Enhancing smE financing in acp countries - ACP Business Climate

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3 Access to finance: current channels, instruments and roles 3.1 Worldwide In most parts of the world, Governments and the commercial sector support SME access to finance in recognition of the fact that the SME sector is the largest segment of the economy in terms of productivity and employment. Micro, small and medium-sized enterprises represent 99% of all enterprises in the EU. They provide around 90 million jobs and contribute to entrepreneurship and innovation 4 . In emerging/developing countries, SMEs play a major role in economic development. Studies indicate that formal SMEs contribute to 45% of employment and up to 33% of GDP in developing economies; these numbers are significantly higher when taking into account the estimated contributions of SMEs operating in the informal sector 5 . It is estimated that there are close to 365-445 million MSMEs in emerging markets, of which 80-100 million are formal MSMEs and 285- 345 million are informal enterprises (of which 45-55 million have no access to finance - not even banking overdrafts 6 ). The role and weight of SMEs needs little elaboration, and is widely evidenced by authoritative studies, both world-wide and in developing Countries. Quoting an OECD Report 7 : “SMEs and entrepreneurship are now recognized world-wide to be a key source of dynamism, innovation and flexibility in advanced industrialized Countries, as well as in emerging and developing economies. They are responsible for most net job creation in OECD countries and make important contributions to innovation, productivity and economic growth. If the SME sector does not have access to external funds for investment, the capacity to raise investment per worker, and thereby improve productivity and wages, is seriously impaired.” Such views need, however, to be strongly qualified in some Sub- Saharan environments; the same OECD Report also provides an analysis of the SME sector in Africa, and concludes that: “In Nigeria, SMEs (about 95% of formal manufacturing activity) are key to the economy, but lack of security, corruption and poor infrastructure prevent them from becoming motors of growth.” OECD countries therefore actively promote their SME sectors. In the EU, numerous structural support instruments exist to foster access to finance by small businesses. The European Investment Fund (EIF) 8 , part of the EIB Group, supports several EU structural initiatives. Numerous organisations also support SME development in emerging economies and developing countries. National support programmes exist alongside the commercial banking sector, and non-banking credit institutions, and some venture capital sources. To a more limited extent (particularly in ACP countries) capital markets also contribute to SME finance through the creation of intermediate listing possibilities 9 on stock exchanges for smaller enterprises to access domestic and international savings. Non-traditional mechanisms have also emerged, such as “Peer to Peer financing (P2P)”. Numerous non-financial support schemes have been developed, such as “business angels” initiatives and enterprise incubators. Outside of high-income countries, the SME Business Advisory Services (BAS), run independently by the EBRD, stands out as one of the best-rated regional schemes 10 . It provides worthwhile SMEs not with direct technical assistance, but with part-grant funding for outsourced technical assistance. In this way, it does not undermine the local consultancy profession and can maintain minimum overheads, which attract multiple donors including the EU and USAID. Since its inception in 1993 in the Baltic States, it has assisted about 10,000 SMEs in 20 countries. To the extent that comprehensive surveys exist, they will be found in authoritative reports such as those of the SME Finance Sub-Group of the G20 Financial Inclusion Expert Group (FIEG) 11 supported by the IFC and co-chaired by Germany and South Africa. The latest in-depth stock-taking and survey by this Group is contained in Scaling-Up SME Access to Financial Services in the Developing World (2011) 12 presented at the Seoul G20 Summit in October 2010. This survey spans all regions, including the ACP region. 3.2 In the ACP Countries In the ACP countries, SMEs are equally important in terms of economic growth, employment, and overall productive capacity. However, there are three main differences with OECD countries. Firstly, relevant SMEs are of smaller sizes, as noted above. Secondly, access to finance by ACP SMEs is very severely constrained, for the reasons indicated in the following Chapter V. The SME Financing Gap: Causes. Thirdly, financial markets remain less developed and depend substantially on external long-term resources, as summarized below. Commercial financial channels The commercial financial channels include commercial banks, venture capital funds, capital markets, as well as (and not to be neglected) supplier credits and trade financing, in particular for cross-border SME transactions. Whilst major differences 4 http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/sme-definition/index_en.htm 5 G-20 Financial Inclusion Expert Group’s (FIEG) SME Finance Sub-Group http://www.biia.com/wp-content/uploads/2011/03/Scaling-up-SME-Access-to-Financial-Services-in-the-Developing- World1.pdf 6 Study by IFC and McKinsey- same source as above 7 OECD- The SME Financing Gap- Volume I: Theory and Evidence (2006) http://ec.europa.eu/enterprise/newsroom/cf/_getdocument.cfm?doc_id=624 8 http://www.eif.org/ EIF is a public-private partnership whose tripartite shareholding structure includes the European Investment Bank (EIB), the European Union represented by the European Commission and 25 financial institutions from the European Union Member States, plus Turkey and Croatia 9 E.g. WAEMU. Although promising, this financing source is not further discussed here as it could address only a few larger SMEs in the medium term. 10 See: http://www.ebrd.com/pages/workingwithus/tambas/results.shtml , http://ww.icmci.org/download/?id=12609868 and http://www.ebrd.com/downloads/research/factsheets/tambas.pdf. 11 See: http://www.biia.com/wp-content/uploads/2011/03/Scaling-up-SME-Access-to-Financial-Services-in-the-Developing-World1.pdf 12 See: http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEFinanceStocktaking/$FILE/G20_Stocktaking_Report.pdf Enhancing SME financing in ACP countries 13
3 Access to finance: current channels, instruments and roles exist between ACP regions in terms of commercial bank SME penetration, traditional banks typically target only a small fraction of the market - except in several Caribbean countries, notably the Dominican Republic, as well as in Mauritius and South Africa. In the bulk of Sub-Saharan Africa, commercial banks prefer to focus on less risky market segments, such as Government bonds and projects, housing and consumer credit, and larger private corporate clients 13 . Authoritative reports, including the G20 Financial Inclusion Experts Group, indicate that SME loans as a percentage of total bank loans is generally 50% smaller in developing countries 14 than in OECD countries. No detailed data providing more detailed reliable regional breakdowns was found, but it is reported that a key characteristic of Sub-Saharan Africa is that the stock of bank credit to the private sector (including all categories of enterprises) is very low compared to other developing countries (except Mauritius, South Africa and the Seychelles) 15 . Analysis is generally provided by bank surveys or financial regulators. Additionally, Country Visits for this Report lead to the same findings: in Ghana, some major banks provide SME clients with significant credit, as well as some free training and advisory services under the growing practice of “relationship banking”. Quoted SME shares of credit portfolios are 6% or €18.3M with €11,500 per SME at GCB, and 10% or €12.3M with €6,200 per SME at TTB. The view is different in some Caribbean countries, and in the case of the Dominican Republic, SME lending represents vastly larger shares of total enterprise lending. Several institutions, strongly aware of the particular situation of the banking sector in Sub-Saharan Africa, have created the “Making Finance Work for Africa Partnership” (MFW4A) as an initiative to support the development of African financial sectors. This is a platform for African governments, the private sector, and development partners to coordinate financial sector development interventions across the continent, avoiding duplication and maximizing developmental impact. The MFW4A Secretariat is hosted at the African Development Bank. MFW4A reports 16 that banking data clearly shows that African banks have significant development opportunities compared with banks in other developing regions. Indicators such as liquid liabilities to GDP (measuring the monetary resources mobilized by banks) and private credit to GDP (measuring the credit extended by banks) are considerably lower in Africa than anywhere else in the world. In addition, the region’s banking system has low intermediation ratios (measuring the deposits intermediated into the private sector) which are mainly explained by difficulties in assessing creditworthiness and enforcing creditors’ rights. Development Finance Institutions active in the ACP Regions Instruments developed and applied by the DFIs and International Finance Institutions (IFIs) are varied and wideranging. They include: • Loans: senior loans; mezzanine finance; • Local currency loans; • Credit enhancement instruments such as guarantees, some of which may be geared to the mobilisation of domestic savings and diaspora funds; • Venture capital/equity; seed money; • Trade finance and documentary credit guarantees (targeting exporting SMEs); • Other financial sector efforts: lease finance; receivables financing (factoring). To the extent that they apply to SMEs, these instruments are generally channelled through local intermediaries. A wide variety of non-financial instruments are also applied, and the following stand out for purposes of this Study: • Capacity building for SMEs (see particularly under Chapter VI, Section 6.1 below); and • Support to exporting SMEs (such as in respect of safety, environmental and other ISO standards). The main DFIs and IFIs active in the ACP countries with impact on SME finance comprise, but are not limited to: • The EC and EIB/IF • African Development Bank (AfDB) Group • Inter-American Development Bank (IADB) and its International Investment Corporation (IIC) and the Multilateral Investment Fund (MIF) with a larger focus on SME finance • Caribbean Development Bank (CDB) • Asian Development Bank (AsDB) • Banque Ouest Africaine de Développement (BOAD) and other regional development banks • Several bilateral institutions such as the seventeen Member Institutions of European DFIs (EDFIs) 17 focusing specifically on private sector finance, as well as Agence Française de Développement (AFD) and KFW Bankengruppe (KFW). Other non-commercial actors include national development banks, which are more present in the Caribbean and the Pacific than in Sub-Saharan Africa. 13 Although no relevant, global statistics seem to be available, these three types of credit beneficiaries were stated as the major ones by bankers interviewed in Ghana and Togo, in the same rough order of importance. 14 World Bank and OECD analysis reported in : G-20 Financial Inclusion Expert Group’s (FIEG) SME Finance Sub-Group http://www.biia.com/wp-content/uploads/2011/03/Scaling-up-SME-Accessto-Financial-Services-in-the-Developing-World1.pdf 15 Access to Bank Credit in Sub-Saharan Africa: Key Issues and Reform Strategies http://www.chatama.netau.net/bankcredit.pdff 16 http://www.mfw4a.org/banking/banking.html 17 http://www.edfi.be/members.html 14 Enhancing SME financing in ACP countries
Page 1 and 2: Enhancing sme financing in acp coun
Page 3 and 4: Design: www.mazygraphic.be
Page 5 and 6: Table of contents SUMMARY 7 1. INTR
Page 7 and 8: Definitions & Acronyms ACP ADR AfDB
Page 9 and 10: 1 Introduction 8 Enhancing SME fina
Page 11 and 12: 2 Smes in the acp context 10 Enhanc
Page 13: 3 Access to finance: current channe
Page 17 and 18: 4 The sme financing gap: causes 16
Page 19 and 20: 4 The sme financing gap: causes Com
Page 21 and 22: 5 Closing the financing gap: option
Page 23 and 24: 5 Closing the financing gap: option
Page 25 and 26: 6 Implications for the eib investme
Page 31 and 32: 7 Recommendations 30 Enhancing SME
Page 33 and 34: 7 Recommendations 7.3. Recommendati
Page 35 and 36: 8 Possible investment facility (if)
Page 41: Towards a private sector enabling e

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