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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 />

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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 />

22<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 />

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 />

23


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>


8<br />

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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8<br />

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 />

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>


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Possible <strong>in</strong>vestment facility (if) alternatives and roadmap for sme support<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 />

39


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