Enhancing smE financing in acp countries - ACP Business Climate

SUMMARY
This study aims to explore ways of improving the financing
of SMEs as well as small States in the ACP regions, particularly
with regard to their access to the Investment Facility (IF) run
by the EIB and through the possible devolution of the IF to
regional financial bodies. The report presents the findings
and recommendations drawn from two technical studies,
two High-Level Meetings of stakeholders, four country visits
and related desk work and exchanges with the EIB. The
Report proceeds from the SME status and financing gap to
the major financing constraints, the best remedies and the
specific implications for the IF as well as the EU.
Bank reluctance to lend to SMEs appears to be a major
constraint, though to a lesser degree in some Caribbean
countries than in Sub-Saharan Africa. Credit risk in the SME
sector is high, and coupled with weak collateral capacity, leads
to low motivation to serve SMEs and/or to high provisioning
requirements for banks in addition to costly processing
of small loans for SMEs. Risk mitigation under guarantee
schemes is one of the main remedies to this situation, and
needs to be developed to a greater extent. Other financial
instruments such as leasing and equity funds need support,
and local currency financing is needed to a greater extent.
With few exceptions however, equity investment funds tend
to concentrate on larger and safer enterprises.
In all ACP regions, SMEs face huge capacity constraints
related mainly, but not only, to their management and ability
to present bankable dossiers and service loans regularly.
Major opportunities to increase SME demand do exist, but
need to be supported by grant funding, of which EIB has
very little. This is a field where potential EC grant funding
support, blended with EIB/IF financing, must be developed.
EIB/IF has not fully developed its guarantee instrument -
guarantees offered have had a very low take-up rate. New
solutions are required, bearing in mind that the main bank
portfolio guarantee lines from other sources that have worked
in Sub-Saharan Africa were partly subsidised schemes. This
again points to a further need for blending EC concessional
or grant funding with EIB/IF instruments.
Similarly, local currency financing by the IF needs to be
expanded, as SMEs cannot withstand the foreign exchange
risk prevailing in many countries. Interest subsidies under
Cotonou are also not aimed at bank lending to SMEs,
although they contribute higher employment.
The Recommendations resulting from this study contains
various proposed steps to be taken according to the
responsible party, i.e.:
• Recommendations to the ACP countries, relating to the
business environment and the financial infrastructure
(e.g. credit bureaus and collateral realisation);
• Recommendations to the EIB and the European Union
(EU), relating to a larger allocation of grant funding for
SME access to finance, both for capacity building and for
the creation of new instruments calling for blending of
grant resources with commercial finance;
• Recommendations to the EIB, relating to the size of SMEs
targeted, and the development of several instruments,
including guarantees;
• Recommendations to the EU Member States controlling
the IF in terms of IF priorities and possibly the IF
sustainability requirement.
The implications for the EIB-managed IF are numerous.
First, the governance of EIB’s ACP activities coupled with its
extremely limited human resources dedicated to the ACPs
remains an obstacle to the smaller and riskier operations.
Sub-contracting additional expertise in the SME sector could
alleviate this constraint, including in terms of field presence.
The SME segment reached is, under many operations, the
higher end of the SME spectrum, except under microfinance
operations. EIB/IF may need to provide lines of credit
contractually dedicated to the so-called “Missing Middle”
(smaller SMEs), and controlled in terms of the size of SMEs
reached. Equity investment funds, with a few exceptions, are
also aimed at larger enterprises, and novel approaches with
different risk tolerances and profitability requirements are
needed.
Enhancing SME financing in ACP countries
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