SME ACCESS TO FINANCEINTERNATIONAL PERSPECTIVES

Jericho

March 23rd, 2016

SMEs are the backbone of economies but face numerous challenges

• SMEs are at core of business operations of many firms

as suppliers, retailers, customers (e.g. agribusiness,

extractives, financial market, telecoms,

manufacturing)

• 7 in 10 formal jobs are provided by SMEs (9 in 10 in

some low income countries];

• 4 out of 5 new formal jobs in emerging markets

created by SMEs, young and start ups.

• 600 million new jobs are needed over the next 15 years

to absorb a growing workforce and tackle

unemployment;

• SMEs can be important channels for supporting

increased economic participation by women and youth;

• Competitive SME sectors create more diversified, agile

and resilient economies – improving productivity and

competitiveness; contributing to economic growth and

better jobs

Access to Finance &

Capital

Access to Markets &

Networks

Skill Development & Workforce Mgmt.

Technology & Infrastructure

Business environment

In 71% countries, SMEs cite* access to finance as the biggest challenge

*World Bank Enterprise Survey 2014, SME between 5-100 employees

A financing gap of up to US$ 2.6 trillion for 360-440 million MSMEs

• Overall estimated financing gap of US$

2.1 -2.6 trillion to US$ 2.6 trillion

• 45% to 55% of the 360 to 440 million

formal and informal MSME in

developing economies* are not

served or are underserved by the

formal financial sector.

(*Source: ‘IFC: Closing the credit gap for formal and informal SMEs’, IFC, 2013)

• For formal SMEs only, it represents a US$ 1.1

trillion financing gap.

• About 55% to 68% of formal SMEs in

developing countries, accounting for 13.8

million to 20.4 million firms, are

estimated to be unserved or underserved

by the financial sector.

• Another $0.5 to 0.6 trillion represents the

credit gap for the estimated 60 to 70 million

formal microenterprises in emerging

economies

Gap to current outstanding SME credit varies: Sub-Saharan Africa and MENA estimated

to require over 300 % increase compared to 8% in East Asia and 30% in East Asia, ECA to

meet financial needs

Higher financing gap for smaller firms, women, agribusiness

(Source: ITC based on World Bank Enterprise Surveys, ‘Connect, compete

and change for inclusive growth’, SME Competitiveness Outlook 2015, ITC)

• Women in emerging

markets are more likely

to cite access to finance

as a major constraint**

• Women are 15 percent

less likely than men to

have a bank account,

and significantly lag

behind men in saving

and borrowing through

formal financial

institutions

• Women-owned formal

SMEs have $260 to 320

billion in unmet

financing needs world-

wide

(**Source: IFC, Strengthening Access to Finance for

Women-Owned SMEs, 2012 and World Bank Financial

Inclusion database, quoted in ‘SME Finance, new findings,

trends, G20 / Global Partnership for financial inclusion

progress, IFC, 2013)

(**** Source: IFC, Scaling Up Access to Finance

for Agricultural SMEs: Policy Review and

Recommendations, 2011, and IFC, Innovative

Agricultural SME Finance Models, 2012)

• demand for credit by

smallholder farmers

globally estimated to

be nearly as high as

$450 billion (incl.

technology, resource

efficiency)

Main factors leading to SME access to finance challenge

Lack of regulations/

frameworks

“The collateral gap”, credit

bureau and registries

Macroeconomic

environment

information asymmetry

lack of financial capability and

access to support services

Financial institutions

SME needs understanding

Inadequate risk management

and approval processes

Documentation requirementsSME

Trends to address this challenge

The case for

holistic and

integrated

approach in the

financial ecosystem

Broadening

financial

instruments:

alternative

financing and

technology

Deepening

segmentation:

building successful

customer value

propositions

The case for holistic approach

Regulator &

financial

infrastructure

support

Financial

Institution

support

(MFI,

Banks,

Funds)

SME support

SME

improved

access to

formal

financing

• Credit information

bureau

• Insolvency and

creditor rights reform

• Secured transaction

registries for movable

properties

• Payment systems

(including electronic)

• Banking and MFI laws

• Partial credit

guarantee systems

• Leasing framework

• Factoring and

discounting of bills

receivable framework

• pre-bank financing

infrastructure for

early stage finance to

survive the “valley of

death”

• Ease of doing

business (registration,

licensing)

• Trade & supply chain

finance

• Risk management,

corporate

governance, E&S

standards advisory

• Segmentation and

product bundling

(e.g. women,

sustainable energy

finance, agri-finance)

• Digital finance

• Capital market

instruments

• Human capital

development (e.g. FI

academy, or

wholesale sector

academy)

• Corporate governance assessments (incl. for equity)

• Skills, knowledge, networks, standards adoption

• financial capabilities, awareness raising on

broad spectrum of financial instruments,

• non-financial services for FI clients,

• retailer and supplier development in

corporate value chains

• Technology upgrade (e.g. POS)

The need for holistic approach: example of MSME facility MENA

Results (since inception FY12-15)

• 2.56 million loans to MSMEs (US$ 2.89

billion)

• 4,454 deposit accounts opened

Through

• 4 new regulations enacted

• 73 entities received Advisory

• 1,181 MSMEs received capacity building

• US$ 450 million leverage & scale up of

Arab funds

• US$ 2.1 billion leveraged in IFC & IBRD

credit lines

Regional World Bank Group facility to

increase MSME access to finance in

Tunisia, Morocco, Egypt, Lebanon,

Jordan, West Bank and Gaza by

addressing the demand and supply side

constraints

The case for holistic approach: Morocco example

Source: ’Supporting access to MSMEs: the Moroccan experience’, World Bank(2013)

SME access

to finance

Best performing and most inclusive financial sector in MSME Facility

Highest share of SME loan in total to SME loans in MENA

Highest rate of microfinance access in MENA (83% of total MFIs in MENA)

Leasing and factoring among the most developed in MENA

Financial infrastructure• Fiscal, regulatory reforms (secured lending, credit

bureau etc.)

• SME strategy w. uniformed definition

• National Agency for SME Promotion w. BDS

• Guarantee fund reform w. revamped process and

products to better match SME life cycle (e.g.

Damane Express for small business)

• Postal bank w. credit for MSMEs in underserved

areas

• Ecosystem mapping VC and private equity

Financial institutions• Microfinance Fund considering sustainable energy

finance, Strengthening core MFIs

• Banque Centrale Populaire for very small business

SME support

• CG Moroccan Institute of Directors

The need for holistic and integrated approach:

The Textile Value Chain Partnership example - Bangladesh

Yarn Knitting Fabric Dyeing Cutting & Making

Spinning WeavingWashing

Finishing

Export

Cotton

• 1700 units • employing 200,000 workers• Growing at 10% per year• Net value addition 12-20%

Cut

Make

Trim

• ~3500 units • employing 4,000,000 workers• Growing at average 16% per year

since 2010

Partnership for

Cleaner textile

(PaCT)

Bangladesh

Textile

Competitiveness

Points for considerationExample of SME access to alternative

finance facilitated through an

integrated multi-stakeholder sector

approach, in a strategic sector for jobs

and growth

Bangladesh Partnership for Cleaner Textile (PaCT)

CHALLENGES

• Groundwater extraction• Surface water pollution• Groundwater depletion

200 global textile firms, IFC,

Solidaridad, local factories, the

Bangladesh Garment

Manufacturers and Exporters

Association

APPROACH

BRAND ENGAGEMENT

De-risking the supply chain by helping brands

adopt environmental sustainable buying

practices (Capacity building of brand staff,

decision support guidance)

SUPPORTS FACTORIES IMPROVE

THEIR RESOURCE EFFICIENCY AND

WATER FOOTPRINT. Awareness Raising,

Basic and in- depth Cleaner Production,

Water Footprints, Textile Technology

Business Center

FACILITATING INVESTMENT IN

RESOURCE EFFICIENT TECHNOLOGIES

Partnering with local banks and financial

institutions to develop dedicated financial

credit lines of USD 500 million to stimulate

investment

CREATING AN ENABLING

ENVIRONMENT. National & Cluster level

Stakeholder engagement, Cluster water

footprints, innovative private sector led

solutions

RESULTS

• 28.4 million $ investment

• 7.6 million $/ year factory

savings

• 13.4 million m3/ an water

savings

• 1.1 million Mwh/ year energy

savings

• 169,000 tonnes CO2 eq/ year

• 10.6 million m3/ year waste

water avoided

SME factory support• IFC direct investments• GTSF onboarding • Thematic E&S workshops & expo

(e.g. building & fire safety issues, trade linkages at expo; improved labor standards, workers safety & improved productivity)

Support to FIs

• develop remediation financing for RMG factories• Brand engagement• GTSF roll-out (incl.

Levi’s tiering pricing )• credit facility for

structural, electrical and fire safety remediation through 4 banks

• Environmental & Social risk management capacity building withCentral Bank Bangladesh Bank • ESRM training and risk

scoring tool • Pipeline development

Bangladesh Textile Competitiveness

CHALLENGES: strengthen sustainability of RMG factories at the sector level

• Perceived declining attractiveness (unsafe, non-compliant, polluting)

• Lack of access to finance to implement remediation

Support to regulators • study on safety remediation

financing for the RMG sector

to inform policy and identify

opportunities for additional

investments

• Standard for building and fire

safety inspections and issuing

construction permits

• New labor law (Better Work)

• Buyers Forum (30+ brands,

regulators dialogue, design

coordination)

Results

Textile buyer

outstanding balance:

US$ 55million ST

credit

IFC direct investment

in 2 RMG suppliers

($6.25 million in

Ananta Apparels

Limited and DBL

$10.50 million in DBL

Color City)

Trends to address this challenge

The case for

holistic and

integrated

approach in the

financial ecosystem

Broadening

financial

instruments:

alternative

financing and

technology

Deepening

segmentation:

building successful

customer value

propositions

Broadening financial instruments: alternative financing

(Source: ITC based on World Bank Enterprise Surveys, ‘Connect, compete and change for inclusive growth’,

SME Competitiveness Outlook 2015, ITC)

In particular

early stage and

seed finance

Asset

based

lending,

leasing

and value

chain

financing

Angels can play a critical role to finance high growth early stage ventures

• Recent trend in emerging markets with an increasing number of high-net worth individuals, often with large business experience, willing to invest their time and, with money (including Diaspora), when VC increasingly focused on later stage investment.

• High risk, strengthens the balance sheet of the MSMEs, eases working capital requirements and enables additional leveraging of capital.

• Typical ticket range: US$ 20,000 -500,000.

• To be considered: policy framework for investment, awareness of SMEs (still very new)

India - early stage debt financing (including

angel and early stage venture debt) and risk capital

financing to high growth MSMEs. A World Bank-

Small Industries Development Bank India 163 US$

million project (since Feb 2015)

Lebanon - early stage equity financingA World Bank – Kafalat facility, 2.5 US$ million for

SME to develop their concept and 25 US$ million for

investment (since 2013). Complemented by another

project to strengthen the early stage ecosystem by

scaling best practice incubators/ accelerators.

VC4Africa – online platform for catalyzing

start up funding through community networks of

17,000 members in 200 countries. Considered the

largest community of VC, Angels and entrepreneurs

to build early stage business in Africa. Started as a

LinkedIn Group in 2008. 27 US$ million raised since

inception in web, health, education, renewable

energy, agri businesses

Supplier leasing – Example Agri Cooperatives Cote d’Ivoire

• Asset-based finance for the lease of trucks in the value chain of Cargill, one of the largest producer of cocoa globally leveraging innovative assessment tool and tailored support program

• Aggregated fragmented farmers through 300 cocoa cooperatives (start organizations separate from agent/ aggregators)

• Segmented and Scored: Screened and segmented suppliers, providing a score on a 0-5 scale leveraging unique quantitative assessment tool, co-developed by IFC with Scope Insight, to assess the level of business management professionalism of cooperatives across 8 performance dimensions (external risks, enablers, supply, market, operations, financial management, sustainability, internal management)

• Targeted skill development program in the Coop Academy towards most critical needs of cooperatives.

• 43 obtained a commercial mid-term (3 yrs) loan for the lease of 78 new trucks for cocoa bean transportation, provided by IFC client Ivorian Bank SIB and backed by Cargill at lower interest rates than currently available.

Points for consideration

• Diagnostic of strategic value chains

• Aggregation reduces risks and costs-

to-serve. Partnership and

collaboration essential. (e.g. Olive

Oil experience)

• Could be replicated to other sectors

Warehouse financing (WHR) example

(Source: IFC Global Warehouse Finance Program)

• Advice to local banks how to value the commodities and structure financing.

• Regulatory support, review WHR financing (licensing systems, inspection systems, market

information systems, and auction market systems).

• Credit line to Banks or risk-sharing facility

Without warehouse receipt finance,

many traders would not have the

collateral to meet banks’

requirements.” Richard Wangwe, Head

of Agriculture at Stanbic Uganda

ST finance secured by the commodities

deposited in warehouse (approved by the

lender or at the lender, controlled by an

independent third party), through use of the

warehouse receipt (WHR). It allows farmers,

small traders to ease refinancing for the goods

in storage and banks to reduce risk.

In Ethiopia, electronic

warehouse receipts,

commercial banks linked to

commodity exchange for

increased transparency

In Kazakhstan, govt licensed

warehouses, warehouse

receipts by ministry of

agriculture, monthly

inspections

In Malawi, collateral

management agreement

(CMA): contractual

relationship between

depositors, storage

operators, financial

institutions, and ACE (no

regulatory framework)

The Fintech paradigm shift

Source: ‘the future of Fintech: a paradigm shift in small business finance’, World

Economic Forum, Oct 2015

• Innovative credit

scoring models

• Extend volumes to

different risk class

• Speed, costs,

convenience

Enabling factors: awareness, infrastructure, regulation

• Purchase order

finance

• Reverse factoring

• Receivable

finance/ factoring

Example: online invoice finance

Footer

Allow small businesses to monetize outstanding

receivables quickly and easily, connect their

accounting system to the invoice finance platform.

From then onward, SMEs can apply for a loan

based on the value of individual receivables.

Since the application is processed mostly

automatically, payment can be received almost

instantly.

Risk models also take into account the frequency

with which a business uses the platform and the

reliability of its payments. Over time, and after

several flawless repayments, SMEs are able to

borrow at a decreasingly lower discount.

Similar to unsecured marketplace lenders, invoice

finance platforms themselves typically do not

grant loans from their own balance sheet, but

have third-party funds which they allocate.

Reduces information

asymmetry, strengthen

education

e.g. Marketinvoice,

Finexkap, TREFI

Trends to address this challenge

The case for

holistic and

integrated

approach in the

financial ecosystem

Broadening

financial

instruments:

alternative

financing and

technology

Deepening

segmentation:

building successful

customer value

propositions

Deepening segmentation: customer value proposition Rawbank

Raymond Loambo, Commercial Banking Manager

and Project Lead

“Our objective is to attract

potential customers who work

mostly in the informal economy.

Once they start to work with the

bank, they gradually put their

business on a formal footing, which

then enables us to support

them more effectively with

products tailored to their

commercial development projects.”

RawBank DRC small business formalization

• Identified as a promising segment in a

country with 5% banking penetration and 96%

of business informal.

• Tailored financial (account, loan) and non-

financial services (legal support, seminars,

one to one meetings)

• Revised credit analysis, 14 youth agents on-

boarded w. Frankfurt School of Management

• Promising results:

• Increased demand for financial products

from the « informal » segment (23

millions USD credit, i.e. 55% of total

MSME credit)

• Controlled NPLs to 2% (before: 15%)

• +22.4% deposits, +12.6% loans (in 1

year), 30% conversion rate

“I used to do my business banking with another

bank, I had a distorted view of RawBank; it was

too exclusive, not for me. But now, I can see

that it is a bank that is close to its customers,

that it encourages small businesses, and that it

is a good bank to have a relationship with.”

Madison, electrical shop owner

(Source: RawBank Annual report 2014, enterprise development manager)

Example : women in business added value proposition

Source: ‘Women's’ insurance market represents trillion dollar opportunity’, IFC, Axa

Group, Accenture (2015)

• From a market of nearly $800 billion in 2013, the women’s insurance market globally is expected to represent between $1.45 and $1.7 trillion by 2030

• only 31 percent of women entrepreneurs surveyed held protection- or savings-oriented life insurance

• five to six tipping points during a woman’s life at which she makes a significant amount of her insurance related decisions: marriage, entering the workforce, buying a house/car, having children, divorce/widowhood, and retirement

• One-third of the world’s entrepreneurs are women who want to grow their business and take more calculated risks, but who face a glaring gender gap and access to finance. By helping them manage the risks, insurance increases women’s ability to access credit and helps them to make this leap.

Kashf Foundation, Pakistan Ibtida-

e-Karobar Karza- credit life

insurance protection for microcredit

loans to new women entrepreneurs

Intesa San Paolo “Business Gemma”

• business interruption and personal

protection for women entrepreneurs

• Maternity, serious health issue and

assistance at difficult times, e,g. disability

in the case of widowhood.

• Deferral of loan payments by up to 12

months if maternity leave or serious

illness within the family.

• AIFIN-Cerchio d’Oro award for financial

innovation in 2011 and the MF

Innovation Award in 2012.

Example: Women traders needed savings, not another branch

• IFC client Tier 2 bank accounting with another 5

for 63% of all assets of the banking sector in

Nigeria. Launched successful bundle for women,

for SMEs

• Tapped profitably into the women traders

segment by providing what they asked for, a

convenient, affordable, secure, confidential and

flexible mobile savings and borrowing product

increasing their comfort with banks, and

introducing incentives and rewards playing on

the winning oriented mindset.

• BETA customers are using their account

regularly: 74 percent of customers transact more

than once a month, saving an aggregate $1.5

million (US) in deposits in the first six months

from the pilot launch. Ca 39,000 accounts

opened in 6 months.

• Developed with the Women’s World Banking

Mobile BETA savings, Diamond Bank Nigeria

Support to regulators and financial infrastructure:

Reforming insolvency and creditor rights to build confidence

• Starts w. corporate law explicit about liquidation

• Way to improve the financial system’s effectiveness for SMEs, including through reform of the discharge of personal debt (SME Finance Sub-Group of the G20)

• Affects creditors confidence and willingness to invest, and the terms, if they know they can recover at least part of their investment

• More credit available on better terms:• In Brazil, led to greater recovery expectations

from creditors, 7.8 to 16.8% lower cost of debt

and a 17% increase in total debt (23 for LT

debt), particularly for smaller firms

• In Italy, accelerating the liquidation procedure in

Italy led to lower interest rates for SMEs, relaxed

credit constraints and allowed more firms to

obtain loans

Creditors recover more, in countries

where reforms increase the possibility

of asset reorganization

Out-of-the-court informal SME debt restructuring

Contractual agreement between creditors and debtor without court involvement, which can

lead to operational restructuring of the business, and/or financial restructuring of liabilities,

before or after the SME cease to pay.

Benefits

Increased investor confidence in

recovery, impacting access to finance

Enabled business continuity for viable

SME after restructuration plan

Mutual increased revenues and time

saved

• In South Corea (1998): End 2002 : 55 business finalized RED (95% of the total of debt)

• In Malaysia (1998): after 3 years, 37 debtsrestructured (77% of the total debt)

• In Thailand (1998): after 3 years, over 10,260 restructuration completed (48% of the total debt)

• India (2008): 4 years after, 327 restructuration completed (70% of the total debt, i.e. 34 milliards USD)

• In Jordan and Lebanon: with WBG support, endorsement and public launch of 12 principles adopted by Central Bank and Bank association (Oct 2015)