Enhancing smE financing in acp countries - ACP Business Climate

More documents

Recommendations

Info

8 Possible investment facility (if) alternatives and roadmap for sme support In this Chapter are gathered only those recommendations most relevant to the management of the IF. Alternative ways to implement them are compared and further developed to outline a possible roadmap. 8.1. Impact on SMEs A higher share (e.g. a third) of the IF could be used to finance SMEs of relevant sizes, including through regular credit lines. The Cotonou Partnership Agreement states three sectors to be supported by the IF: SMEs through intermediaries 47, the financial sector in itself, and revenue-generating infrastructure critical to the private sector. The ACP Secretariat and its Members are concerned about the limited IF impact on the first sector and specifically on SMEs of sizes consistent with ACP country definitions and needs. Most IF financing is directed to large private companies and various types of infrastructure. These projects are generally less risky and less staff-intensive than SME support. When the SME objective is stated under other projects, the EIB applies it by selecting financial intermediaries with an SME focus and by setting rather wide maxima on individual enterprise allocations. The EIB does not generally fix any limit on the size of eligible enterprises and thus leaves intermediaries free to allocate the IF to the less risky, larger enterprises. In fact, the major IF instrument relevant to SMEs – that is, its credit lines - represents only about 20% of the IF signed commitments up to end 2010. At the very most, 14% of this credit reaches SMEs of an ACP-relevant size, as may be inferred from individual allocation levels. SME financing contributions from some of the IF-supported equity funds and microfinance institutions are less significant. As EIB points out, however, ACP intermediaries would be reluctant to concentrate their IF funding on SMEs and to bear the resulting higher risks without compensation. The main incentive currently available is to offer TA to intermediaries out of the small IF subsidy component (€40M). Even if refocused on SME finance, this seems unlikely to be sufficient. Credit is the largest type of SME financing, and banks are the largest providers of credit. The IF’s standard SME “package” in a country should thus always include a credit line to banks in order to have a quantitative impact. Part of other relevant IF instruments, such as equity finance, could also be earmarked for SMEs of relevant sizes. Leasing deserves particular support, as it is as yet little developed and can mitigate two prevalent SME constraints, i.e.: lack of collateral and of net worth. Moreover, the EIB could build upon its successes in helping mature microfinance institutions enter SME lending (e.g. Dominican Republic) and seek all opportunities to repeat this process in other countries. The Cotonou agreement (Annexe II, Chapter II) provides that: “Cooperation shall support from the grant allocation … micro-finance to promote SMEs and micro-enterprises”. The resulting broad alternatives are summarized below. The last one seems more effective although it entails higher costs and a policy shift by the EIB, probably at the expense of infrastructure financing. Option Features Pros Cons Statu quo Some intermediaries chosen for their SME focus IF profitability No policy shift Low SME and employment impact Higher IF share to SMEs Higher SME share with intermediary incentives Intermediaries to allocate IF to SMEs of ACP-relevant size Intermediaries to finance SMEs and obtain sufficient incentives in addition to TA 8.2. Risk Mitigation Medium impact on SMEs High impact on SMEs Low interest of intermediaries IF operating costs Cost of incentives IF operating costs The IF could include arrangements for bank portfolio risk-sharing within its regular SME credit line operations, with possible support from local guarantee funds. The reluctance of banks to take on any SME credit risk is the primary constraint to SME financing as was confirmed by the High-Level Meetings, the in-country interviews and the bibliography. Thus, guarantees to banks are the most relevant incentive that the IF could offer alongside credit lines. However, the EIB’s credit guarantee facilities for the ACP regions have been left unused, mainly due to their price and initial complexity. Direct ways to lower this price could be pursued, e.g.: portfolio guarantee caps, performance-based guarantee allocation, portfolio track record verification, first loss subsidy, and TA to borrowers. Credit guarantees may then be allocated to banks directly or through ACP guarantee 47 Its revised version adds that the IF “shall ... seek to channel funds through ACP national and regional institutions and programmes that promote the development of small- and medium-sized enterprises (SMEs)”. Enhancing SME financing in ACP countries 35
8 Possible investment facility (if) alternatives and roadmap for sme support institutions, and jointly with IF’s credit lines or independently, i.e.: • For the above incentive to boost IF’s financing, credit guarantees should focus on the same SMEs that receive IF’s credit lines. Conversely, guarantees are less useful in the absence of donor credit lines since most ACP banks have limited long-term resources available 48 , even when they are liquid. • Channelling guarantees through ACP guarantee institutions (when reliable) would allow the IF to benefit from their multiplier effect. It further allows for closer monitoring and institutional development impact. • Hence, IF’s SME guarantees would ideally be dovetailed to its credit lines (i.e. risk-sharing) and channelled through local guarantee funds when they are reliable. Their design should then be streamlined to favour delegation and portfolio monitoring rather than multiple ex-ante individual approvals (i.e. by the EIB, the bank and the fund). The EIB has given much thought to the recognised need for credit guarantees and intends to issue a carefully designed new product shortly. Meanwhile broad alternatives are sketched below. They are more attractive when combined. Option Features Pros Cons Statu quo Guarantee to capital 1:1 gearing High guarantee price No intermediary interest EU guarantee funding Mixed credit/ guarantee lines Guarantees through ACP funds Capital grant for backing IF’s SME guarantees IF’s SME credit lines to include portfolio guarantee component IF’s portfolio guarantees passed on through ACP guarantee funds IF guarantee capacity Low guarantee price High efficiency/ focus Helps expand IF credit Low guarantee price Easy risk monitoring Monitoring load Opportunity cost of grant Monitoring load Subsidy needs Appraisal/ coordination load Possible waste/ dispersion 8.3. Technical Assistance The EU could fund effective technical assistance (TA) to SMEs lacking access to financing from IF intermediaries. Provision of TA to SMEs is one of the top priorities adopted by stakeholders at the High-Level Meetings and confirmed throughout the country visits. Many otherwise creditworthy SMEs present specific management shortcomings that deter their financing and may be corrected by appropriate TA. Although such SMEs might have other, less critical needs (e.g., marketing and production) TA should then focus on their financing needs, starting with the prevalent need for credit. Appropriate TA would help SMEs to prepare sound investments and thereby facilitate credit appraisal by banks. This would help upgrade accounting and financial control, and thereby facilitate credit monitoring. TA could cater by priority for those SMEs financed by IF intermediaries, or likely to be financed by them, in order to allow for broader SME financing by the IF. The management of TA allocations to SMEs should be consistent with this focus on financing and with the need for ownership by stakeholders. Of course, a bank could not fairly extend both credit and advice at a fee on what to do to get it. The above focus implies, however, that ACP banking associations should preferably be participating in the TA management. Moreover, ownership requires the involvement of the existing SME associations when they are independent and representative. The EU’s oversight, either directly or preferably through the EIB, is also needed for ensuring continuous TA funding. Depending on the country, the TA management unit should thus report to the SME association, the banking association, the EIB, or ideally some combination of these. Financiers and SME representatives are unanimous in their advice against the involvement of the Government, based on past experience of biased assistance allocations. Besides, Government involvement would not generally add to the desired ownership and financing focus. 48 Particularly due to public sector borrowing and banking regulations (e.g.: WAEMU) 36 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 and 32: 7 Recommendations 30 Enhancing SME
Page 33 and 34: 7 Recommendations 7.3. Recommendati
Page 35: 8 Possible investment facility (if)
Page 39 and 40: 8 Possible investment facility (if)
Page 41: Towards a private sector enabling e

Enhancing smE financing in acp countries - ACP Business Climate

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?