Enhancing smE financing in acp countries - ACP Business Climate

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7 Recommendations The Recommendations resulting from this study contains various proposed steps to be taken according to the responsible party, i.e.: 7.1. Recommendations to the ACP Countries and their public institutions A participant at the 13-14 October 2011 ACP High-Level Meeting stated that: “Governments need to come to the table”. Besides broader improvements in the macro-economic framework and financial sector infrastructure, the following areas lend themselves to priority action. 1. Create (or improve) credit bureaus 2. Improve collateral and insolvency regimes 3. Adapt banking regulatory/supervisory regimes 4. Facilitate commercial dispute settlement and consider the use of Alternative Dispute Resolution mechanisms (ADRs) 7.2. Recommendations to the EIB and the European Union 1. Recommendation retained as Strategic Recommendation – The European Union (EU)’s PSD activities should place SME capacity building very high on their priorities in the ACP, and vastly expand capacity building for SMEs in the areas described in Chapter VI, Section 6.1 above, by creating private sector managed structures in ACP countries or regions which can deliver necessary technical assistance. Such capacity building efforts are by necessity largely grant-based, though beneficiary matching funding might be appropriate. Capacity building, a precondition for many SMEs to even solicit finance, is considered by many authoritative studies as the key step to increase SME access to finance, as well as to support the transition from the informal to the formal sector. Delivery channels for capacity building should be grantbased, and handled by private sector actors with the assistance of banks. Country visits strongly yielded this view, but foremost, the participants at the two High- Level ACP Meetings of 15 July and 13-14 October 2011 forcefully insisted that the issue of the delivery vehicle, which must be private sector-based, be made the core element of this particular . 2. Recommendation retained as Strategic Recommendation – EU grant funding should support the EIB’s efforts to develop new guarantee and risk-sharing instruments. Blending should be expanded from grant and loan blending to other instruments. Blending of EU grant funding with EIB instruments should be made a priority for the EU in the ACP countries. 3. EU grant funding should support EIB/IF pre-project country work, such as prior institutional restructuring, SME market surveys and deeper involvement of local actors (e.g., Employers’ Federations, or Chambers of Commerce) in analysing the SME fabric and needs. 4. This can be done with the support of EU grant funding for non-project related work, or by setting up Trust Funds. The EIB/IF does not have access to such funding (unlike e.g. the FEMIP trust Fund for the Mediterranean Region). Enhancing SME financing in ACP countries 31
7 Recommendations 7.3. Recommendations to the EIB 1. Strategic Recommendation – The EIB should target the lower SME segments (the “Missing Middle”) more forcefully in targeting its SME support instruments, and require intermediaries to adhere to pre-set SME segments. The Missing Middle represents the SME segment that experiences the deepest difficulties in accessing finance. 2. Strategic Recommendation – The IF’s risk-bearing capacity should be used more forcefully for risk mitigation and mobilisation of domestic resources into SME finance. Indeed, in most ACP countries, risk is the deterrent to SME financing, rather than processing costs. In this field, the development of new guarantee instruments under the IF will be of great importance. 3. The EIB should take a more proactive stance in developing intermediation in those environments in which the private commercial banks are not interested in EIB credit lines or other SME-geared instruments. A wider reach might be achieved by motivating private commercial banks, upgrading national development banks (provided that they function on a fully commercial basis) or creating special purpose vehicles for SME financing. Where relays for SME lending are more limited, such as in the Pacific and to a lesser extent the Eastern Caribbean, the EIB could assist the financial sector in developing the necessary relays. Actions that might be considered include helping to create either a regional bank or a special purpose vehicle (SPV) to group interventions in small island states. The EIB should endeavour to reach many markets though qualified regional banks in Africa such as ECOBANK, Bank of Africa, or United Bank of Africa, as well as several regional commercial banks in the Eastern Caribbean. 7.4. Recommendations to the EU Member States controlling the IF 1. Local currency financing by the EIB, in which the IF bears the foreign exchange risk, proved to be a very potent instrument. It is however subject to risk ceilings. Further deepening of local currency financing may need to be subsidised (unless the financial sustainability requirement for the IF was alleviated). 2. As to interest subsidies, Cotonou (Annex II, Art. 2) sets strict restrictions. Interest subsidies are generally not applied with regard to SME lending. The relevant Cotonou provisions allow for interest subsidies for “projects with substantial and clearly demonstrable social ... benefits”. It is unclear whether this might apply to banks that accept to serve SMEs, in spite of their impact on employment. EU-EIB blending can be envisaged for further interest subsidies for SME lending that is not special purpose (special purpose being mainly energy efficiency, environmental character, etc.); subject to analysis of its non-distortive nature if applied to all participating banks. 3. The Infrastructure vs. Financial Sector proportion of the IF could be reviewed. The two main priorities for the IF, as contained in the EIB’s Business Plan for the IF, are Infrastructure and the Financial Sector - by itself or as the channel to reach SMEs. Should EIB wish to change its strategy and allocate much larger proportionate amounts to the Financial Sector, this would need to be endorsed by the IF’s Management Committee. 32 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 and 26: 6 Implications for the eib investme
Page 31: 7 Recommendations 30 Enhancing SME
Page 35 and 36: 8 Possible investment facility (if)
Page 41: Towards a private sector enabling e

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