in</strong> conjunction with two important reports,<br />
namely the Mid-term Evaluation of the Investment Facility and<br />
EIB own resources operations <strong>in</strong> <strong>ACP</strong> <strong>countries</strong> and the OCTs<br />
(2010) 45 and the Mid‐Term Review of EIB external mandate –<br />
Report of the Steer<strong>in</strong>g Committee – Feb. 2010 46 which expla<strong>in</strong><br />
this consideration. One of the consequences thereof is the<br />
limited staff resources that EIB can allocate to the operation<br />
of the IF.<br />
The outreach of EIB/IF can be enhanced <strong>in</strong> the follow<strong>in</strong>g key<br />
areas.<br />
Reach<strong>in</strong>g the lower SME segments<br />
It appears that the SME segment reached is, under many<br />
operations, the higher end of the SME spectrum, except<br />
under microf<strong>in</strong>ance operations. Of course, the EIB has<br />
reached enterprises, although these have been relatively<br />
large; however, a concern rema<strong>in</strong>s that there is limited effort<br />
to reach the real SMEs per the <strong>ACP</strong> <strong>countries</strong>’ concerns. What<br />
can be called the “Miss<strong>in</strong>g Middle” may not be reached much.<br />
Credit l<strong>in</strong>es, the most relevant <strong>in</strong>strument, receive only 18% of<br />
the IF, or possibly 20% with EDFIs, and are not all specifically<br />
target<strong>in</strong>g SMEs. When the SME objective is emphasized,<br />
the EIB would set rather wide maxima (down to €200,000)<br />
and low m<strong>in</strong>ima (down to €10,000, if not €5,000) on credit<br />
l<strong>in</strong>e allocations to <strong>in</strong>dividual enterprises. With<strong>in</strong> that range,<br />
banks are mostly left to decide the level of allocations<br />
accord<strong>in</strong>g to their own practice. Moreover, there are no<br />
examples of specific EIB conditionality requir<strong>in</strong>g a bank not<br />
to limit <strong>in</strong>dividual allocations, but the sizes of the borrow<strong>in</strong>g<br />
enterprises.<br />
The EIB keeps records of credit allocations and numbers<br />
of enterprises reached but not of enterprise sizes. When<br />
exclud<strong>in</strong>g the special case of the Dom<strong>in</strong>ican Republic, the EIB<br />
reports an average credit l<strong>in</strong>e allocation to date of €634,000,<br />
which is substantially above what an <strong>ACP</strong> SME could need<br />
and obta<strong>in</strong>.<br />
In some <strong>in</strong>stances, microf<strong>in</strong>ance <strong>in</strong>stitutions and microf<strong>in</strong>ance<br />
banks supported by EIB have up-scaled their portfolios<br />
to <strong>in</strong>clude SMEs as well. Some microf<strong>in</strong>ance approaches<br />
may improve SME credit and such isolated successes (e.g.,<br />
Dom<strong>in</strong>ican Republic) would deserve to be replicated.<br />
In the case of Private Equity Funds, it strongly appears that<br />
the EIB ma<strong>in</strong>ly reaches the higher end of the SME spectrum,<br />
or enterprises much larger than SMEs, although there are<br />
exceptions. There is only one case of the EIB requir<strong>in</strong>g that<br />
enterprises not exceed a given threshold, and that threshold<br />
is at 100 employees, yearly sales of less than $5m and gross<br />
assets of less than $3m, which are <strong>in</strong> fact very large SMEs.<br />
In summary, the EIB could cover all SME segments, and<br />
particularly the “Miss<strong>in</strong>g Middle”, more deeply, and agree<br />
with beneficiary banks and other f<strong>in</strong>ancial <strong>in</strong>stitutions<br />
on a classification of SMEs expected to be reached. The<br />
recommendation entails that the EIB establish a larger<br />
portfolio of credit l<strong>in</strong>es subject to strict conditionality qua<br />
SME size (<strong>in</strong>clud<strong>in</strong>g start-ups).<br />
In addition, the EIB has been <strong>in</strong>strumental <strong>in</strong> develop<strong>in</strong>g<br />
new approaches <strong>in</strong> microf<strong>in</strong>ance, by blend<strong>in</strong>g f<strong>in</strong>ancial and<br />
non-f<strong>in</strong>ancial assistance for capacity build<strong>in</strong>g for both SMEs<br />
and f<strong>in</strong>ancial <strong>in</strong>termediaries. A model of such <strong>in</strong>terventions<br />
is found <strong>in</strong> the Dom<strong>in</strong>ican Republic, where the EIB has<br />
f<strong>in</strong>anced Banco ADEMI and Banco ADOPEM, both of which<br />
have portfolios reach<strong>in</strong>g microenterprises for 70%, and SMEs<br />
for 30%. This suggests that the EIB/IF could also reach the<br />
“Miss<strong>in</strong>g Middle” of the SME population by extend<strong>in</strong>g its<br />
approaches adopted for microf<strong>in</strong>ance to the SME level. An <strong>in</strong>depth<br />
study of the potential to achieve this followed by pilot<br />
projects <strong>in</strong> other <strong>countries</strong> would be worthwhile. Although<br />
the occurrence of such mature microf<strong>in</strong>ance <strong>in</strong>stitutions is<br />
not comparable to the bank<strong>in</strong>g network, this smaller channel<br />
should not be left aside s<strong>in</strong>ce commercial bank <strong>in</strong>terest <strong>in</strong><br />
SME lend<strong>in</strong>g rema<strong>in</strong>s low.<br />
Guarantees and credit enhancement<br />
The IF’s unique risk-bear<strong>in</strong>g capacity can be used more<br />
forcefully for risk mitigation and mobilisation of domestic<br />
resources <strong>in</strong>to SME f<strong>in</strong>ance. Reference needs to be made to<br />
the conclusions of the Mid-term Evaluation of the Investment<br />
Facility and EIB own resources operations <strong>in</strong> <strong>ACP</strong> <strong>countries</strong> and the<br />
OCTs (2010), which conta<strong>in</strong> more detailed recommendations<br />
<strong>in</strong> terms of <strong>in</strong>creased resource mobilisation efforts by the EIB<br />
through appropriate <strong>in</strong>struments, <strong>in</strong>clud<strong>in</strong>g guarantees.<br />
45 http://ec.europa.eu/europeaid/how/evaluation/evaluation_reports/2010/1285_docs_en.htm<br />
46 http://www.eib.org/attachments/documents/eib_external_mandate_2007-2013_mid-term_review.pdf & http://www.eib.org/about/documents/mtr-external-mandate-report-steer<strong>in</strong>gcommittee.htm<br />
26<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
6<br />
Implications for the eib <strong>in</strong>vestment facility and the ec<br />
Indeed, <strong>in</strong> most <strong>ACP</strong> <strong>countries</strong>, the perceived credit risk is<br />
more of a constra<strong>in</strong>t than the process<strong>in</strong>g costs related to<br />
smaller enterprises.<br />
The EIB/IF has attempted to apply guarantee facilities for<br />
SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> purposes, and broader resource mobilisation<br />
purposes, but the take-up has been poor for a number<br />
of reasons. The EIB is currently recast<strong>in</strong>g its guarantee<br />
programme along some l<strong>in</strong>es.<br />
EIB is aware of the need for more flexibility for blend<strong>in</strong>g <strong>in</strong><br />
order to develop other <strong>in</strong>struments (first loss support, direct<br />
grants, etc.) and it is the EIB’s <strong>in</strong>tention to submit a proposal<br />
for the 11th EDF which gives the EIB much more flexibility <strong>in</strong><br />
that regard. EU grant fund<strong>in</strong>g should support the EIB’s efforts<br />
to develop new guarantee and risk-shar<strong>in</strong>g <strong>in</strong>struments.<br />
Blend<strong>in</strong>g should be expanded from grant and loan blend<strong>in</strong>g<br />
to other <strong>in</strong>struments. Blend<strong>in</strong>g of EU grant fund<strong>in</strong>g with EIB<br />
<strong>in</strong>struments could be made a priority for the EU <strong>in</strong> the <strong>ACP</strong><br />
<strong>countries</strong>.<br />
Capacitat<strong>in</strong>g SMEs is a precondition to enlarg<strong>in</strong>g the SME<br />
population that can hope to access f<strong>in</strong>ance. Capacity<br />
support is needed <strong>in</strong> the follow<strong>in</strong>g areas:<br />
• Management competence;<br />
• Account<strong>in</strong>g & transparency;<br />
• Forecast<strong>in</strong>g and market surveys;<br />
• Articulat<strong>in</strong>g and present<strong>in</strong>g bankable dossiers;<br />
• In order to develop feeder SME <strong>in</strong>dustries <strong>in</strong>to larger<br />
projects, a country plan is needed - def<strong>in</strong><strong>in</strong>g the<br />
participants <strong>in</strong> sectors such as <strong>in</strong>frastructure and tourism,<br />
their potential dynamic effect on the economy, and a<br />
f<strong>in</strong>ancial scheme for start-ups.<br />
Delivery channels for capacity build<strong>in</strong>g should be grantbased,<br />
and preferably handled by private sector actors with<br />
the assistance of banks.<br />
Grant fund<strong>in</strong>g for SME capacity build<strong>in</strong>g<br />
An equally important recommendation is a substantial<br />
<strong>in</strong>crease <strong>in</strong> capacity build<strong>in</strong>g for SMEs. This is a particular<br />
area <strong>in</strong> which the EU can play the ma<strong>in</strong> role <strong>in</strong> allocat<strong>in</strong>g grant<br />
fund<strong>in</strong>g to be managed <strong>in</strong> conjunction with the EIB.<br />
The need to support the demand side is well established. EIB<br />
is aware of this, as it has <strong>in</strong>cluded some capacity build<strong>in</strong>g for<br />
SMEs (though this has been limited due to the scarcity of TA<br />
grant fund<strong>in</strong>g available to the EIB) <strong>in</strong> several of its f<strong>in</strong>ancial<br />
sector operations, as listed below.<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
27
6<br />
Implications for the eib <strong>in</strong>vestment facility and the ec<br />
IF F<strong>in</strong>ancial Sector Technical Assistance (TA) Projects - Cotonou TA Annual Report 2010<br />
Country Operation Year €’000<br />
Projected <strong>in</strong> 2011:<br />
Ivory Coast Greenfield Microf<strong>in</strong>ance Institution(s) <strong>in</strong> Côte d'Ivoire 2011 1,000<br />
Mauritius State Bank of Mauritius L<strong>in</strong>e of Credit II - SME Sub-Loans 2011 189<br />
Regional<br />
Caribbean<br />
SME Access to F<strong>in</strong>ance Facility <strong>in</strong> Caribbean (SAFFC) 2011 1,000<br />
Regional Pacific SME Access to F<strong>in</strong>ance Facility (SAFFP) 2011 1,000<br />
Regional<br />
Regional<br />
Regional<br />
Uganda<br />
ShoreCap Exchange TA for strengthen<strong>in</strong>g microf<strong>in</strong>ance <strong>in</strong>stitutions and small<br />
bus<strong>in</strong>ess banks (ShoreCap II Investees)<br />
Regional Micro, Small and Medium-Size Enterprises (MSME) Fund for Sub-<br />
Saharan Africa (REGMIFA) - Implementation<br />
Programme d’appui technique de la Banque de Développement des Etats<br />
d’Afrique Centrale (BDEAC) dans le doma<strong>in</strong>e de la gestion de risques bancaires<br />
Capacity Build<strong>in</strong>g of private entreprises and facilitat<strong>in</strong>g the implementation<br />
of EIB’s Private Enterprise F<strong>in</strong>ance Facility (PEFF) – Component III<br />
(Implementation)<br />
Signed under Cotonou II:<br />
LeapFrog F<strong>in</strong>ancial Inclusion fund<br />
Regional<br />
Technical Assistance Facility<br />
Dom<strong>in</strong>ican<br />
Republic<br />
Dom<strong>in</strong>ican<br />
Republic<br />
TA Programme to F<strong>in</strong>ancial Institutions <strong>in</strong> the Dom<strong>in</strong>ican Republic for<br />
<strong>in</strong>stitutional capacity build<strong>in</strong>g, Phase II - Implementation<br />
TA Programme to F<strong>in</strong>ancial Institutions<br />
<strong>in</strong> the Dom<strong>in</strong>ican Republic for <strong>in</strong>stitutional capacity build<strong>in</strong>g, Phase I –<br />
Preparation<br />
2011 3,000<br />
2011 2,000<br />
2011 200<br />
2011 511<br />
2010 2,000<br />
2009 649<br />
2008 35<br />
Regional REGMIFA FX Risk Study 2009 70<br />
Uganda<br />
TA for capacity build<strong>in</strong>g of private enterprises and facilitat<strong>in</strong>g the<br />
implementation of the Bank's Private Enterprise F<strong>in</strong>ance Facility (PEFF) - Phase<br />
I preparation<br />
2008 34<br />
Uganda Promotion of PEFF 2009 47<br />
Signed under Cotonou I:<br />
Cameroon Assistance Technique au Prêt Global Pro-Pme II 2007 145<br />
Ethiopia TA to the Development Bank of Ethiopia - Preparation 2008 35<br />
Ethiopia TA to the Development Bank of Ethiopia - Implementation 2008 461<br />
Liberia TA to the AccessBank Liberia 2008 1,000<br />
Regional<br />
TA microf<strong>in</strong>ance facility: AccessBank Tanzania/ Madagascar/Tanzania/Zambia<br />
Ltd.<br />
2008 2,000<br />
Regional AFRICAP (microf<strong>in</strong>ance) 2009 2,000<br />
Regional Shorecap Exchange Corporation 2009 2,000<br />
Regional TA microf<strong>in</strong>ance facility: Advans Cameroon/Ghana/Congo and 4th country 2008 2,000<br />
Regional TA microf<strong>in</strong>ance facility: MicroCred Madagascar/Senegal and 3rd country 2008 2,000<br />
Rwanda<br />
Establishment of a detailed Technical Assistance Programme to Banque<br />
Rwandaise de Développement (BRD) and Banque Commerciale du Rwanda<br />
S.A. (BCR) - Phase I<br />
2008 31<br />
Rwanda<br />
Establishment of a detailed Technical Assistance Programme to Banque<br />
Rwandaise de Développement (BRD) and Banque Commerciale du Rwanda<br />
S.A. (BCR) - Implementation<br />
2009 560<br />
28<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
6<br />
Implications for the eib <strong>in</strong>vestment facility and the ec<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
29
7 Recommendations<br />
30<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
7<br />
Recommendations<br />
The Recommendations result<strong>in</strong>g from this study conta<strong>in</strong>s<br />
various proposed steps to be taken accord<strong>in</strong>g to the<br />
responsible party, i.e.:<br />
7.1. Recommendations to the <strong>ACP</strong><br />
Countries and their public <strong>in</strong>stitutions<br />
A participant at the 13-14 October 2011 <strong>ACP</strong> High-Level<br />
Meet<strong>in</strong>g stated that: “Governments need to come to the table”.<br />
Besides broader improvements <strong>in</strong> the macro-economic<br />
framework and f<strong>in</strong>ancial sector <strong>in</strong>frastructure, the follow<strong>in</strong>g<br />
areas lend themselves to priority action.<br />
1. Create (or improve) credit bureaus<br />
2. Improve collateral and <strong>in</strong>solvency regimes<br />
3. Adapt bank<strong>in</strong>g regulatory/supervisory regimes<br />
4. Facilitate commercial dispute settlement and consider<br />
the use of Alternative Dispute Resolution mechanisms<br />
(ADRs)<br />
7.2. Recommendations to the EIB and the<br />
European Union<br />
1. Recommendation reta<strong>in</strong>ed as Strategic Recommendation<br />
– The European Union (EU)’s PSD activities should place<br />
SME capacity build<strong>in</strong>g very high on their priorities <strong>in</strong><br />
the <strong>ACP</strong>, and vastly expand capacity build<strong>in</strong>g for SMEs<br />
<strong>in</strong> the areas described <strong>in</strong> Chapter VI, Section 6.1 above,<br />
by creat<strong>in</strong>g private sector managed structures <strong>in</strong><br />
<strong>ACP</strong> <strong>countries</strong> or regions which can deliver necessary<br />
technical assistance. Such capacity build<strong>in</strong>g efforts are<br />
by necessity largely grant-based, though beneficiary<br />
match<strong>in</strong>g fund<strong>in</strong>g might be appropriate.<br />
Capacity build<strong>in</strong>g, a precondition for many SMEs to<br />
even solicit f<strong>in</strong>ance, is considered by many authoritative<br />
studies as the key step to <strong>in</strong>crease SME access to f<strong>in</strong>ance,<br />
as well as to support the transition from the <strong>in</strong>formal to<br />
the formal sector.<br />
Delivery channels for capacity build<strong>in</strong>g should be grantbased,<br />
and handled by private sector actors with the<br />
assistance of banks. Country visits strongly yielded this<br />
view, but foremost, the participants at the two High-<br />
Level <strong>ACP</strong> Meet<strong>in</strong>gs of 15 July and 13-14 October 2011<br />
forcefully <strong>in</strong>sisted that the issue of the delivery vehicle,<br />
which must be private sector-based, be made the core<br />
element of this particular .<br />
2. Recommendation reta<strong>in</strong>ed as Strategic Recommendation<br />
– EU grant fund<strong>in</strong>g should support the EIB’s efforts to<br />
develop new guarantee and risk-shar<strong>in</strong>g <strong>in</strong>struments.<br />
Blend<strong>in</strong>g should be expanded from grant and loan<br />
blend<strong>in</strong>g to other <strong>in</strong>struments. Blend<strong>in</strong>g of EU grant<br />
fund<strong>in</strong>g with EIB <strong>in</strong>struments should be made a priority<br />
for the EU <strong>in</strong> the <strong>ACP</strong> <strong>countries</strong>.<br />
3. EU grant fund<strong>in</strong>g should support EIB/IF pre-project<br />
country work, such as prior <strong>in</strong>stitutional restructur<strong>in</strong>g,<br />
SME market surveys and deeper <strong>in</strong>volvement of local<br />
actors (e.g., Employers’ Federations, or Chambers of<br />
Commerce) <strong>in</strong> analys<strong>in</strong>g the SME fabric and needs.<br />
4. This can be done with the support of EU grant fund<strong>in</strong>g<br />
for non-project related work, or by sett<strong>in</strong>g up Trust Funds.<br />
The EIB/IF does not have access to such fund<strong>in</strong>g (unlike<br />
e.g. the FEMIP trust Fund for the Mediterranean Region).<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
31
7<br />
Recommendations<br />
7.3. Recommendations to the EIB<br />
1. Strategic Recommendation – The EIB should target<br />
the lower SME segments (the “Miss<strong>in</strong>g Middle”) more<br />
forcefully <strong>in</strong> target<strong>in</strong>g its SME support <strong>in</strong>struments,<br />
and require <strong>in</strong>termediaries to adhere to pre-set SME<br />
segments.<br />
The Miss<strong>in</strong>g Middle represents the SME segment that<br />
experiences the deepest difficulties <strong>in</strong> access<strong>in</strong>g f<strong>in</strong>ance.<br />
2. Strategic Recommendation – The IF’s risk-bear<strong>in</strong>g capacity<br />
should be used more forcefully for risk mitigation and<br />
mobilisation of domestic resources <strong>in</strong>to SME f<strong>in</strong>ance.<br />
Indeed, <strong>in</strong> most <strong>ACP</strong> <strong>countries</strong>, risk is the deterrent to SME<br />
<strong>f<strong>in</strong>anc<strong>in</strong>g</strong>, rather than process<strong>in</strong>g costs. In this field, the<br />
development of new guarantee <strong>in</strong>struments under the IF<br />
will be of great importance.<br />
3. The EIB should take a more proactive stance <strong>in</strong> develop<strong>in</strong>g<br />
<strong>in</strong>termediation <strong>in</strong> those environments <strong>in</strong> which the<br />
private commercial banks are not <strong>in</strong>terested <strong>in</strong> EIB credit<br />
l<strong>in</strong>es or other SME-geared <strong>in</strong>struments.<br />
A wider reach might be achieved by motivat<strong>in</strong>g private<br />
commercial banks, upgrad<strong>in</strong>g national development<br />
banks (provided that they function on a fully commercial<br />
basis) or creat<strong>in</strong>g special purpose vehicles for SME<br />
<strong>f<strong>in</strong>anc<strong>in</strong>g</strong>. Where relays for SME lend<strong>in</strong>g are more<br />
limited, such as <strong>in</strong> the Pacific and to a lesser extent the<br />
Eastern Caribbean, the EIB could assist the f<strong>in</strong>ancial<br />
sector <strong>in</strong> develop<strong>in</strong>g the necessary relays. Actions that<br />
might be considered <strong>in</strong>clude help<strong>in</strong>g to create either<br />
a regional bank or a special purpose vehicle (SPV) to<br />
group <strong>in</strong>terventions <strong>in</strong> small island states. The EIB should<br />
endeavour to reach many markets though qualified<br />
regional banks <strong>in</strong> Africa such as ECOBANK, Bank of Africa,<br />
or United Bank of Africa, as well as several regional<br />
commercial banks <strong>in</strong> the Eastern Caribbean.<br />
7.4. Recommendations to the EU Member<br />
States controll<strong>in</strong>g the IF<br />
1. Local currency <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> by the EIB, <strong>in</strong> which the IF bears<br />
the foreign exchange risk, proved to be a very potent<br />
<strong>in</strong>strument. It is however subject to risk ceil<strong>in</strong>gs. Further<br />
deepen<strong>in</strong>g of local currency <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> may need to be<br />
subsidised (unless the f<strong>in</strong>ancial susta<strong>in</strong>ability requirement<br />
for the IF was alleviated).<br />
2. As to <strong>in</strong>terest subsidies, Cotonou (Annex II, Art. 2) sets<br />
strict restrictions. Interest subsidies are generally not<br />
applied with regard to SME lend<strong>in</strong>g. The relevant Cotonou<br />
provisions allow for <strong>in</strong>terest subsidies for “projects with<br />
substantial and clearly demonstrable social ... benefits”. It<br />
is unclear whether this might apply to banks that accept<br />
to serve SMEs, <strong>in</strong> spite of their impact on employment.<br />
EU-EIB blend<strong>in</strong>g can be envisaged for further <strong>in</strong>terest<br />
subsidies for SME lend<strong>in</strong>g that is not special purpose<br />
(special purpose be<strong>in</strong>g ma<strong>in</strong>ly energy efficiency,<br />
environmental character, etc.); subject to analysis of its<br />
non-distortive nature if applied to all participat<strong>in</strong>g banks.<br />
3. The Infrastructure vs. F<strong>in</strong>ancial Sector proportion of the<br />
IF could be reviewed. The two ma<strong>in</strong> priorities for the<br />
IF, as conta<strong>in</strong>ed <strong>in</strong> the EIB’s Bus<strong>in</strong>ess Plan for the IF, are<br />
Infrastructure and the F<strong>in</strong>ancial Sector - by itself or as<br />
the channel to reach SMEs. Should EIB wish to change its<br />
strategy and allocate much larger proportionate amounts<br />
to the F<strong>in</strong>ancial Sector, this would need to be endorsed<br />
by the IF’s Management Committee.<br />
32<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
7<br />
Recommendations<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
33
8<br />
Possible <strong>in</strong>vestment facility (if)<br />
alternatives and roadmap for sme<br />
support<br />
34<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
8<br />
Possible <strong>in</strong>vestment facility (if) alternatives and roadmap for sme support<br />
In this Chapter are gathered only those recommendations<br />
most relevant to the management of the IF. Alternative ways<br />
to implement them are compared and further developed to<br />
outl<strong>in</strong>e a possible roadmap.<br />
8.1. Impact on SMEs<br />
A higher share (e.g. a third) of the IF could be used to<br />
f<strong>in</strong>ance SMEs of relevant sizes, <strong>in</strong>clud<strong>in</strong>g through regular<br />
credit l<strong>in</strong>es.<br />
The Cotonou Partnership Agreement states three sectors<br />
to be supported by the IF: SMEs through <strong>in</strong>termediaries 47,<br />
the f<strong>in</strong>ancial sector <strong>in</strong> itself, and revenue-generat<strong>in</strong>g<br />
<strong>in</strong>frastructure critical to the private sector. The <strong>ACP</strong> Secretariat<br />
and its Members are concerned about the limited IF impact<br />
on the first sector and specifically on SMEs of sizes consistent<br />
with <strong>ACP</strong> country def<strong>in</strong>itions and needs.<br />
Most IF <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> is directed to large private companies and<br />
various types of <strong>in</strong>frastructure. These projects are generally<br />
less risky and less staff-<strong>in</strong>tensive than SME support. When the<br />
SME objective is stated under other projects, the EIB applies<br />
it by select<strong>in</strong>g f<strong>in</strong>ancial <strong>in</strong>termediaries with an SME focus<br />
and by sett<strong>in</strong>g rather wide maxima on <strong>in</strong>dividual enterprise<br />
allocations. The EIB does not generally fix any limit on the size<br />
of eligible enterprises and thus leaves <strong>in</strong>termediaries free to<br />
allocate the IF to the less risky, larger enterprises.<br />
In fact, the major IF <strong>in</strong>strument relevant to SMEs – that is,<br />
its credit l<strong>in</strong>es - represents only about 20% of the IF signed<br />
commitments up to end 2010. At the very most, 14% of<br />
this credit reaches SMEs of an <strong>ACP</strong>-relevant size, as may be<br />
<strong>in</strong>ferred from <strong>in</strong>dividual allocation levels. SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong><br />
contributions from some of the IF-supported equity funds<br />
and microf<strong>in</strong>ance <strong>in</strong>stitutions are less significant.<br />
As EIB po<strong>in</strong>ts out, however, <strong>ACP</strong> <strong>in</strong>termediaries would be<br />
reluctant to concentrate their IF fund<strong>in</strong>g on SMEs and to bear<br />
the result<strong>in</strong>g higher risks without compensation. The ma<strong>in</strong><br />
<strong>in</strong>centive currently available is to offer TA to <strong>in</strong>termediaries<br />
out of the small IF subsidy component (€40M). Even if<br />
refocused on SME f<strong>in</strong>ance, this seems unlikely to be sufficient.<br />
Credit is the largest type of SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>, and banks are the<br />
largest providers of credit. The IF’s standard SME “package” <strong>in</strong><br />
a country should thus always <strong>in</strong>clude a credit l<strong>in</strong>e to banks <strong>in</strong><br />
order to have a quantitative impact. Part of other relevant IF<br />
<strong>in</strong>struments, such as equity f<strong>in</strong>ance, could also be earmarked<br />
for SMEs of relevant sizes. Leas<strong>in</strong>g deserves particular support,<br />
as it is as yet little developed and can mitigate two prevalent<br />
SME constra<strong>in</strong>ts, i.e.: lack of collateral and of net worth.<br />
Moreover, the EIB could build upon its successes <strong>in</strong> help<strong>in</strong>g<br />
mature microf<strong>in</strong>ance <strong>in</strong>stitutions enter SME lend<strong>in</strong>g (e.g.<br />
Dom<strong>in</strong>ican Republic) and seek all opportunities to repeat this<br />
process <strong>in</strong> other <strong>countries</strong>. The Cotonou agreement (Annexe<br />
II, Chapter II) provides that: “Cooperation shall support from<br />
the grant allocation … micro-f<strong>in</strong>ance to promote SMEs and<br />
micro-enterprises”.<br />
The result<strong>in</strong>g broad alternatives are summarized below.<br />
The last one seems more effective although it entails higher<br />
costs and a policy shift by the EIB, probably at the expense of<br />
<strong>in</strong>frastructure <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>.<br />
Option Features Pros Cons<br />
Statu quo<br />
Some<br />
<strong>in</strong>termediaries<br />
chosen for their<br />
SME focus<br />
IF profitability<br />
No policy shift<br />
Low SME and<br />
employment<br />
impact<br />
Higher IF share to<br />
SMEs<br />
Higher SME share<br />
with <strong>in</strong>termediary<br />
<strong>in</strong>centives<br />
Intermediaries to<br />
allocate IF to SMEs<br />
of <strong>ACP</strong>-relevant size<br />
Intermediaries to<br />
f<strong>in</strong>ance SMEs and<br />
obta<strong>in</strong> sufficient<br />
<strong>in</strong>centives <strong>in</strong><br />
addition to TA<br />
8.2. Risk Mitigation<br />
Medium impact<br />
on SMEs<br />
High impact on<br />
SMEs<br />
Low <strong>in</strong>terest of<br />
<strong>in</strong>termediaries<br />
IF operat<strong>in</strong>g costs<br />
Cost of <strong>in</strong>centives<br />
IF operat<strong>in</strong>g costs<br />
The IF could <strong>in</strong>clude arrangements for bank portfolio<br />
risk-shar<strong>in</strong>g with<strong>in</strong> its regular SME credit l<strong>in</strong>e operations,<br />
with possible support from local guarantee funds.<br />
The reluctance of banks to take on any SME credit risk is the<br />
primary constra<strong>in</strong>t to SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> as was confirmed by<br />
the High-Level Meet<strong>in</strong>gs, the <strong>in</strong>-country <strong>in</strong>terviews and the<br />
bibliography. Thus, guarantees to banks are the most relevant<br />
<strong>in</strong>centive that the IF could offer alongside credit l<strong>in</strong>es.<br />
However, the EIB’s credit guarantee facilities for the <strong>ACP</strong><br />
regions have been left unused, ma<strong>in</strong>ly due to their price and<br />
<strong>in</strong>itial complexity. Direct ways to lower this price could be<br />
pursued, e.g.: portfolio guarantee caps, performance-based<br />
guarantee allocation, portfolio track record verification, first<br />
loss subsidy, and TA to borrowers. Credit guarantees may<br />
then be allocated to banks directly or through <strong>ACP</strong> guarantee<br />
47 Its revised version adds that the IF “shall ... seek to channel funds through <strong>ACP</strong> national and regional <strong>in</strong>stitutions and programmes that promote the development of small- and medium-sized<br />
enterprises (SMEs)”.<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
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Possible <strong>in</strong>vestment facility (if) alternatives and roadmap for sme support<br />
<strong>in</strong>stitutions, and jo<strong>in</strong>tly with IF’s credit l<strong>in</strong>es or <strong>in</strong>dependently,<br />
i.e.:<br />
• For the above <strong>in</strong>centive to boost IF’s <strong>f<strong>in</strong>anc<strong>in</strong>g</strong>, credit<br />
guarantees should focus on the same SMEs that receive<br />
IF’s credit l<strong>in</strong>es. Conversely, guarantees are less useful <strong>in</strong><br />
the absence of donor credit l<strong>in</strong>es s<strong>in</strong>ce most <strong>ACP</strong> banks<br />
have limited long-term resources available 48 , even when<br />
they are liquid.<br />
• Channell<strong>in</strong>g guarantees through <strong>ACP</strong> guarantee<br />
<strong>in</strong>stitutions (when reliable) would allow the IF to benefit<br />
from their multiplier effect. It further allows for closer<br />
monitor<strong>in</strong>g and <strong>in</strong>stitutional development impact.<br />
• Hence, IF’s SME guarantees would ideally be dovetailed to<br />
its credit l<strong>in</strong>es (i.e. risk-shar<strong>in</strong>g) and channelled through<br />
local guarantee funds when they are reliable. Their<br />
design should then be streaml<strong>in</strong>ed to favour delegation<br />
and portfolio monitor<strong>in</strong>g rather than multiple ex-ante<br />
<strong>in</strong>dividual approvals (i.e. by the EIB, the bank and the<br />
fund).<br />
The EIB has given much thought to the recognised need for<br />
credit guarantees and <strong>in</strong>tends to issue a carefully designed<br />
new product shortly. Meanwhile broad alternatives are<br />
sketched below. They are more attractive when comb<strong>in</strong>ed.<br />
Option Features Pros Cons<br />
Statu quo<br />
Guarantee to<br />
capital 1:1 gear<strong>in</strong>g<br />
High guarantee<br />
price<br />
No <strong>in</strong>termediary<br />
<strong>in</strong>terest<br />
EU guarantee<br />
fund<strong>in</strong>g<br />
Mixed credit/<br />
guarantee l<strong>in</strong>es<br />
Guarantees<br />
through <strong>ACP</strong> funds<br />
Capital grant for<br />
back<strong>in</strong>g IF’s SME<br />
guarantees<br />
IF’s SME credit<br />
l<strong>in</strong>es to <strong>in</strong>clude<br />
portfolio guarantee<br />
component<br />
IF’s portfolio<br />
guarantees passed<br />
on through <strong>ACP</strong><br />
guarantee funds<br />
IF guarantee<br />
capacity<br />
Low guarantee<br />
price<br />
High efficiency/<br />
focus<br />
Helps expand IF<br />
credit<br />
Low guarantee<br />
price<br />
Easy risk<br />
monitor<strong>in</strong>g<br />
Monitor<strong>in</strong>g load<br />
Opportunity cost<br />
of grant<br />
Monitor<strong>in</strong>g load<br />
Subsidy needs<br />
Appraisal/<br />
coord<strong>in</strong>ation load<br />
Possible waste/<br />
dispersion<br />
8.3. Technical Assistance<br />
The EU could fund effective technical assistance (TA) to<br />
SMEs lack<strong>in</strong>g access to <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> from IF <strong>in</strong>termediaries.<br />
Provision of TA to SMEs is one of the top priorities adopted<br />
by stakeholders at the High-Level Meet<strong>in</strong>gs and confirmed<br />
throughout the country visits. Many otherwise creditworthy<br />
SMEs present specific management shortcom<strong>in</strong>gs that deter<br />
their <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> and may be corrected by appropriate TA.<br />
Although such SMEs might have other, less critical needs<br />
(e.g., market<strong>in</strong>g and production) TA should then focus on<br />
their <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> needs, start<strong>in</strong>g with the prevalent need for<br />
credit. Appropriate TA would help SMEs to prepare sound<br />
<strong>in</strong>vestments and thereby facilitate credit appraisal by banks.<br />
This would help upgrade account<strong>in</strong>g and f<strong>in</strong>ancial control,<br />
and thereby facilitate credit monitor<strong>in</strong>g. TA could cater by<br />
priority for those SMEs f<strong>in</strong>anced by IF <strong>in</strong>termediaries, or likely<br />
to be f<strong>in</strong>anced by them, <strong>in</strong> order to allow for broader SME<br />
<strong>f<strong>in</strong>anc<strong>in</strong>g</strong> by the IF.<br />
The management of TA allocations to SMEs should be<br />
consistent with this focus on <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> and with the need<br />
for ownership by stakeholders. Of course, a bank could<br />
not fairly extend both credit and advice at a fee on what<br />
to do to get it. The above focus implies, however, that <strong>ACP</strong><br />
bank<strong>in</strong>g associations should preferably be participat<strong>in</strong>g<br />
<strong>in</strong> the TA management. Moreover, ownership requires the<br />
<strong>in</strong>volvement of the exist<strong>in</strong>g SME associations when they are<br />
<strong>in</strong>dependent and representative. The EU’s oversight, either<br />
directly or preferably through the EIB, is also needed for<br />
ensur<strong>in</strong>g cont<strong>in</strong>uous TA fund<strong>in</strong>g.<br />
Depend<strong>in</strong>g on the country, the TA management unit should<br />
thus report to the SME association, the bank<strong>in</strong>g association,<br />
the EIB, or ideally some comb<strong>in</strong>ation of these. F<strong>in</strong>anciers<br />
and SME representatives are unanimous <strong>in</strong> their advice<br />
aga<strong>in</strong>st the <strong>in</strong>volvement of the Government, based on<br />
past experience of biased assistance allocations. Besides,<br />
Government <strong>in</strong>volvement would not generally add to the<br />
desired ownership and <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> focus.<br />
48 Particularly due to public sector borrow<strong>in</strong>g and bank<strong>in</strong>g regulations (e.g.: WAEMU)<br />
36<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
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Possible <strong>in</strong>vestment facility (if) alternatives and roadmap for sme support<br />
F<strong>in</strong>ally the TA design should draw on best practices, such as<br />
the efficient features of the SME Bus<strong>in</strong>ess Advisory Services<br />
run by EBRD across 20 <strong>countries</strong>, e.g.:<br />
• SMEs are to pay for part of TA costs (around 50%) to<br />
prevent wastage;<br />
• Management units outsource all TA, not to undercut the<br />
local consultancy profession (<strong>in</strong>clud<strong>in</strong>g local accountants<br />
and auditors);<br />
• Units are headed by qualified, <strong>in</strong>dependent bus<strong>in</strong>essmen,<br />
not bureaucrats;<br />
• Only SMEs with growth/profit potential and clear TA<br />
needs are selected;<br />
• Some TA is also open to participat<strong>in</strong>g banks and local<br />
consultants (tra<strong>in</strong><strong>in</strong>g);<br />
• Other donors than the EC may jo<strong>in</strong> <strong>in</strong> the scheme’s<br />
fund<strong>in</strong>g and oversight.<br />
The ma<strong>in</strong> alternatives summed up below are all preferred to<br />
the status quo, and become more effective when they may<br />
be comb<strong>in</strong>ed.<br />
Option Features Pros Cons<br />
Statu quo (limited<br />
No grant needed<br />
amount and focus)<br />
TA via SME<br />
associations<br />
TA via bank<br />
associations<br />
TA via EU/EIB PMUs<br />
Some TA from<br />
banks, donors,<br />
States & equity/<br />
guarantee funds<br />
TA allocation<br />
management<br />
under<br />
representative SME<br />
association<br />
TA allocation under<br />
bank association<br />
TA allocation by<br />
EU Programme<br />
Management Units<br />
run by EIB<br />
SME ownership and<br />
read<strong>in</strong>ess to pay<br />
High SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong><br />
impact<br />
Fund<strong>in</strong>g secured<br />
and open to other<br />
donors<br />
Little efficiency<br />
and SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong><br />
impact<br />
Moderate impact<br />
on SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong><br />
Relative conflict of<br />
<strong>in</strong>terests for banks<br />
Moderate SME and<br />
bank ownership<br />
8.4. Relative IF Devolvement<br />
The distribution of the IF’s credit l<strong>in</strong>es to national banks<br />
could be delegated to regional banks as apexes, <strong>in</strong> order<br />
to f<strong>in</strong>ance SMEs <strong>in</strong> more <strong>ACP</strong> <strong>countries</strong>.<br />
The terms of reference of the present study provide for draw<strong>in</strong>g<br />
from the stakeholders’ meet<strong>in</strong>gs “…recommendations about<br />
possible devolvement of management of the Investment<br />
Facility upon regional organisations…” <strong>in</strong>clud<strong>in</strong>g the “…<br />
possibility of a roadmap prepared for tak<strong>in</strong>g forward the<br />
discussion on devolv<strong>in</strong>g the management of the Investment<br />
Facility”.<br />
The IF <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> of SMEs is already devolved to the extent<br />
that it falls below the €5M threshold and is therefore fully<br />
channelled through <strong>ACP</strong> <strong>in</strong>termediaries. S<strong>in</strong>ce project<br />
approvals less returns to date match the IF capital, only<br />
staggered future returns rema<strong>in</strong> available under the current<br />
Protocol for gradually apply<strong>in</strong>g further devolution and other<br />
policy changes to new projects. Subject to this limitation,<br />
the follow<strong>in</strong>g opportunities for relative devolvement appear<br />
worth consider<strong>in</strong>g.<br />
First, IF’s credit l<strong>in</strong>es are estimated to have reached SMEs<br />
<strong>in</strong> only some 12 <strong>ACP</strong> <strong>countries</strong>, based on the amounts of<br />
<strong>in</strong>dividual allocations. The EIB could use regional banks<br />
as apexes to distribute credit l<strong>in</strong>es to banks among more<br />
<strong>countries</strong>, <strong>in</strong>clud<strong>in</strong>g smaller states. It could further promote<br />
reliable regional relays 49 where they are lack<strong>in</strong>g (e.g., the<br />
Pacific). It could then largely unload the appraisal and<br />
monitor<strong>in</strong>g of banks onto such apexes 50 . At present, the<br />
EIB appears to make no use of multi-country apex lend<strong>in</strong>g,<br />
whether through regional development banks or even<br />
through exist<strong>in</strong>g regional networks of s<strong>in</strong>gle commercial<br />
banks.<br />
Second and as noted above, the IF’s credit guarantees are<br />
hampered by a strict guarantee to capital gear<strong>in</strong>g and<br />
cumbersome monitor<strong>in</strong>g requirements. The EIB could<br />
associate with reliable <strong>ACP</strong> guarantee <strong>in</strong>stitutions to benefit<br />
from their closer monitor<strong>in</strong>g and higher gear<strong>in</strong>g.<br />
49 The Cotonou agreement (Art. 76) provides <strong>in</strong> pr<strong>in</strong>ciple for “grants for … <strong>in</strong>stitutional capacity-build<strong>in</strong>g… ”.<br />
50 The Cotonou agreement (Art. 64) specifies that: “Where the <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> is undertaken through an on-lend<strong>in</strong>g body based and/or operat<strong>in</strong>g <strong>in</strong> the <strong>ACP</strong> States, it shall be the responsibility of that<br />
body to select and appraise <strong>in</strong>dividual projects and to adm<strong>in</strong>ister the funds placed at its disposal… ”.<br />
<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
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Possible <strong>in</strong>vestment facility (if) alternatives and roadmap for sme support<br />
Thirdly, when prepar<strong>in</strong>g new projects, the EIB could regularly<br />
consider such opportunities for <strong>in</strong>creased delegation to<br />
the national and especially the regional <strong>in</strong>stitutions. This<br />
may reduce costs and the need for ex-ante approvals, and<br />
contribute to <strong>in</strong>stitutional development. It applies to leas<strong>in</strong>g<br />
and other <strong>in</strong>struments as well as credit.<br />
Fourth, and as noted above, the management of parallel TA to<br />
SMEs is recommended to be delegated to representative SME<br />
associations and/or bank associations <strong>in</strong> the <strong>ACP</strong> <strong>countries</strong>.<br />
Any radical proposal for transferr<strong>in</strong>g the management of the<br />
IF would have to await the next Protocol and is likely to be<br />
less efficient than the gradual delegation of operations from<br />
EIB to exist<strong>in</strong>g <strong>ACP</strong> regional f<strong>in</strong>ancial bodies.<br />
Option Features Pros Cons<br />
Statu quo<br />
No apex credit or No policy shift Very low country<br />
guarantee l<strong>in</strong>es<br />
spread<br />
Apex credit l<strong>in</strong>es<br />
Guarantees<br />
through <strong>ACP</strong> funds<br />
(re above)<br />
SME TA via <strong>ACP</strong><br />
associations<br />
Credit l<strong>in</strong>es to<br />
regional apexes<br />
to cover several<br />
<strong>countries</strong> at one go<br />
IF’s portfolio<br />
guarantees passed<br />
on through <strong>ACP</strong><br />
guarantee funds<br />
TA allocation<br />
management<br />
under SME and/or<br />
bank associations<br />
Small State impact<br />
Institutional impact<br />
Low guarantee<br />
price<br />
Easy risk<br />
monitor<strong>in</strong>g<br />
SME ownership<br />
High SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong><br />
Cost of promot<strong>in</strong>g<br />
reliable apexes<br />
where absent<br />
Cost of promot<strong>in</strong>g<br />
funds<br />
Coord<strong>in</strong>ation with<br />
IF credit<br />
EU fund<strong>in</strong>g<br />
uncerta<strong>in</strong>ties<br />
• The EIB could then develop a full “bus<strong>in</strong>ess plan” for the<br />
new policies, <strong>in</strong>clud<strong>in</strong>g the total EU grant needed, the<br />
standard SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> package (i.e.: credit l<strong>in</strong>e plus<br />
guarantee) and the standard scheme for provid<strong>in</strong>g TA to<br />
SMEs;<br />
• The EIB could consult the <strong>ACP</strong> Secretariat and selected<br />
implement<strong>in</strong>g <strong>ACP</strong> partners about this bus<strong>in</strong>ess plan;<br />
• The EIB could f<strong>in</strong>ally submit the bus<strong>in</strong>ess plan and<br />
underly<strong>in</strong>g policies to the formal approval of the IF<br />
Member States and of the EU, with the back<strong>in</strong>g of the <strong>ACP</strong><br />
Secretariat.<br />
The EIB, the EU and the EDFIs could possibly hold a major<br />
Europe-<strong>ACP</strong> SME conference as a start<strong>in</strong>g po<strong>in</strong>t for this<br />
approach. This would also have the advantage of affirm<strong>in</strong>g<br />
a degree of leadership of the European platform <strong>in</strong> PSD,<br />
commensurate to the EU be<strong>in</strong>g the largest s<strong>in</strong>gle donor<br />
among all development sources. It might be noted that<br />
among the authoritative sources used for this Study, none<br />
emanates from the EU.<br />
The recommended steps will be different accord<strong>in</strong>g to<br />
whether they are to be implemented under the Cotonou<br />
II Protocol end<strong>in</strong>g December 2013, or need to become<br />
<strong>in</strong>tegrated <strong>in</strong> the new F<strong>in</strong>anc<strong>in</strong>g Perspectives 2014-2020 for<br />
the current IF mandate <strong>in</strong> view of the negotiation of Cotonou<br />
III.<br />
8.5. Outl<strong>in</strong>e of a Possible Roadmap<br />
A consistent launch of the preferred alternatives among those<br />
discussed above would <strong>in</strong>volve the follow<strong>in</strong>g ma<strong>in</strong> steps:<br />
• The EIB could first review and amend the recommendations<br />
of the present report, and discuss and agree on priorities<br />
with the <strong>ACP</strong> Secretariat;<br />
• The <strong>ACP</strong> Secretariat is to table proposed IF orientations <strong>in</strong><br />
the light of the present Study to the next <strong>ACP</strong> Council of<br />
M<strong>in</strong>isters;<br />
• The EIB could <strong>in</strong>formally sound out the IF Member States<br />
and the European Union about key orientations, <strong>in</strong>clud<strong>in</strong>g<br />
the <strong>in</strong>crease <strong>in</strong> the relevant SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> share and the<br />
related need for grant-fund<strong>in</strong>g;<br />
• The <strong>ACP</strong> Secretariat could propose to <strong>ACP</strong> Governments<br />
to discuss and eventually agree on desirable support<br />
measures (e.g., credit bureaus and collateral realization);<br />
• The EIB could consult a sample of implement<strong>in</strong>g <strong>ACP</strong><br />
partners (e.g., regional banks, guarantee funds and bank<br />
associations) about key policies and perhaps test related<br />
arrangements through 1 or 2 new projects;<br />
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<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong>
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<strong>Enhanc<strong>in</strong>g</strong> SME <strong>f<strong>in</strong>anc<strong>in</strong>g</strong> <strong>in</strong> <strong>ACP</strong> <strong>countries</strong><br />
39
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