AfDB-EMRC SME Forum Session 5 Robert Zegers

Bridging The Missing

Middle Gap in AfricaRole and Activities of the AfDB

& its Partners

African Development Bank

Robert Zegers

SME Finance

Lisbon – June 6 – 7

AGENDA:

•Conceptual framework

•Financial intermediation

• Bankers perspective• AfDB Finance and TA• “Entrepreneurial ecosystem” approaches• Upscaling SME financing

•Potential for value chains & clusters

•Conclusions

SME Missing Middle

AGENDA:

•Conceptual framework

SME Missing Middle

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.

Small and Medium Sized

Enterprises

SMEs are heterogeneous

One-size doesn‟t fit all – Risk of over-simplification

Size Requirements

Lower End• Large numbers, very small, often informal, little or no collateral, highly

vulnerable, access to short term financing through MFIs most pressing need.

Middle

• „Life-style‟ businesses, family owned, stable without growth, more

often formalised, often banked, but little or only short term credit available.

Upper End• Growth-oriented and sometimes export oriented enterprises, which

need working capital and investment financing and more advanced business development services.

SME entrepreneur perspective

Finance

Suppliers,

Customer,

employees

Management capacity

Market information

& access

Entrepreneur

Infrastructure

Law enforcement Regulations,

Licenses, Taxes

A global perspective

public private

Regulatory

reform

Taxation

Central

bank

support

Credit

guarantees

SME

Infrastructure

Cross

border

trade

1-stop-

shops

Credit

bureaus

Registering

property

Contract

enforcement

Reposs-

ession law

Increased

FI capacity

BD services &

incubation

Representative

associationsAffordable

capital

Integrated interventions necessary for good results

8

Research, Country

and regional

teams

Public sector

operations

Private sector

operations

Research &

strategy

Governance &

public sector

operations

Catalytic

transactions

Three complementary axes:

• Identifying investment and competitiveness obstacles

• Improving the business climate

• Demonstrating the African investment

potential

A collaboration between the operational units in the Bank

AfDB’s operational approach

There are two broad approaches for

assisting SME targeted operations

Two SME Assistance Strategies

Mega

Large

Small & Medium

Micro

Business Chain

Linkages

Via Financial

Intermediaries

Advisory

Agenda:

•Financial intermediation

• Bankers perspectives

SME Missing Middle

Trade-offs traditional

bankingEarnings

Risk /

Reward /

Cost

No SME Lending:

Alternative income from

Gov. bonds

High interest

rates

High

revenue,

low risk &

effort

SME lending with limited

bank competition,

information & collateral

High interest

rates

High

revenue,

high risk,

high effort

A bankers’ perspective

SME Financing is balancing risk /

reward / cost

SME desks

Automated credit scoring

Variety of standardised products

Streamlined credit approval sales /

risk assessment

Outreach / numbers / backoffice

Smart portfolio management

Link to TA

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

Agenda:

•Financial intermediation

• AfDB Finance and TA

SME Missing Middle

AfDB financial intermediation approach

• AfDB relies on partnering with intermediaries

• Focus on up-scaling intermediaries

Intermediaries

Instruments

Equity

Lines of credit

Guarantees

DFIs, MFIs

Comm. Banks

PE Funds

AfDB

• 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

AfDB Financial Institutions Dept.s

Technical Assistance + Financing

Provision of

Finance

Banks

NBFIs

Equity Funds

Reg. DFIs

LOCs

Equity

Seed Capital

Guarantees

Recipients

SMEs

Technical Assistance Provision

Beneficiaries

17

Supporting DFIsSupporting DFIs to reach SMEs, e.g. :

•DBSA

•BOAD

•BDEAC

•BRD Rwanda

•Shelter Afrique

•LBDI Liberia

•ATI

•…

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

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Supporting FIs with LoCs, sub-debt, guarantees, equity, TA

•IDC

•Guarantee Trust Bank Nigeria

•Afrexim Bank

•Zenith Bank, Nigeria

•UBA, Nigeria

•Barclays Bank

•PTA Bank

•Prudential Bank

•Mauritania Leasing

•BCI Mauritania

•CRDB, Tanzania

•CAL Bank, Ghana

•Zanaco, Zambia

•Investrust Zambia

•STB, Tunisia

•Nedbank

•……

CAL Bank

Ghana

AfDB loan USD 25 mn

AfDB roles

Technical assistance

Benefits:

SMEs

Balance sheet support

The classic SME instrument is a LOC through a local commercial bank

Capital participation to promote housing and SME jobs

Housing finance

Equity participation

Grants

LoC

Advantages:

◦ Promoting the

construction of

◦ Job creation

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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)

•…

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

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Supporting SME PE Funds

Equity, mezzanine or debt finance for SMEs:

•GroFin

•AfricInvest II

•Aureos Africa Fund (AAF) - agribusiness focus

•Maghreb Fund II and III (Tuninvest – Africinvest)

•..

Agenda:

•Financial intermediation

• “Entrepreneurial ecosystem”

approaches

SME Missing Middle

The entrepreneurship ecosystem

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1. Raise Awareness

2. Reinforce Business

Support Provision

3. Support

Entrepreneurship

Development

4. Enabling Environment

AfDB

1. Enhance Access To Finance

The Entrepreneurship Ecosystem

28

BU

SIN

ES

SA

SS

OC

IAT

ION

S

Beneficiaries:

MEs

SEs

Commercial

banks

Financial

Instruments

AfDB

Lines Of Credit

Guarantee

Technical

Assistance

ILO WEDGE

PROGRAMFinancial Flows

Service provision

Donors

Enabling environment:

A programmatic perspective

GOWE, Franchising, Ghana Export SMEs, Zambia SMEs, Malawi SME programme, Tunisia SME programme, …

The Role of TA in AfDB investments for SMEs

Reinforce the SME banking technical capacities of the partner Financial Institutions

Reinforce the technical & institutional capacity of Bus. 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

Mitig

ate

the

risk

for th

e

FIs

an

d A

fDB

an

d a

ccele

rate

s

develo

pm

en

t

Assess and address specific local constraints

(credit information, collateral, etc.)

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

TA Partners

Work with „best practice‟ partners, e.g.:

•ILO

•ITC

•AMSCO (project management)

•Specialized consultants

•Others: incubators, etc.

•Donors (FAPA etc.)

Embedded TA models: SME PE Funds

SME fund

managerSMEs

Embedded

TA

AfDB SMEsSMEs

SMEs

ADB

CAPACITY BUILDING

OF BDS PROVIDERS

TO SUPPORT

(ASPIRING)

FRANCHISORS

AWARENESS RAISING /

KNOWLEDGE TRANSFER

FINANCIAL INSTITUTIONS

AND OTHER STAKEHOLDERS

CAPACITY BUILDING

OF FRANCHISE

ASSOCIATIONS

BUILD LEGAL AND REGULATORY

FRAMEWORK (e.g. IP protection,

franchise contract enforcement)

* business format franchising

Sometimes stand-alone capacity building for the private sector as a „public good‟

Regional Franchising Programme - AWIB

Agenda:

•Financial intermediation

• Upscaling SME financing

SME Missing Middle

Upscaling (M)SME financing

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 efficiencyand scale

Banks / NBFIs

LoCs & TA

Int. & Bilateral

DFI partners

pa

rtn

ers

hip

s

TA

AfDB

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

Int. & Bilateral

DFI partners

pa

rtn

ers

hip

s

Instruments

Intermediaries

TA

AfDB

Agenda:

•Potential for value chains & clusters

SME Missing Middle

A 2nd SME support approach: Like a whale, large

projects can support entire business “eco-system”

Business Eco-System

Large

Project

Large projects provide the business

opportunity for MSME development

Business Chain Linkages

Indirect MSMEs

Direct MSMEs

Core Project

MSME Modalities

•Technical partners

•Joint contributions

•ADB - grants or pricing

“rebates”

Project

/

Sponsor

US

suppliers

Jo’burg

suppliers

retail

SME and local economy linkages around large investment, sector projects, clusters

SME linkage

Local Economic

linkages (LEL)

Supply chain

Upstream

linkagesDownstream

linkages

Community building

or indirect LEL

A service company can spin-off many SME opportunities

Kempinski HotelGhana

Partners

African Dev.

Zakhem construction

GCC resorts

ADB roles

Lender to hotel

Contribution to fund

Benefits

MSMEs

Potential for value chain linkages

Dakar Container Terminal

OLEA Capital –

Agro Industry Morocco

ETAP Gas production Tunisia

Enfidha A’port Tunisia

In summary…There are two broad operational approaches for

assisting MSME development.

The AfDB is building significant support in the financial

sector through intermediaries to reach SMEs.

Entrepreneurial ecosystem approaches, if done well,

can address various constraints and build local market

support for SMEs

Large projects provide a very promising business

opportunity for commercially sustainable MSME

development in Africa.

Partnerships with International DFIs / IFIs and with various

other partners are necessary to scale up and succeed

AfDB