Africa Micro, Small, and Medium Enterprise MSME Finance Program

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Africa Micro, Small, and Medium Enterprise (MSME)
Finance Program Dar 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
  Africas 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
• Standard due diligence and appraisal
  questionnaire, term sheet and loan documentation
  for all investments
• 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
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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 projects 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
Measurements
Expected Impact
Bank Reporting and External Impact Assessment
Portfolio growth Portfolio quality
improvements Improved products and
services Higher profitability and efficiency
External Impact Asessment
Greater access to finance Easiness in doing
business
Higher income Higher employment Quality of life
improvements
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 banks 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

• Banks 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 (16525 banks)
• Only banks showing greatest contribution remain
  under consideration

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Thank you

• Contact Person
• Rubin Japhta (CAF)
• Tel [phone]
• Email rjaphta_at_ifc.org
• Imtiaz Khan
• Tel [phone]/4000
• Email ikhan_at_ifc.org