AfDB-EMRC SME Forum Session 5 Robert Zegers


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AfDB-EMRC SME Forum Session 5 Robert Zegers

  1. 1. Bridging The MissingMiddle Gap in AfricaRole and Activities of the AfDB& its Partners African Development BankRobert ZegersSME FinanceLisbon – June 6 – 7
  2. 2. SME Missing Middle AGENDA: •Conceptual framework •Financial intermediation • Bankers perspective • AfDB Finance and TA • “Entrepreneurial ecosystem” approaches • Upscaling SME financing •Potential for value chains & clusters •Conclusions
  3. 3. SME Missing Middle AGENDA: •Conceptual framework
  4. 4. Small and Medium SizedEnterprises SMEs in the Developing World Key Characteristics of African SME‟s: •Contribution to job creation is highest among formal sector enterprises. •Typically have weak balance sheets and use retained earnings to grow. •Lack skills and access to professional services. •Fall between micro-finance and corporate lending.
  5. 5. SMEs are heterogeneous Size Requirements • Large numbers, very small, often informal, little or no collateral, highly Lower End vulnerable, access to short term financing through MFIs most pressing need. • „Life-style‟ businesses, family owned, stable without growth, more Middle often formalised, often banked, but little or only short term credit available. • Growth-oriented and sometimes export oriented enterprises, which Upper End need working capital and investment financing and more advanced business development services.One-size doesn‟t fit all – Risk of over-simplification
  6. 6. SME entrepreneur perspective Infrastructure FinanceLaw enforcement Regulations, Entrepreneur Licenses, Taxes Market information Suppliers, & access Customer, employees Management capacity
  7. 7. A global perspective public private Central Regulatory bank Credit Increased reform support bureaus FI capacity Taxation Credit guarantees Cross BD services & Reposs- border SME incubation ession law trade Infrastructure Representative 1-stop- Contract Affordable associations shops enforcement capital Registering propertyIntegrated interventions necessary for good results
  8. 8. AfDB’s operational approachThree complementary axes: Research, Country and regional • Identifying investment and teams competitiveness obstacles • Improving the business climate • Demonstrating the African investment Research & potential strategy A collaboration between the operational units in the Bank Governance & public sector Catalytic operations transactions Public sector Private sector operations operations 8
  9. 9. There are two broad approaches forassisting SME targeted operations Two SME Assistance Strategies Business Chain Mega Linkages Large Advisory Small & Medium Via Financial Intermediaries Micro
  10. 10. SME Missing Middle Agenda: •Financial intermediation • Bankers perspectives
  11. 11. A bankers’ perspective Risk / Trade-offs traditional SME Financing is balancing risk / Earnings Reward / banking reward / cost Cost SME desks No SME Lending: High High interest Alternative income from rates revenue, Automated credit scoring Gov. bonds low risk & effort Variety of standardised products SME lending with limited High Streamlined credit approval sales / High interest revenue, risk assessment bank competition, rates high risk, information & collateral Outreach / numbers / backoffice high effort Smart portfolio management Link to TA
  12. 12. Bankers perspective• Providing funds to SMEs with low return expectations appears wasteful, yet interest rates must be affordable for the SME to ensure ability to repay.• SME Finance needs to be coupled with technical assistance to SMEs, otherwise failure rates, higher NPLs• Traditional banks and DFIs are often not equipped to service this market segment as their lending and risk assessment criteria need to be turned upside down: Bank No Business plan / collateral = No Loan SME Finance No Business plan = “Let’s help you develop one” No collateral: let’s look at the entrepreneur and business
  13. 13. SME Missing Middle Agenda: •Financial intermediation • AfDB Finance and TA
  14. 14. AfDB financial intermediation approach• AfDB relies on partnering with intermediaries• Focus on up-scaling intermediaries DFIs, MFIs Comm. Banks PE Funds Intermediaries AfDB Instruments Equity Lines of credit Guarantees
  15. 15. AfDB Financial Institutions Dept.s• As at December 31st 2010 (since 2005): • Total active FI portfolio: 61 projects • Total approved amount: UA 2 billion. • UA 1.3 billion disbursed• During 2010 year: • 8 projects approved • Total amount: UA 407 million.• 2011 expected approvals of up to UA 1 billion 15
  16. 16. Technical Assistance + Financing Provision of Recipients Beneficiaries Finance LOCs Banks Equity NBFIs SMEs Seed Capital Equity Funds Guarantees Reg. DFIs Technical Assistance Provision
  17. 17. Supporting DFIsSupporting DFIs to reach SMEs, e.g. :•DBSA•BOAD•BDEAC•BRD Rwanda•Shelter Afrique•LBDI Liberia•ATI•… 17
  18. 18. Subregional DFIs such as BOAD:Development partners Banque Ouest Africaine de Développement (BOAD) Togo (West Africa) AfDB equity AfDB loan AfDB roles Board member Technical assistance Local currency Benefits SMEs Institutional reforms
  19. 19. Supporting FIs with LoCs, sub-debt, guarantees, equity, TA•IDC •Mauritania Leasing•Guarantee Trust Bank Nigeria •BCI Mauritania•Afrexim Bank •CRDB, Tanzania•Zenith Bank, Nigeria •CAL Bank, Ghana•UBA, Nigeria •Zanaco, Zambia•Barclays Bank •Investrust Zambia•PTA Bank •STB, Tunisia•Prudential Bank •Nedbank •…… 19
  20. 20. The classic SME instrument is a LOCthrough a local commercial bank CAL Bank Ghana AfDB loan USD 25 mn AfDB roles Technical assistance Benefits: SMEs Balance sheet support
  21. 21. Capital participation to promote housingand SME jobs Housing finance  Equity participation  Grants  LoC  Advantages: ◦ Promoting the construction of ◦ Job creation
  22. 22. Supporting Specialised Agencies Supporting specialised agencies to reach SMEs, e.g. : •Africa Re (re-insurance) •Mauretania Leasing •IFHA (health) •ACSP SME/Power regional •ICF (enabling environment) •… 22
  23. 23. Leasing programme in Mauritania:Mauritania Leasing (ML)  Mauritania  USD 5 mn LOC  The only leasing company in Mauritania  SMEs are the main market for ML in the agro business sector, tourism, construction, public works and transportation.  Benefits  Strengthen local financial markets  Finances 60 additional SMEs 23
  24. 24. Supporting SME PE FundsEquity, mezzanine or debt finance for SMEs:•GroFin•AfricInvest II•Aureos Africa Fund (AAF) - agribusiness focus•Maghreb Fund II and III (Tuninvest – Africinvest)•.. 24
  25. 25. SME Missing Middle Agenda: •Financial intermediation • “Entrepreneurial ecosystem” approaches
  26. 26. The entrepreneurship ecosystem
  27. 27. The Entrepreneurship Ecosystem 1. Raise Awareness To Finance 1. Enhance Access 3. Support2. Reinforce Business AfDB EntrepreneurshipSupport Provision Development 4. Enabling Environment 27
  28. 28. A programmatic perspectiveGOWE, Franchising, Ghana Export SMEs, Zambia SMEs, MalawiSME programme, Tunisia SME programme, … Enabling environment: Beneficiaries: Financial Instruments ASSOCIATIONS BUSINESS AfDB MEs Commercial Lines Of Credit banks SEs Guarantee ILO WEDGE PROGRAM Financial Flows Technical Service provision Donors Assistance 28
  29. 29. The Role of TA in AfDB investments for SMEs Reinforce the SME banking technical capacities of the partner Financial Institutions FIs and AfDB and accelerates Mitigate the risk for the Reinforce the technical & institutional capacity of Bus. development Associations and Chambers of Commerce as representatives and custodians of SMEs needs Provide management skills & training to BDS providers to build SME capacity and monitor their performance Assess and address specific local constraints (credit information, collateral, etc.)
  30. 30. Experience suggests a few “key success factors”using intermediaries 1. Select the right Financial Intermediary: Clear commitment to SME support Adequate FI tools / systems to address SME needs 2. Select the right technical assistance partner: Proven track record with SMEs and/or with banks/FIs Clear commitment to SME support 3. Consistent monitoring: Clear objectives, periodic monitoring of progress and adjustments 4. Accountability and communication between partners: BDS service providers payable on measurable achievements, cost sharing with SMEs; direct links with and referrals through FIs. In general: capacity first, then adequate systems for payments, referrals, BDS quality and sustainability
  31. 31. TA PartnersWork with „best practice‟ partners, e.g.:•ILO•ITC•AMSCO (project management)•Specialized consultants•Others: incubators, etc.•Donors (FAPA etc.) 31
  32. 32. Embedded TA models: SME PE Funds SME fund manager SMEs AfDB SMEs SMEs SMEs Embedded TA
  33. 33. Sometimes stand-alone capacity building for theprivate sector as a „public good‟ Regional Franchising Programme - AWIB BUILD LEGAL AND REGULATORY FRAMEWORK (e.g. IP protection, franchise contract enforcement) CAPACITY BUILDING CAPACITY BUILDING OF BDS PROVIDERS OF FRANCHISE ADB TO SUPPORT ASSOCIATIONS (ASPIRING) FRANCHISORS AWARENESS RAISING / KNOWLEDGE TRANSFER FINANCIAL INSTITUTIONS AND OTHER STAKEHOLDERS * business format franchising
  34. 34. SME Missing Middle Agenda: •Financial intermediation • Upscaling SME financing
  35. 35. Upscaling (M)SME financing
  36. 36. Upscaling liquidity & TA for smaller FIs • Banks have the infrastructure to provide loans • medium / long term liquidity • Develop local SME lending capacity through best practice TA providers • Create DFI/IFI partnerships and delivery mechanisms for efficiency and scale partnershipsInt. & Bilateral DFI partners Banks / NBFIs LoCs & TA AfDB TA
  37. 37. Upscaling SME Financial Instruments • Provide debt and/or equity financing to support intermediaries • „Roll out‟ products across the region through existing and greenfield FIs: (Reverse) Factoring, (Quasi)-Equity, Trade Finance, Leasing, Insurance, etc. • Provide technical assistance support to intermediaries partnershipsInt. & Bilateral DFI partners Intermediaries Instruments AfDB TA
  38. 38. SME Missing Middle Agenda: •Potential for value chains & clusters
  39. 39. A 2nd SME support approach: Like a whale, largeprojects can support entire business “eco-system” Business Eco-System Large Project
  40. 40. Large projects provide the businessopportunity for MSME development Business Chain Linkages Core Project Direct MSMEs MSME Modalities Indirect MSMEs •Technical partners •Joint contributions •ADB - grants or pricing “rebates”
  41. 41. SME and local economy linkages around largeinvestment, sector projects, clusters Supply chain US suppliers Upstream Downstream linkages linkages Project / Sponsor retail Jo’burg suppliers Community building or indirect LEL SME linkage Local Economic linkages (LEL)
  42. 42. A service company can spin-off manySME opportunities Kempinski Hotel Ghana Partners African Dev. Zakhem construction GCC resorts ADB roles Lender to hotel Contribution to fund Benefits MSMEs
  43. 43. Potential for value chain linkagesDakar Container Terminal ETAP Gas production Tunisia OLEA Capital – Enfidha A’port Tunisia Agro Industry Morocco
  44. 44. In summary…There are two broad operational approaches forassisting MSME development.The AfDB is building significant support in the financialsector through intermediaries to reach SMEs.Entrepreneurial ecosystem approaches, if done well,can address various constraints and build local marketsupport for SMEsLarge projects provide a very promising businessopportunity for commercially sustainable MSMEdevelopment in Africa.Partnerships with International DFIs / IFIs and with variousother partners are necessary to scale up and succeed AfDB