Enhancing smE financing in acp countries - ACP Business Climate

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The sme financing gap: causes
Commercial banks
Bank financing remains by and large the most important
source of external finance to SMEs. However, low bank interest
or motivation is considered a major problem in most ACP
countries, though this is not uniformly so. Banks and other
commercial intermediaries generally face major challenges in
offering better access to finance.
• Credit risk is the main obstacle, enhanced by deficient SME
accounting and weak collateral capacity;
• Particularly in those ACP countries that lack credit bureaus,
uncertainty acts as a brake to SME lending. Many ACP
countries either do not possess credit registries, or those
that exist are not found reliable by banks;
• As a result, provisioning required by regulators represents
a major cost for banks. The introduction of Basel II capital
adequacy requirements is said to add to the reluctance
of banks to take risks on SMEs, though this is still a highly
debated issue;
• For those banks that have small business units (and not all
commercial banks have the in-house capacity to handle
SME finance), processing and monitoring is considered
very expensive;
• The above three reasons lead banks to take relatively
higher margins for SME lending than for wholesale/
corporate banking;
• Despite high levels of liquidity in a number of ACP countries,
the mismatch between short-term sources of funds and
long-term lending becomes a problem (depending of
course on the stringency of regulatory transformation
ratios). Smaller banks have difficulty mobilising long term
savings in the local market;
• In some countries, banks have far reaching “Social
Responsibility” and their mission statement focuses in a
large part on SME support; but in other countries this is
not the case at all and banks are not focused on the small
business sector;
• Depending on the macro-economic parameters of a
country, the foreign exchange risk in utilising foreignsourced
hard currency funding for local currency lending
adds on to the banks’ risk;
• SME lending entails high internal transaction costs, limiting
financial institutions’ ability to reach out to SMEs at more
attractive interest rates.
Other financing sources
Non-bank intermediaries serving SMEs are insufficiently
developed:
• Guarantee facilities, mainly bank SME portfolio
guarantees, have mixed results. Some such facilities
have achieved high impact, depending on how they are
designed. Guarantee schemes with an element of subsidy
in risk-sharing appear to have reached their objective
better, while those offered by EIB/IF have had a low takeup
rate. The main benefits of guarantee facilities lie in
(i) enhanced risk tolerance, which also results in lesser
provisioning, and (ii) in their resource mobilisation effect.
• Leasing intermediaries, as well as factoring, enable SMEs
to improve both their credit risk and cash-flow situation.
While leasing and factoring markets are particularly
useful to SMEs, they are very unevenly developed in ACP
countries.
• In some ACP countries, equity funds (Venture Capital
Funds; Seed Capital Funds) are non-existent. However,
equity financing is a highly beneficial source for SMEs,
and in particular for higher-risk SMEs in the early phases
of their life cycle when cash-flow is still irregular. In most
cases, striking a proper balance between debt and equity
financing is of utmost importance. Equity finance in itself
increases the capacity of an enterprise to access debt
financing. In countries where equity funds exist, they
generally focus on the high end, and not on real SMEs in
the country context.
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Enhancing SME financing in ACP countries