Enhancing smE financing in acp countries - ACP Business Climate
Enhancing smE financing in acp countries - ACP Business Climate
Enhancing smE financing in acp countries - ACP Business Climate
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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