Enhancing smE financing in acp countries - ACP Business Climate

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Closing the financing gap: options & opportunities
5.1 SME capacity for accessing finance
The need to support the demand side is well established. EIB
is aware of this and included some capacity building for SMEs
(though limited due to the scarcity of Technical Assistance
(TA) grant funding available to EIB) in several of its financial
sector operations.
SME capacity building with grant-based TA is a precondition
to enlarging the SME population that can hope to access
finance. Capacity support is needed in the following areas:
• Articulating and presenting bankable dossiers;
• Accounting and transparency;
• Management competence;
• Forecasting and market surveys;
• In order to develop feeder SME industries into larger
projects, a country plan is needed to define the
participants in sectors such as infrastructure and tourism,
their potential dynamic effect on the economy, and a
financial scheme for start-ups;
• In the agro sector, and in certain other sectors, small
producers can be organised in clusters such as
cooperatives 35 .
Delivery channels for capacity building should be partially
(but not exclusively) grant-based, and preferably handled
by private sector actors with the assistance of banks.
During the country visit to Grenada, a bank recommended
that official grant funding be applied to an SME Support
Centre, possibly regionally based for the Eastern Caribbean.
This Centre could be managed by an ad hoc association
of Chambers of Commerce and Industry, employers’
associations, and commercial banks. As per the above
EBRD-run BAS model, it could mobilize multiple donors and
promote local consultants. Local accountants in particular
would be well placed to vet eligible SMEs and build up their
bankable profile.
5.2 Motivating banks and increasing bank
SME penetration
The other major priority is enhancing commercial bank
interest in SME lending.
The primary obstacle to higher bank penetration in the SME
sector is the perceived risk. Apart from SME capacity and
environment issues, all steps for specifically reducing the
bank credit risk, or compensating for it, need to be addressed:
• Guarantee schemes will help the banks with
higher penetration as well as alleviate provisioning
requirements. Guarantee schemes may also address the
shortage of collateral that can be offered by SMEs. Such
guarantees can take many forms. They are generally
partial guarantees, and less costly when applied globally
to portfolios of SME loans. These can be self-standing
guarantees, or be in hybrid form when combined with
lines of credit 36 . They can be constructed on a pro rata
risk-sharing basis, or on a first-loss basis. The allocation of
guarantees between specific banks can be performance
based;
• Some schemes have been in existence for some time, with
high take-up, such as the AFD-ARIZ Funds and the USAID-
Development Credit Authority (DCA) Loan Portfolio
Guarantee, and the credit risk insurance scheme provided
by the African Trade Insurance Agency (see Chapter IV,
Section 4.2.3 above for details on such initiatives). New
schemes are currently being developed, such as the
AfDB-African Guarantee Fund for Small and Mediumsized
Enterprises and the IADB-Credit Guarantee Funds
for SMEs;
• Tax credits to banks expanding their SME portfolio;
• Local currency lines;
• Bank training and upgrading in various forms should,
when required, accompany DFI financial support to
banks.
5.3 Non-banking institutions and
instruments
Non-banking instruments and institutions are not only
complementary to bank finance - for a number of SMEs they
constitute a prerequisite. SME investments and working
capital needs cannot be financed solely by debt. Internal
resources and adequate cash-flow constitute a precondition
for a bank to consider financing, to the same degree as, for
instance, collateral. A healthy balance between instruments
needs to be achieved.
Mezzanine loans and equity finance
A number of SMEs will be better able to access debt finance
if their own resources, or non-senior debt liabilities, are
reinforced. Banks are most reluctant to finance new equipment
and machinery 100% by debt funding, meaning that equity
finance in the form of seed money for start-ups, and venture
capital from private equity funds need to be put in place.
Equity financing remains a challenge in many ACP countries.
Venture capital funds do not exist in many ACP countries. In
other countries, they do exist, and some are financed by EIB,
but experience appears to show that these are aimed at the
higher end of SMEs, and larger corporate firms, with strong
market access, management and technology, and a highly
profitable track record.
35 In the Dominican Republic, such clusters are highly organised for agricultural producers, particularly in order to allow for sufficient capacity to become exporting industries. At the 15 July 2011
High Level ACP Meeting, Standard Bank highlighted such approaches developed in four pilot countries.
36 These hybrid schemes have the key advantage of delivering both products (credit and guarantees) to the same beneficiaries in one go. They may entail higher costs or subsidies if there is no
local supervision of the guarantee components.
Enhancing SME financing in ACP countries
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