Ecosystem Supporting SMEs and SME Banking

QAMAR SALEEMSENIOR SME BANKING SPECIALISTIFC BANK ADVISORY SERVICES, EMENA NOVEMBER 24TH, 2014

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Key Messages Sizeable SME population in MENA region (19-23 million) largely

lacking access to credit ($210-240 billion financing gap)

SME finance from the banking sector is low in MENA (8%); Jordan was estimated at 10%. Multiple access to finance challenges inhibit growth

Banks as well as SMEs face various obstacles which inhibit easy access to finance for this underserved segment

IFC as part of G20 SME Finance sub-group recently reviewed global SME finance practices & reviewed 164 models

Significance of legal & regulatory framework, financial infrastructure, public sector interventions & capacity building for banks emphasized

IFC as a knowledge leader in SME finance has a range of services and knowledge collateral available to support SME development

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SOURCE: McKinsey-IFC MSME Database 2011

There are 19-23 million Micro Small & Medium Enterprises in the MENA facing a financing gap of $210-240 billion

Total 19-23

Informal 12.9-15.7

Micro(1-4 employees)

4.2-5.2

Very small(5-9 employees)

0.9-1.0

Small(10-49 employees)

0.8-0.9

Medium(50-250 employees)

0.4-0.5

Number of MSMEs in MENA by sizeMillions

Formal SME’s (>5 employees) by country‘000

SOURCE: IFC-McKinsey database 2011, Country statistical officesJordan 16-20

Kuwait 28-35

Qatar 10-12

UAE 80-90

Yemen 60-70

Iraq 150-190

Saudi Arabia 120-140

Sudan 140-160

Morocco 200-250

Egypt 200-250

Algeria 180-200

Fo

rmal S

ME

s 10%

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Unemployment amongst Youth and limited financial inclusion of Women remain key areas of concern in the region

SOURCE: IFC, Education for Employment Report, 2011 SOURCE: IFC. Strengthening Access to Finance for Women-Owned SMEs in Developing Countries

Youth unemployment Women in Business

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SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011

While SME finance has 10% share in Jordan, it is heavily medium enterprise focused; ~$2 billion finance gap needs to be addressed 75%

Korea

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SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011

However, there are multiple obstacles faced by financial institutions – information asymmetry, collateral, & enabling environment are key issues

% of banks responding that obstacle is very important or important for SME Financing

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SOURCE: SMEs in MENA: Leveraging Growth Finance for Sustainable Development (Citi Foundation and Shell Foundation)

There are various barriers for SMEs as well to obtain funding – collateral, pricing, advisory requirements being the key areas

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IFC completed a review of leading SME finance practices and models as part of our work with the G20

G20 SME finance Sub Group identified successful practices & policy measures for SMEs in 2011

Work involved review of 164 different models globally and subsequent policy requirements

Key Recommendations from the G20 Sub-Group

Developing specific country strategies

Developing supporting legal & Regulatory framework

Building reliable data sources for SME finance

Strengthening the financial infrastructure

Effective government support mechanisms

Address specific market failures e.g. women and sustainable energy finance

Building the capacity of financial institutions

SME Finance Policy Guide – issued October 2011 by IFC

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Country level strategies and supportive legal & regulatory environment are needed to enhance access to finance for SMEs

Ensure effective collection & monitoring of data for efficiency of measures

Strengthen credit reporting to even the playing field between small and big banks

Avoid over restrictive licensing requirements to significantly increase competition levels

Support non-FI alternatives to bank lending in the market e.g. leasing and factoring

Case Study: SME Corporation,Malaysia

Single dedicated agency to formulate and coordinate overall policies & strategies for SMEs

Malaysia Incorporated (established 1983) and PEMUDAH task force (launched 2007) for public-private sector collaboration

Bling (business linkages) program to facilitate SMEs supplying to large companies

Launch of SCORE (A diagnostic tool to rate and enhance competitiveness of SMEs) in 2007

INNOCERT (Innovation Certification for Enterprise Rating and Transformation Programme) program

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Financial infrastructure needs to be strengthened for improved transparency of SMEs

Accounting and audit requirements need a balance between transparency & regulatory simplicity

Credit bureau & registries need complimentary systems for personal and business information from all players (i.e. FI and Non-FI)

SME rating agencies offer a potential alternative, but need a certain critical market size (e.g. India)

Case Study: SME Rating Agency of India

India’s 1st rating agency for MSME’s

Diversified equity ownership by 11 banks allowed lenders to accept rating and extend financial and non-financial benefits

SMEs are bucketed by size for peer comparisons

Rating fee < $1155, subsidized by the government by 75%

SMERA forecast to reach out to over 80,000 SMEs over the next 5 years

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….and financial infrastructure can be strengthened for venture capital and private equity access to the SME market

Secured transaction regimes should allow for a wide range of enforceable collateral & out of court enforcement options

Improve corporate governance practices should allow venture Capital/ private Equity access to SMEs

SME stock Exchanges have only proven marginally useful due to low volumes and a lack of investor interest

Case Study: INOVAR Program, Brazil

Objective: to strengthen investment in new technology SMEs and to establish Venture capital

Created a research and information dissemination platform and developed mgt capacity to accelerate VC investment

Established a VC portal where investors and entrepreneurs register

Allows for the provision of business plans and joint due diligence for VC funds

20 venture forums established and over $1 billion in VC/ PE investment made in SMEs

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Effective public sector interventions needed to widen opportunities, build SME capacities and avoid market distortions

Credit guarantees can be highly effective, but subsidies should be minimized to clear market failure areas

Government procurement can link SMEs into supply chain finance, providing they are paid on time

MSME capacity measures e.g. training should ideally be on a commercial/near-commercial basis and become scalable

Case Study: FOGAPE, Chile

Outreach– 30,000 guarantees issued (1,800 per million people)

Finance – Targeted to small businesses, low ceilings

Distribution – Through its partner lending institutions

Coverage – 70-80%, higher for investment loans

Approach – Portfolio/program Lending

Fees- risk-based (1-2%)

Delinquency - Net loss rate = 1.5%

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SOURCE: World Bank-A review of Credit Guarantee Schemes in MENA region

….currently credit guarantee schemes outreach in MENA is low – benchmark country averages (2,080/million people; 1.2% of GDP)

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Operation Mechanism

Individual

N/A

Individual

Hybrid

Hybrid

Individual

Individual

Individual

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SOURCE: World Bank-A review of Credit Guarantee Schemes in MENA region

….benchmark countries schemes exhibit higher scale and proficiency

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Operation Mechanism

Portfolio

Auction

Hybrid

Hybrid

Hybrid

Portfolio

Hybrid

Hybrid

Portfolio

Hybrid

Hybrid

Hybrid

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Specific market failures like financial services to Women-in-business & Sustainable energy finance (SEF) need to be addressed Case Study: Women Entrepreneur

Package, Garanti Bank, Turkey

Objective to meet businesswomen’s network, training and financial needs

Provision of customized suite of services and a support loan and financial training

Reached out to 8,400 women and $156 m USD lending disbursed

Economic impetus - 31 to 38% of SMEs in developing countries are owned by women – MENA average is 12-15%

Women owned SMEs is a profitable opportunity but requires a tailored methodology

Key approaches adopted for SEF are a) legal and policy reforms, b) lending facilities targeting banks and/or directly SMEs; c) technical assistance to raise awareness

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Case Study: Erste, Czech Republic

FINESA (Financing Energy Saving Applications) developed. IFC supported bank, identified SEF potential in Czech market- identified SEF potential in Czech market (10M people), $7.3 billion over 6 years

CS became leading bank in Czech sustainable energy market, with a $650M (Euro 500M) portfolio, 1700+ new deposit accounts valued at $10 million

In Collaboration with IFC

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Banks can play a leading role but capacity of financial institutions needs to be enhanced to effectively manage SME business

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SOURCE: IFC Analysis

Key areas where core competencies are required for successful SME banking

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….SME Banking can be the most profitable business segment in the Bank but performance varies considerably between winners and losers

SME Banking profitability comparison Winners vs. Losers in SME Banking

SOURCE: IFC, SME Banking Knowledge Guide SOURCE: Mckinsey Research

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IFC provides a combination of Investment and Advisory Services for optimal results

Capacity Building for

FIs

• Build capacity of FIs in strategy, market segmentation, credit risk management, product development through new approaches and systems to scale up their financing for SMEs on a sustainable basis

• Promote sub-sector focus: women-owned SMEs, sustainable energy SME projects, agri SMEs, leasing, etc

• Raise awareness on best practices in the SME Finance space

Financial Infrastructure

• Develop credit reporting infrastructure based on country needs• Support development of secured transactions, collateral registries,

legal and regulatory framework• Build capacity of public/private stakeholders through advice and

training

SME Financing & Investments

• Equity Investments in Financial Institutions / Equity Funds for SMEs

• Funded lines to expand investment and working capital lines especially in illiquid markets

• Blended finance options to support the expansion of IFC’s risk appetite (e.g. grace periods, performance based pricing, subordination, higher risk /lower security or in limited cases, local currency positions) [for selected projects]

• Focus underserved segments, e.g., gender, fragile/conflict, agri, climate

Risk Mitigation &

Enhancements

• Risk Sharing Facilities / Partial Credit Guarantees to: - Enhance risk taking capacity and provide capital relief via low risk

weightings- Avoid FX mismatches and encourage domestic resources for SME

financing

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International Finance CorporationBank Advisory Services, EMENA24th Floor, Nile City Tower (North)2005C Corniche El NilRamlet BoulacCairo – Egypt