AfDB - EMRC SME Forum - Lisbon, June 2011 Bridging the Missing Middle Gap in Africa Plenary Session 8: International partnerships to facilitate SME growth ARIZ AFD’s CREDIT GUARANTEE SCHEME on SME market Nicolas Hertkorn– Senior Investment Officer, firstname.lastname@example.org Agence Française de Développement,Disclaimer : this overview is for discussion purpose only. 06-07 June 2011 1
Presentation of ARIZ guarantee scheme1 – AFD group overview2 – Approaches on guarantee schemes for SME banking3 – ARIZ guarantee scheme 2
1 – AFD Group overview AFD : French Operator for Bilateral Overseas Development Assistance Created in 1941 AAA rated State Owned Financial Institution (under French banking regulation) Large network in 60+ Countries € 7 Billion new commitments in 2010 Wide Range of Financing Tools and clients Non sovereign loans to the private and public sectors (concessional or market conditions) Sovereign loans (from very concessional to market conditions) Equity financing Guarantees on loans in EUR, USD and local currencies (“ARIZ”) Grants (for study funds, technical assistance and projects) 3
Countries of operation & mandates – Africa, Mediterranean countries, SE Asia, Caribbean – Strong focus on Africa – Rapid geographical expansion since 2005: India, China, Thailand, Philippines, Brazil, Mexico, Columbia… Poverty Global Public National alleviation Goods solidarity Green & inclusive growth 4
2. To fight exclusion: Building Bridges between SMEs and financial institutionsAFD’s programms on bridging the gap of the « missing middle finance » Domesticby providing : and International LARGE Commercial 1. support to local initiatives CORPORATIONS Banks aimed at strengthening SMEs SMALL and MEDIUM 2. technical and financial ENTERPRISES Frequently unaddressed Market assistance to up-scaling MFI’s by Commercial Banks MICRO-to-SMALL ENTREPRISES 3. a risk-sharing tool to commercial banks : MICRO- ARIZ guarantee scheme ENTERPRISES MFIs 5
Lessons learned shared at the IFC… Each Bank builds it’s own experience on SME market, on it’s own way … …but all state that it needs a step by step learning approach, requiring to invest among several years before measuring risk and profitability… ….and all banks need to invest in particular on : Client approach : defining the targeted market, knowing the customers and building an accurate segmentation, offering tailored products that fit to each segment; Risk assessment with new decision making processes : replacing case by case credit analysis based on financial statements, with a statistic approach using credit scoring tools and simple but accurate financial and non financial information; Cost management and profitability : new processes and risk management are volume driven, closer to retail banking than corporate banking. There is a need to invest on standardized & simple processes, which efficiency is linked to a significant increase of SME loan portfolio. Banks need an appropriate environment : global governance (justice, financial statements&auditors), adapted bank regulation (risk weight on assets), fiscal issues, guarantee scheme 6
Different appoaches on a guarantee scheme for SME banking1. Partial credit guarantee as a tool for policy makers (government, donors) to support a lending activity with specific targets - sector oriented : agriculture, reniewable energies - post conflict economies - economic crises (countercyclic) Specific approaches (risk concentration) Expected losses are high (higher than a profitable bank lending activity would allow) Guarantee as a public subsidy : The guarantee is used as a tool to secure loans that would not be granted by bank without guarantee because of high risk, or unknown risk, or weak collaterals. Guarantor’s conditions : interest rates, maturity, collaterals 7
Different appoaches on a guarantee scheme for SME banking2. Guarantee scheme as an institutional approach for the SME banking market : - Lending segmentation approach : Guarantee scheme is implanted on a full segment of lending activity, all loans (partially) covered : risk dispersion, statistical risk approach - Institutional stability : Guarantee scheme is designed for long term use on SME market - Attractive product : easy to use (industrial process ) and cost effective (i.e. also low cost of risk for the scheme)Guarantee scheme must thus fit following requirements : - Simple but effective design: rules fitting to bank credit process (automatic cover, quick indemnty process) - Partial risk sharing: neither substitution to bank’s risk, nor incentive to weaker risk assessment - Profitability of banks loan portfolio: the guarantee scheme should aim both at mitigating credit risk (by sharing losses), and decreasing the risk weighting of assets for the capital adequacy ratio (Basel 1 or 2 on credit risk) - Sustainability of the scheme : volume driven activity, wide risk dispersion, reasonable management costs With this approach : - the guarantor avoids constraining banks with impacts on credit rates, maturity, decrease of collaterals, or more risk acceptance - expected losses are the same (or close) to the bank’s (market conditions) For banks starting an SME activity, guarantee scheme can be offered with other incentives as credit lines and technical assistance. The guarantee scheme then becomes one of the bank’s tools of an SME market approach, to be combined with : *development of new products (for example combined product to SMEs : term loan, overdraft, credit card, non financial services). * development of new risk analysis and decision methods (statistic approach with credit scoring tools, criteria based both on financial information and qualitative appreciation of the client such as history of the SME). 8
Risk-related barriers are the primary difficulty banks face in lending to SMEs (source Dalberg 2011) “Most important” reasons limiting bank lending to SMEs (# out of 33 respondents from 26 banks, asked to select up to three) 0 5 10 15 20 25 30 Difficulty in establishing credit-worthiness of SMEs 8 9 10 2 Risk Lack of effective risk sharing solutions 8 7 6 1 Limited enforcement / collection options 6 6 8 The SME market size is 11 Revenue too small /not compelling Other markets are more lucrative 1 11 Upfront SME product investment costs are prohibitive 1 11 Kenya Cost Transaction/operating Tanzania costs are too high 2 2 5 3 Ghana Taxes and regulation make some products unprofitable 2 11 South AfricaSource: Stakeholder survey results in Kenya, Tanzania, South Africa and Ghana 9 9
3 - ARIZ solutions for financial institutions: A Guarantee of a portfolio of SME loans ARIZ PORTFOLIO-Definition of a maximum amount of portfolio GUARANTEEcovering two years of new loans activity-Once the criteria and loan ranges are defined,all the loans of the banks are automaticallyincluded ARIZ INDIVIDUAL Deal by deal GUARANTEE FOR A- Credit scheme that are out of portfolio eligibility SINGLE DEALcriterias-any company and investment loan- MFIs 10
Potential Beneficiaries of the guarantee All SMEs and MFIs, All business sectors (except real estate, tobacco, alcohol, weapons…), Start-ups or development projects, Fresh loans financing medium term investments (overdrafts are excluded) Loans denominated in EUR, USD or local currency 11
How can ARIZ guarantee scheme be part of the banks SME market tools ? Portfolio guarantee : - Either on a new or on a growing loan portfolio, - Once criterias defined (i.e. segments to cover) , all matching new loans are automatically guaranteed with 50% on final loss : systematic risk share, automatic process linked to internal credit decision process - Semi annual report on guaranteed loans. Clients and loans targeted : - All sectors, all registered business, including starts ups, including individual entrepreneurs ; - term loans from 1 to 5 years on asset financing, but can include working capital linked to the investment ; - loans from 10 000 EUR to 300 000 EUR in local currency, or deal by deal approach with a guarantee up to 2 M EUR. Risk covered : - ARIZ shares final loss in any case of default. Claim procedures follows banks procedures : - claim when bank decides acceleration, - payment of 50% of indemnity immediately, - file closed (balance payment) when bank decides to write off12the loan
Africa, a priority region: an update on the impact of ARIZ SME Guarantee Fund 2010 ARIZ 2008 2009 2010 cumulated Amounts guaranteed by 25 102 150 277 ARIZFunds mobilized 50 202 310 562Total Investments 63 253 387 702Number of SMEs 73 640 936 1649 Number of jobs created or 5 222 32 307 36 796 74 325 maintained 13
Thank you for your attention ! Contact : email@example.com +33 1 53 44 40 41 14
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