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Africa Micro, Small, and Medium Enterprise (MSME) Finance ProgramDar es Salaam – June 2007

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Why?

• IFC investment in MSME “sector” negligible

• Bank credit to private sector remains low compared to other emerging market regions

• Access to finance a major constraint to growth of Africa’s MSME sector

YET

• Competition increasing in many countries and high-end client market saturated

• Growing interest in SME market

• Some useful donor programs in place

SME Finance KNOW-HOW is the main constraint

Absence of sustained technical assistance to African FIs

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What It Is

• A major institution-building initiative and platform to speed up the transfer of know-how to financial intermediaries serving micro, small, and medium enterprises in sub-Saharan Africa

• A platform to enable IFC to develop relationships with targeted banks in sub-Saharan Africa and leading MSME finance advisory firms

• Scaleable, replicable model leveraging IFC resources

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Goals

• Deliver high impact within 3 years through a combination of technical assistance and IFC investment in sub-Saharan Africa

• Increase volume of MSME finance

• Widen FIs’ product offering to MSMEs and the retail market:Loans, cash management, trade financing, housing finance, environmental finance

• Raise standards of financial services provided to smaller businesses by FIs

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Approach

• Programmatic design approach

• Provide financing and TA as an integrated package

• Leverage IFC and consultant existing know-how and Africa infrastructure

• Utilize transparency, fairness and competition to promote the IFC package

• Complement (not displace) other MSME initiatives

• Rigorously and comprehensively monitor client market development

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Design, Coordination, Communication…

1) Core Team = Africa staff + HQ staff CAF, CGF, CSM, CGAP

2) Coordination with:• CAF offices• 4 CGF sub-coordinators• Trade finance program

3) IFC PEP-Africa manages TA consultants

4) Standard due diligence and appraisal questionnaire, term sheet and loan documentation for all investments

5) Six advisory firms/consortia were shortlisted: LFS, DAI, Shorebank Advisory Services, Crédit Agricole Consultants, Rabo International Advisory Services (RIAS), Enterplan

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From filtering to proposals

• April 06 162 banks in 36 countries "mapped" as potentially eligible (IFC)

• April-June 06 84 banks in 24 countries contacted by consultants

• June 20 06 44 proposals in 21 countries received by IFC

• July 10-13 06 25 proposals in 17 countries selected by IFC

• August 15 06 IFC team visits banks to negotiate mandate letters

• July 07 Launch Round 2 bank selections• IFC proceeding with parallel investment-TA due diligence

• Target – close 15 financing deals by 31 December 07

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Regional Distribution of 25 Selected Proposals*WEST AFRICA

(4 banks)

Dakar hub (Cape Verde, The Gambia,

Guinea-Bissau, Mali, Mauritania, Senegal

1 bank

Accra hub(Benin, Burkina Faso, Cote

d'Ivoire, Ghana, Guinea, Liberia, Nigeria, Sierra Leone, Togo

2 banks

Lagos hub(Nigeria)

1 bank

CENTRAL AFRICA

(1 bank)

Douala hub(Cameroon, Chad, CAR, Congo,

D.R. of Congo, Equatorial Guinea, Gabon, Sao Tome and

Principe)

1 bank

EAST AFRICA

(9 banks)

Nairobi hub(Burundi, Djibouti, Eritrea, Ethiopia, Kenya, Rwanda, Somalia, Sudan,

Tanzania, Uganda)

9 banks

SOUTHERN AFRICA

(11 banks)

Maputo hub(Angola, Mozambique)

3 banks

Johannesburg hub(Botswana, Malawi, Lesotho,

Namibia, South Africa, Swaziland, Zambia, Zimbabwe)

8 banks

Antananarivo hub(Comoros, Madagascar, Mauritius,

Seychelles)

0 banks

* Ghana, Mali, Madagascar, Senegal, Sudan, South Africa, and Zimbabwe were excluded from the program.

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24

3

6

5

79

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8SOUTH AFRICA

g

LESOTHO

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TA Funding

CAF Strategic Initiative

($2 m)

Status: Approved 16 November 2006

Performance-Based

Grants Initiative (PBGI)

($30 m)

Status: approved by IFC Board

30 March 2006

$100K per consultant x 6

+ Administrative budget

+ Impact evaluation

$1 m per bank (minimum 2 years) x 15-30 banks

Phase 1

Phase 2

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Investment

• Type: Senior corporate loans (To be revised)• Disbursement: Bullet disbursement, i.e. not contingent upon

the size of MSME loan portfolio• Tenor: Up to 5 years with a minimum tenor of 2 years to match

the length of the technical assistance work• Pricing: As per IFC pricing guidelines.• Covenants:

• Standard loan covenants• Mandatory Prepayment clause if Borrower fails to honor its

commitment to support MSME as per Advisory Services Assistance

• Special reporting requirements in order to capture the project’s developmental impact at the bank and at the aggregate program levels.

• Risk mitigation: The presence of a resident advisor in each participating bank under the program (by design) will improve quality of supervision.

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Highlights

• Higher than expected bank interest in program

• Team considering 23 banks in 17 countries

• Four banks approved (10 pipeline)• July 07 launch Round 2 bank selection

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Expected Impact

• Demonstration effect that MSME lending is profitable in Africa

• 60,000-90,000 new MSME loans from 15 banks for $500-750 million

• Wider product offering to MSMEs

• Imitation by other banks, leading to further MSME service improvement

• Replication of the program in other regions

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Expected Impact

Banks

SMEs

Greater CommunityEconomy

Portfolio growthPortfolio quality improvements

Improved products and servicesHigher profitability and efficiency

Greater access to financeEasiness in doing business

Higher incomeHigher employment

Quality of life improvements

Bank Reporting

and External Impact

Assessment

External Impact

Asessment

MeasurementsExpected Impact

External Impact

Assessment

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Performance system for banks

• Step-up/Step-down interest rate• 25-50 bps• Annual review• Base and stretch targets• Step-up if fail to meet base target• Step-down if exceed stretch target

(no change if fall between base and stretch)

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Incentives for Program Banks

Incentives for Banks• First 2 years:

• TA package• resident advisor• Step down of I (25-50 bps)

• Remainder of program [3-5 more years]:

• Step down of I (25-50bps)

If base targets not met• TA support removed (first 2 yrs)• Step up of I (25-50 bps)• Option to require

pre-payment/acceleration

Incentives for Consultants• First 2 years:

• 5 percent of contract amount (if meet TA targets)

• Year 3:• 5 percent of contract if bank meets

base target

• If TA targets not met• Contract terminated

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Program Impact

At Bank Level

• Has the TA really made a difference?• What specific changes resulted from the TA? • Are banks serving new markets?• Have they improved services to existing clients?• Did the IFC investment make any difference?• How do bank’s changes compare to changes in local

financial market?• Did the program raise wider interest in MSME market among

other banks/FIs?

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Program Impact

At MSME and Community Level• Do the new services improve MSME performance?

• Increase in sales?• Increase in profits?• Increase in employment? Wages?

• How do clients compare to MSMEs not getting the new services?

• Improvement in MSME opinion of the bank? Comparison to other banks/FIs?

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Cost sharing by banks

• Bank’s investment in MSME program must equal 30 to 50 percent of IFC TA support

• Higher cost-sharing expected from larger banks• Network banks may invest over 100 percent of TA value

• Competitive selection process (165=>25 banks)• Only banks showing greatest contribution remain under

consideration

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Thank you

Contact Person:

• Rubin Japhta (CAF)Tel: +27 11 731 3000Email: rjaphta@ifc.org

• Imtiaz KhanTel: +254 20 322 6340/4000Email: ikhan@ifc.org