Micro and Small Enterprise Finance and Institution Building

1
Micro and Small Enterprise Finance and
Institution Building

• Elizabeth Wallace
• Director Group for Small Business

2
Operating Environment Stability Pact Countries,
Russia, Ukraine, Caucasus and Central Asia

• Typical environment at project start defining
  approach to MSE Finance
• Financial Sector
• Low level of financial intermediation
• Limited credit know-how
• Lending decisions based on collateral,
  connections, size
• Risk aversion and/or easy money to be made on
  non-credit activities or Western clients
• Economy Political situation
• Post war situation
• Ethnic conflicts
• Underemployment / shedding in former state
  structures
• High levels of poverty, especially in rural areas
• Flight of capital and workforce to capital cities

3
Objective Provide sustainable access to
financial services to micro and small enterprises
not presently catered for by the formal financial
sector

• Ensure fast and wide outreach
• Broad regional coverage of lending and training
  operations, including remote and depressed
  areas. plus conflict zones (e.g. Mitrovica)
• gt 700 outlets and most recently mobile banks
• All economic sectors, all sizes (typically 1 to
  100 employees)
• Range of loan products working capital and
  investment loans
• Loans up to 3,000 disbursed w/out collateral
  and within 24 hours of client application
  (Express Micro)
• Ensure commercial viability of MSE lending
• - Efficient and streamlined lending procedures
• Commercial pricing of loan products to banks and
  borrowers
• Banks take full credit risk (with transfer of
  know-how to assess this risk)
• - Mass scale - critical mass level is a
  necessity for cost-covering sustainability
• Integration into formal financial system
  capacity of capital markets far greater than
  donors / IFIs

4
Principles of Donor Co-ordination and Effective
use of External Assistance

• TA provisions and funding lines are strictly
  linked to clear and measurable performance
  benchmarks, e.g. CGAP standards, measured month
  by month, bank by bank
• Number of loans as outreach and financial
  broadening indicator
• Average loan size low as financial deepening
  indicator
• Repayment rate and repeat clients as proxies for
  health of firms and quality of service and
• RoE for sustainability (contribution analysis for
  PBs)
• Donor Co-ordination and Harmonisation - in
  On-lending, Project Management, and
  TA-Institution Building
• US, EU, Japan, G-7, UK, Canada, Switzerland, et
  al. provide TA
• KfW, IFC, FMO and others (including private
  sector) participate in equity and/or loans
• Investors and donors need to build upon each
  other for efficiency and outreach
• Avoid duplication and projects undermining one
  another and/or distorting financial sector

5
MSE Finance Stability Pact Countries, Russia,
Ukraine, Caucasus

• Loan Range
• Micro Loans between 10 and 10,000
• Small Loans typically between 10,000 and
  200,000
• Medium typically up to 500,000
• Average overall 6,600
• Approximately 26,000 micro and 4,000 small and
  medium loans/mo
• Sectors
• - Trade - 49
• - Production, Services, Agriculture - 51

6
Lending Results

• 570,000 loans disbursed for 3.9 billion
• 30,000 loans disbursed for 175 million monthly
  of which 9,454 are in Stability Pact countries
  55m/mo
• Approx. 95 of borrowers are first time borrowers
• Non performing loans 0.60 of Portfolio
• Equal access for ethnic minorities / all groups
• 95 of loans disbursed outside capital cities
  (600 outlets in towns and cities)
• 16 loans in the agriculture sector
• Strong year on year growth 125 in Stability
  Pact countries in 2003 over 100 anticipated in
  2004
• Steady increase in TA efficiency and graduation
  from TA, with 80 graduated and TA efficiency
  of one cent to disburse one Euro / Dollar

7
Distribution of MSE Loans Disbursed
8
Use of Donor Funds / Building Capacity

• Intensive Institution building
  interventionist with focus on well qualified
  lending personnel, streamlined and well monitored
  lending procedures and strict attention to terms
  conditions to
• a) lower transactions cost for banks and
  borrowers, and
• b) increase the boundaries of whos bankable
• TA covers initial start-up costs for institution
  building and regional expansion costs on a
  declining scale. (Banks always co-finance.)
• TC is a scarce resource (it should be treated as
  such)
• Does the subsidy lead to the largest number of
  borrowers reached?
• Does the subsidy contribute significantly to
  building sustainability, e.g. personnel trained,
  assimilation of procedures, and mass-scale loan
  output sustainability at a low level
  failure?
• Is the subsidy substantially more or less than in
  other projects
• Is the subsidy declining strongly measured by
  TA per loan disbursed and per Dollar / Euro?

9
TC Efficiency CUMULATIVE Grant Element
(Current TC Spent Per 1 disbursed ProCredit
Bosnia 0 ended December 2003, ProCredit Bulgaria
0.005)
10
Approach PBs, Specialised MFIs, and NGOs

• Lending through existing commercial banks
• When there are financially stable commercial
  banks that meet standards of integrity,
  commitment to aggressively target MSEs, and
  financial stability
• 40 partner banks in SEE and NIS - 26
  partner banks in Accession countries
• Lending through specialised microfinance
  institutions (MFIs)
• Where no suitable commercial banks are available
  or where these banks are unwilling to adopt
  necessary procedures and client orientation,
  specialised MFIs are set up.
• 12 banks (ProCredit) including in Bulgaria,
  Romania, Serbia, Albania, Kosovo, Bosnia,
  Macedonia, Moldova, Montenegro
• Lending through PBs and MFIs (Dual Approach)
• Where existing banks are lending to MSEs and a
  specialised bank is started because the market is
  substantially under-served
• Ukraine, Russia, Georgia, Romania, Bulgaria

11
Approach NGOs what we look for

• Lending through NGOs
• NGOs that are best-practice and
  commercialising so that they can attract
  capital market funds rather than remain dependent
  on limited donor resources.
• Croatia and Montenegro first NGO projects
• Profitable with clear indication in statutes that
  profits will be retained
• Financially sustainable (i.e. no longer reliant
  on grant funding to cover expenses)
• Operating according to industry best-practice
  standards (CGAP)
• Management/Board must have long-term strategic
  vision and willingness to operate on a commercial
  basis
• In general, at least 2,000 active clients with
  sufficient market potential to reach at least
  5,000 clients in the medium term
• Financial statements to be prepared according to
  IFRS
• Licensed according to local law and preferably
  supervised by the Central Bank or other
  regulatory body.

12
Loans Disbursed ProCredit Bank Network (MFIs) and
PBs
Cumulative Number of MSE Loans Disbursed to date
Number of MSE Loans Outstanding to date
13
Next Steps for MSE Lending Programmes

• Increase rural lending and village outreach, e.g.
  micro-mobile bank at MEC Moldova
• Farm Lending increase across the region with
  specialised loan officers / ProCredit Serbia
  methodology,
• Push extremes particularly express micro loans
  (under 3,000, no collateral, 24 hrs) and larger,
  longer term fixed asset loans as borrowers grow
• Partner Banks - continue to include new banks as
  long as sufficient TA is available Mature
  partners to continue business without
  consultants (gt 80 of branches have
  graduated)
• MSE banks - increase deposit mobilisation, other
  funding sources and gain independence from IFIs
  and
• Continue to push TA efficiency for measurable
  results.

14
Thank you!