Transcript supporting small and medium enterprises (smes)

SUPPORTING SMALL AND MEDIUM
ENTERPRISES (SMEs)
IN AFRICA
THE ROLE OF CREDIT GUARANTEE SCHEMES
SEMINAR: SMEs FINANCIAL INCLUSION:- SME Finance Basel II/ Basel III
Case of Guarantees Schemes as Credit Risk Mitigation
VENUE:
DATE:
CAIRO,EGYPT
11TH – 12TH MAY 2016
PRESENTED BY : ZAC BENTUM
SME Finance Basel II/ Basel III
Case of Guarantees Schemes as Credit Risk Mitigation
CHARACTERISTICS OF SMEs:
 Small and Medium Enterprises (SME’s) account for more than 95%
of all firms in Africa.
 Engine of growth : Economic
Social
Poverty alleviation
 SMEs are wealth-creators.
 SMEs in Africa usually start with 1-4 employees and do not expand
beyond 10 employees.
Eg. “of a study of 116 firms in Nigeria over a 30 year period, only 2
of 21 firms that originally had fewer than 10 employees graduated
above that number. Ref: Kirby (1993).
CHARACTERISTICS OF SMEs: (contd)
 SMEs in Africa do not survive for long.
o A study conducted over a 30 year period on SMEs in Eastern
Nigeria showed that 50% of those SMEs did not make the 50th
year mark. Ref: Onyeiwu (1992).
o SME failure rate is 75% in South Africa. Ref: Okawale / Garwe
(2010)
 SME growth is influenced by owner/manager characteristics eg.
age, education and previous experience.
CHALLENGES
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Lack of access to finance
Lack of adequate collateral
Insufficient government support
High interest rates
Lack of information technology/systems
Lack of managerial/ experience/ business skills
Lack of training
Lack/ Bad credit history
Information asymmetry
High tax regimes
Cumbersome legal regimes - licensing
Access to markets
Ghanaian eg. oil/ gas industry
The characteristics and challenges of the SMEs create obstacles to
SME growth and do not make them attractive to the financing
community.
Empirical evidence have shown that in economies where there is
ease of access to credit (ie to SMEs) high economic growth have
been recorded.
BANK LENDING TO PRIVATE SECTOR (SME)
PERCENTAGE (%) OF GDP
High - Income Countries
168%
Middle – Income Countries
83%
Low – Income Countries
43%
 A catalyst that increases bank financing to
SMEs is a “Credit Guarantee Scheme” - A
scheme in which a third party (eg.
Government) undertakes to settle the credit
taken by a borrower in case of default.
Note
 For such schemes to be widely acceptable and provide the
necessary comfort to the financing institution i.e the banks
should pass the Basel II/ III recognition text.
 Guarantee institution in developing their products should ensure
that:
 Legal certainty for the purchaser, a bank or other Financial
Institution (i.e legally enforceable).
 Clearly documented collateral transaction
Note (contd)
 The purchaser i.e Bank has a right to liquidate/ take legal
possession in a timely manner in the event of default.
 The collateral must be registered – Collateral Registry
 The Guarantee should be:
 Direct
 Explicit
 Irrevocable
 Unconditional
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There should not be the need for legal recourse
 Avoid maturity mismatch – where the guarantee runs
for a shorter period than the facility maturity date.
MANAGING THE RISKS
 Risk Identification – all risks associated with a
facility before and after approval
and issuance are identified.
- Due diligence
- Inspection
 Risk Assessment - identified risks are assessed for the
probability of occurrence as well as
their impact
 Risk Control
- Strategies are developed to
minimize or eliminate occurrence
as well as the impact
MANAGING THE RISKS (contd)
 Risk Control
-
Strategies are developed to
minimize or eliminate occurrence
as well as the impact
 Review of Control Measure - periodically monitor
and review the control
measures to ensure that
risks are within
manageable levels
NB: Facilities are categorized as:
 20 largest exposures
 50 largest exposures
 Guarantees flagged under “Watchlist”
 Guarantees with peculiar characteristics
 “Watchlist” - facilities that remain on the books for 6
months or more without movements etc
 Credit Administration Policies – guidelines, policies
and procedures to follow in approving credit
guarantees.
PHILOSOPHY
 Our Credit risk mitigating is a collateral lending approach,
thus every guarantee issued is against a recoverable asset
both moveable, immovable as well as cash–assets.
 Our credit guarantee products are partial – thus sharing
the risk with the Financing Institution.
 Our products include:
- Counter guarantees
- Co-guarantees/ syndication
AN ENABLING ENVIRONMENT
Having a robust and innovative Financial Services Industry
supported by:
 A Strong Legal Regime
 Credit Reporting / Reference Bureaux eg. Xdsdata , Dun &
Bradstreet, Hudsonprice Data Solution
 Efficient Collateral Registry
 Establishment of a Deposit Protection Scheme.
EXIM PRODUCTS
A
Bank Credit Guarantee
Credit Guarantee cover for pre and post shipment
Credit Guarantee for export proceeds against noninsurance risk on NTEs
Local Credit Line Guarantee for Microfinance
Institutions
Credit Guarantee for Refinance
Credit Syndication Guarantee – risk sharing
Machinery Credit Guarantee
Machinery Leasing Guarantee
Contract Awarding Agencies
B
 Bid Bond
 Advance Mobilisation Guarantee
 Advance Payment Guarantee
 Seed Fund Guarantee
There are 31 (+ 4 representative Banks) Commercial/
Universal Banks in Ghana, and Exim works with all of
them, but only a few are active/ regular participants in
the programmes.
DOCUMENTATION
 Security Sharing Agreement
 Terms and Conditions Guiding the Credit
Guidance Scheme
 The Guarantee Document
Conclusion
The impact and success of African Credit Guarantee Schemes to
assist SME access to credit has been dependent on:
• Size of the Fund - Credit Guarantee Schemes should maintain
adequate economic and guarantee funds
commensurate with the risks they undertake.
• Good Corporate Governance – This would enable credit guarantee
schemes operate effectively and
efficiently and be accountable for
the management of resources.
Conclusion (contd)
• Effective Risk Management - This would guide the underwriting
processes as well as ensuring
effective internal audit function.
• Credit Reporting/ Reference - Introduction of credit bureau in the
financial system, reduces the
information asymmetry issues.
• Establishment of an efficient Collateral Registry.
• Deposit Protection Scheme – This ensures an appropriate legal
framework for the financial markets.
Thank You
Part II
SUPPORTING SMALL AND MEDIUM
ENTERPRISES (SMEs)
IN AFRICA
THE ROLE OF CREDIT GUARANTEE SCHEMES
SEMINAR:
VENUE:
DATE:
SMEs FINANCIAL INCLUSION:- GUARANTEE SCHEMES
INTERNATIONAL BEST PRATICE.
CAIRO,EGYPT
11TH – 12TH MAY 2016
PRESENTED BY : ZAC BENTUM
TABLE OF CONTENTS
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INTRODUCTION - AFRICA AT A GLANCE
CHARACTERISTICS /CHALLENGES OF SME’S IN AFRICA
WHY CREDIT GUARANTEES
BENEFITS OF CREDIT GUARANTEE SCHEME
GUARANTEE MODELS
FORMS OF CREDIT GUARANTEE SCHEMES
CASE STUDIES
AFRICAN GUARANTEE FUND
GUARANTEE FUND FOR PRIVATE INVESTMENT IN WEST AFRICA ( GARI)
AGRICULTURAL CREDIT GUARANTEE SCHEMES – NIGERIA
EXIMGUARANTY COMPANY GHANA LIMITED
CONCLUSIONS
INTRODUCTION
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AFRICA AT A GLANCE
Population of Africa
54 sovereign states
Population growth rate
GDP of Africa
GDP growth
GDP per capita
Contribution of Agric to GDP
Contribution of Agric to Employment
Financial services industry
: 1.2 billion
:
: + 2%
: US$2,449 billion
: 5.2%
: US$2320
: 32%
: 65%
: US$107 billion
AFRICA AND THE WORLD
Indicators
Population (bn)
GDP (US$ billion)
GDP Growth (%)
World
7.3
77,302
3.8
Europe
0.7
22,804
Asia
4.2
25,374
0.4
5.2
5.5
10,153
27,525
6,090
Poverty % ≤ US$ 1.00
-
-
-
1.2
2,449
7.9
10,880
Africa
4,473
1.1
GDP per capital (US$)
Ext Debt % GDP
South America
-
2,320
39
60.7
CHARACTERISTICS/CHALLENGES OF SME’S IN AFRICA
• CHARACTERISTICS:
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Small and Medium Enterprises (SME’s) account for more than 95% of all firms in Africa.
Engine/Drivers of growth :
Economic
Social
Poverty alleviation
SMEs are wealth-creators
SMEs account for
SMEs in Africa usually start with 1-4 employees and do not expand beyond 10
employees.
Eg. “of a study of 116 firms – Nigeria over a 30 year period, only 2 of 21 firms that
originally had fewer than 10 employees graduated above that number ref. Kirby (1993).
SMEs in Africa do not survive for a long time.
A study conducted over a 30 year period on SMEs in Eastern Nigeria showed that 50% of
those SMEs did not make the 50th year mark. Ref: Onyeiwu (1992)
SME failure rate is 75% in South Africa. Ref: Okawale and Garwe (2010)
SME growth is influenced by owner/manager characteristics eg. Age, education and
previous experience
CHALLENGES:
•
•
•
•
•
•
•
•
•
•
•
•
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•
Lack of access to finance
Lack of adequate collateral
150%
Insufficient government support
High interest rate
Lack of information technology/systems
Lack of managerial/experience/business skills
Lack of training
Poor infrastructure – roads, telecom, electricity, water supply etc.
Lack/bad credit history
Information asymmetry
High tax regimes/inflation
Cumbersome legal regimes - licensing
Access to markets
Ghanaian example oil/gas industry
WHY CREDIT GUARANTEES:
These challenges create obstacles to the SME growth and do not make them
attractive to the financing community.
Empirical evidence have shown that in economies where there is ease of access to
credit (ie to SMEs) high economic growth have been recorded.
BANK LENDING TO PRIVATE SECTOR (SMEs)
High - Income Countries
PERCENTAGE (%) OF GDP
168%
Middle -Income Countries
83%
Low - Income Countries
43%
Because the challenges of lack of access to finance for the SMEs is primarily due to
weaknesses in the enabling environment, African government have therefore found
it imperative and are motivated to devise structures and mechanisms that afford the
private sector/SMEs easy access to credit. A catalyst that increases bank financing
to SMEs.
One such scheme is a “Credit Guarantee Scheme” for SMEs. A scheme in which a
third party (the government) undertakes to settle the credit taken by a borrower in
case of default.
BENEFITS OF CREDIT GUARANTEE SCHEME:• Protect the interest of the lender (ie Bank/Financing
institution) from the chance of non-payment by the
borrower/SME.
• Facilitates access to credit
• Eliminates the need for collateral
• Ensures proper project appraisal since the financing
institution takes a share of the risk (partial guarantees)
• Identifies clear cash flow pattern of the SME
GUARANTEE MODELS:•
•
-
Individual loan guarantees
CGS provider assesses the loan after a referral by the
Bank.
Portfolio guarantees
they rely on the bank’s loan approval processes
more flexible target borrower/loan
faster utilization
FORMS OF CREDIT GUARANTEE SCHEMES
Coverage:
• Regional
• National
• Sectorial
Funding:
• Donor sponsored
• Specialized eg GARI
• Regional
eg AGF
• National
eg Exim/ACGS
CASE STUDIES:
CS 1. AFRICAN GUARANTEE FUND – a market friendly Guarantee
Scheme for African SMEs founded in June 2012.
• Funded by AfDB with Spain and Denmark as partners
• Location: Nairobi, Kenya
• Guarantees:
» Portfolio/individual
» Bank fund raising
» Equity
• Capacity Building
• Products :
» SME financial product offering
» Bankable SME segment
» Banks appraisal capacity
CS 1.
AGF (contd)
• Guarantee Capital - US$50m / US$66m
• Target:- To generate approximately US$2billion of new
lending.
- 10,000 African SMEs (per 5year Strategy Plan)
As per their 2014 Accounts:
• Guarantee Portfolio: US$171m
• SMEs supported: 300
• Countries: 23
• Average Financing Tenor: 55 months
• Available Financing: US$400m
CS 2.
GUARANTEE FUND FOR PRIVATE INVESTMENTS IN WEST AFRICA
(GARI)
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Incorporated : 1994
Funded
:
– French Development Agency (AFD)
– European Investment Bank (EIB)
– Deutsch Development Organisation (DEG)
– Secrѐtariated’Etatàl’Econome (SECO)
– 23 Commercial Banks
Location
:
Lome, Togo
Coverage
:
ECOWAS Region
Guarantee Capital:
US$26m
Maximum Coverage:
60% - 75%
Maximum Cover:
US$6m
Target :
» Start ups
» Modernisation
» Capacity upgrade
» Restructuring
CS 2.
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GARI (contd)
Tenor
: 60 months (2 -10years)
Acceptance Rate
: 70%
Applications approved
: 361
Guarantee amounts
: US$700
Available financing
: US$1.8billion (14 Countries including):
Ivory Coast
Togo
Ghana
Benin
Senegal
Burkina Faso
Niger
Nigeria
Cameroon
Sierra Leone
These interventions no doubt has had a very positive impact in the African region but a lot still needs
to be done.
The presentation does not give the number of jobs or employment created or sustained because
data in this area is sketchy, but it can be reasonably assumed that the numbers are high.
CS 3. AGRICULTURAL CREDIT GUARANTEE SCHEME - NIGERIA
Nigeria: The Agriculture Credit Guarantee Scheme (ACGS)
In Nigeria, like most of Africa, the activity in agriculture sector is by SMEs. Financing
SMEs in the Agric Sector is probably even worse than financing other SME activity for
example in Commerce.
Bank lending to the Agric Sector %:
2012 - 2014
Agric as a percentage
of total Bank lending
4.0%
Reasons for this lack of support is the same as stated for the SME sector in general
but more emphasis on:
• Lack of required technology and infrastructure
• Inability to assess and price the risk associated with agric sector
CS 3.
ACGS (contd)
Agric however has a high potential in Nigeria and Africa
• Agric Employment
: 65%
• Population Growth Rate
: 2.5%
• Agric Share of Non-Oil Exports
: 70%
• Total Land Area
: 98.3m Hectares
• Cultivable Land Area
: 84.0m Hectares (40% utilized)
• Large Internal Market
:170 million people (2.5% growth rate)
• Large Surface Market
(with untapped irrigation potential): 279 billion cubic meters.
Nigeria’s Top Agric Imports: (World largest importer of US Wheat, World 2nd largest importer of Rice)
• Wheat
US$
• Rice
US$
• Sugar
US$
• Fish
US$
With this huge potential and the apparent lack of support from the financing institutions, the
Government intervened with known policies to include the establishment of the ACGS in order to
mitigate these deficiencies and afford SMEs the needed credit guarantees to access the much needed
credit to help overturn the current trend.
CS 3.
Established in
Funded
ACGS (contd)
:
:
1977
Central Bank of Nigeria 40%
Federal Government of Nigeria 60%
Guarantee Capital :
US$ 30 million
Target Coverage : 75% maximum
Maximum Single Coverage : US$ 250,000 (N50m)
Coverage
: 900,000 farmers
Guaranteed Portfolio : US$ 370m (N75billion)
CS 4. EXIMGUARANTY COMPANY GHANA LIMITED
Incorporated
Funded
:
:
Location
Coverage
Guarantee Capita
Maximum Coverage
Target
:
:
:
:
:
1994
Bank of Ghana, Ecobank, National Investment Bank,
Social Security and National Insurance Trust (SSNIT)
and Ministry of Finance.
Accra (Kumasi/Takoradi)
National
US$10,million
75%
All sectors
CS 4.
Avg Tenor
Acceptance Rate
Applications Approved
Guarantee amounts
Available financing
SME supported
EXIM (contd)
:
:
:
:
:
:
18 – 24 months
65%
5,617
GH¢359,326,836 = US$100m
1,000
CONCLUSION
The impact and success of African Credit Guarantee Schemes to assist SME
access credit has been dependent on.
1. Size of the Fund - Credit Guarantee Schemes should maintain adequate
economic and guarantee funds commensurate with the risks they
undertake.
2. Good Corporate Governance – This would enable credit guarantee schemes
operate effectively and efficiently and be accountable for the management
of resources.
3. Effective Risk Management Practices - This would guide the underwriting
processes as well as ensuring effective internal audit function.
4. Credit Reporting/Reference Institutions - Introduction of credit bureau in
the financial system, reduces the information asymmetry issues.
5. The establishment of an efficient collateral registry.
Deposit protection scheme – This ensures an appropriate legal
framework for the financial markets.
CONCLUSION (contd)
It is also important to recognise the impact in terms of:
• Additionality
• Sustainability
• Increased volume of lending to SME sector.
• Catalysed ventures into new markets.
• Renewed understanding /partnership between CGS and
Banks to SME financing.
THANK YOU