Enhancing smE financing in acp countries - ACP Business Climate

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6 Implications for the eib investment facility and the ec The mandate given by the ACP Secretariat through BizClim requires that this study review opportunities for increased SME outreach by the EIB, and in particular the EIB-managed ACP Investment Facility (IF). 6.1 Outreach of the ACP Investment Facility for SME finance The EIB, out of the IF and its own resources, reaches SMEs by applying indirect financing, i.e. through various financial intermediaries. The EIB as such “devolves” to both private commercial intermediaries, though devolution to regional and national development banks is also conducted. Financial support As illustrated below, the IF’s financial support from inception has been spread amongst several instruments: • Lines of credit (18%), mostly to banks, including a few lines for leasing (e.g., Cameroon and Uganda) or for microfinance institutions (Dominican Republic). They are the most relevant as they often refer explicitly to an SME objective and offer the financing predominantly used by SMEs, i.e., bank credit; • A Framework Agreement with EDFIs (14%), including a minority of financial sector operations (14% by 2009) a priori not focused on SMEs; • Direct loans (up to about 44% together with some subordinated loans and quasi-equity), generally above €1.5M, mostly for infrastructure and large companies (e.g., mining); • Equity investments (20%) into large companies (e.g. tourism) and mostly financial institutions, particularly microfinance and venture capital funds, for supporting their overall operations rather than specific SME financing; • Guarantees are available, but the IF’s current product has not succeeded, and EIB is reviewing its approach in depth. The concern of the ACP Secretariat and its Members regarding the SME segment being reached by the IF is a legitimate one for the following reasons: • Apart from broadening entrepreneurship, the major advantage of financing the smaller enterprises is to generate much more employment, as substantiated by several surveys. Beyond a threshold of €300,000, the average investment cost per job 43 sharply picks up in most low to middle-income countries and in most economic sectors; • As reported also by an in-depth study under the SME Finance Sub-Group of the G-20 Financial Inclusion Expert Group (FIEG) 44 , the likelihood of a small firm having access to a bank loan in low-income countries is about a third of that for a medium-sized firm, and less than half of that for larger firms (the reasons for this are explained under “Constraints” in Chapter V, Section 5.1 above); • ACP enterprises that account for most employment and lack access to finance are relatively small as compared to world-wide SME definitions. As emphasized during the High-Level Meetings, larger enterprises are few and not considered as SMEs by ACP country standards. Cotonou IF cumulative signatures: breakdown by financial instrument (as of 31/12/2010, from IF 2010 Annual Report) 7 % 18 % 14 % 37 % 20 % 4 % *: EFP Framework Agreement Non-financial support Credit lines Agency agreement Equity Guarantee Senior loan Subordinated loan and quasi-equity The EIB/IF has usefully deployed technical assistance as a companion component to credit lines, microfinance and equity investments for capacity support not only to the intermediaries, but increasingly to beneficiary enterprises (e.g., Uganda credit and African micro-insurance). However, EIB/IF has access to extremely limited grant resources. Only €40 million or 10% of the current €400 million “Subsidy Envelope” of the IF is currently authorised for “project related” technical assistance. The rest is for interest subsidy for public projects, and for private projects involving privatisation or yielding “clearly demonstrable social or environmental benefits”. 43 i.e., enterprise’s total net assets/total number of employees. 43 Scaling-Up SME Access to Financial Services in the Developing World http://www.ifc.org/ifcext/gfm.nsf/AttachmentsByTitle/G20SMEFinanceStocktaking/$FILE/G20_Stocktaking_Report.pdf Enhancing SME financing in ACP countries 25
6 Implications for the eib investment facility and the ec 6.2 Enhancing EIB/IF outreach The next Chapter (VII) contains the main recommendations resulting from this Study, which all aim at enhancing EIB/IF outreach with a focus on SME access to finance. A preliminary broad comment is called for with regard to EIB resource capacity to deepen its impact. EIB does not have the mandate to be a development agency, and its governance is not geared to such a role. Recommendations to EIB should thus be read in conjunction with two important reports, namely the Mid-term Evaluation of the Investment Facility and EIB own resources operations in ACP countries and the OCTs (2010) 45 and the Mid‐Term Review of EIB external mandate – Report of the Steering Committee – Feb. 2010 46 which explain this consideration. One of the consequences thereof is the limited staff resources that EIB can allocate to the operation of the IF. The outreach of EIB/IF can be enhanced in the following key areas. Reaching the lower SME segments It appears that the SME segment reached is, under many operations, the higher end of the SME spectrum, except under microfinance operations. Of course, the EIB has reached enterprises, although these have been relatively large; however, a concern remains that there is limited effort to reach the real SMEs per the ACP countries’ concerns. What can be called the “Missing Middle” may not be reached much. Credit lines, the most relevant instrument, receive only 18% of the IF, or possibly 20% with EDFIs, and are not all specifically targeting SMEs. When the SME objective is emphasized, the EIB would set rather wide maxima (down to €200,000) and low minima (down to €10,000, if not €5,000) on credit line allocations to individual enterprises. Within that range, banks are mostly left to decide the level of allocations according to their own practice. Moreover, there are no examples of specific EIB conditionality requiring a bank not to limit individual allocations, but the sizes of the borrowing enterprises. The EIB keeps records of credit allocations and numbers of enterprises reached but not of enterprise sizes. When excluding the special case of the Dominican Republic, the EIB reports an average credit line allocation to date of €634,000, which is substantially above what an ACP SME could need and obtain. In some instances, microfinance institutions and microfinance banks supported by EIB have up-scaled their portfolios to include SMEs as well. Some microfinance approaches may improve SME credit and such isolated successes (e.g., Dominican Republic) would deserve to be replicated. In the case of Private Equity Funds, it strongly appears that the EIB mainly reaches the higher end of the SME spectrum, or enterprises much larger than SMEs, although there are exceptions. There is only one case of the EIB requiring that enterprises not exceed a given threshold, and that threshold is at 100 employees, yearly sales of less than $5m and gross assets of less than $3m, which are in fact very large SMEs. In summary, the EIB could cover all SME segments, and particularly the “Missing Middle”, more deeply, and agree with beneficiary banks and other financial institutions on a classification of SMEs expected to be reached. The recommendation entails that the EIB establish a larger portfolio of credit lines subject to strict conditionality qua SME size (including start-ups). In addition, the EIB has been instrumental in developing new approaches in microfinance, by blending financial and non-financial assistance for capacity building for both SMEs and financial intermediaries. A model of such interventions is found in the Dominican Republic, where the EIB has financed Banco ADEMI and Banco ADOPEM, both of which have portfolios reaching microenterprises for 70%, and SMEs for 30%. This suggests that the EIB/IF could also reach the “Missing Middle” of the SME population by extending its approaches adopted for microfinance to the SME level. An indepth study of the potential to achieve this followed by pilot projects in other countries would be worthwhile. Although the occurrence of such mature microfinance institutions is not comparable to the banking network, this smaller channel should not be left aside since commercial bank interest in SME lending remains low. Guarantees and credit enhancement The IF’s unique risk-bearing capacity can be used more forcefully for risk mitigation and mobilisation of domestic resources into SME finance. Reference needs to be made to the conclusions of the Mid-term Evaluation of the Investment Facility and EIB own resources operations in ACP countries and the OCTs (2010), which contain more detailed recommendations in terms of increased resource mobilisation efforts by the EIB through appropriate instruments, including guarantees. 45 http://ec.europa.eu/europeaid/how/evaluation/evaluation_reports/2010/1285_docs_en.htm 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-steeringcommittee.htm 26 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 and 14: 3 Access to finance: current channe
Page 15 and 16: 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: 6 Implications for the eib investme
Page 29 and 30: 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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