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1
ARIZ AFD’s CREDIT GUARANTEE
SCHEME on SME market
Disclaimer : this overview is for discussion purpose only. 06-07 June 2011
AfDB - EMRC SME Forum - Lisbon, June 2011
Bridging the Missing Middle Gap in Africa
Plenary Session 8: International partnerships to facilitate SME growth
Nicolas Hertkorn– Senior Investment Officer, [email protected]
Agence Française de Développement,
2
Presentation of ARIZ guarantee scheme
1 – AFD group overview
2 – Approaches on guarantee schemes for SME banking
3 – ARIZ guarantee scheme
3
1 – AFD Group overview
AFD : French Operator for Bilateral Overseas Development AssistanceCreated in 1941
AAA rated State Owned Financial Institution (under French banking regulation)
Large network in 60+ Countries
€ 7 Billion new commitments in 2010
Wide Range of Financing Tools and clientsNon sovereign loans to the private and public sectors (concessional or market conditions)
Sovereign loans (from very concessional to market conditions)
Equity financing
Guarantees on loans in EUR, USD and local currencies (“ARIZ”)
Grants (for study funds, technical assistance and projects)
4
Countries of operation & mandates
– Africa, Mediterranean countries, SE Asia, Caribbean
– Strong focus on Africa
– Rapid geographical expansion since 2005: India, China,
Thailand, Philippines, Brazil, Mexico, Columbia…
Global Public Goods
Poverty alleviation
National solidarity
Green & inclusive growth
5
Domestic
and
International
Commercial
Banks
2. To fight exclusion: Building Bridges between SMEs and financial institutions
SMALL and
MEDIUM
ENTERPRISES
MICRO-to-SMALL
ENTREPRISES
Frequently
unaddressed Market
by Commercial
Banks
MICRO-
ENTERPRISESMFIs
LARGE
CORPORATIONS
AFD’s programms on
bridging the gap of the
« missing middle finance »
by providing :
1. support to local initiatives
aimed at strengthening SMEs
2. technical and financial
assistance to up-scaling MFI’s
3. a risk-sharing tool to
commercial banks :
ARIZ guarantee scheme
6
Each Bank builds it’s own experience on SME market, on it’s own way …
…but all state that it needs a step by step learning approach, requiring to
invest among several years before measuring risk and profitability…
….and all banks need to invest in particular on :
Client approach : defining the targeted market, knowing the customers and building an
accurate segmentation, offering tailored products that fit to each segment;
Risk assessment with new decision making processes : replacing case by case credit
analysis based on financial statements, with a statistic approach using credit scoring tools
and simple but accurate financial and non financial information;
Cost management and profitability : new processes and risk management are volume
driven, closer to retail banking than corporate banking. There is a need to invest on
standardized & simple processes, which efficiency is linked to a significant increase of
SME loan portfolio.
Banks need an appropriate environment : global governance (justice, financial
statements&auditors), adapted bank regulation (risk weight on assets), fiscal issues,
guarantee scheme
Lessons learned shared at the IFC…
7
1. Partial credit guarantee as a tool for policy makers (government, donors) to support a lending activity with specific targets
- sector oriented : agriculture, reniewable energies
- post conflict economies
- economic crises (countercyclic)
Specific approaches (risk concentration)
Expected losses are high (higher than a profitable bank lending activity would allow)
Guarantee as a public subsidy : The guarantee is used as a tool to secure loans that would not be granted by bank without guarantee because of high risk, or unknown risk, or weak collaterals.
Guarantor’s conditions : interest rates, maturity, collaterals
Different appoaches on a guarantee scheme for SME banking
8
2. Guarantee scheme as an institutional approach for the SME banking market :
- Lending segmentation approach : Guarantee scheme is implanted on a full segment of lending activity, all loans (partially) covered : risk dispersion, statistical risk approach
- Institutional stability : Guarantee scheme is designed for long term use on SME market
- Attractive product : easy to use (industrial process ) and cost effective (i.e. also low cost of risk for the scheme)
Guarantee scheme must thus fit following requirements :
- Simple but effective design: rules fitting to bank credit process (automatic cover, quick indemnty process)
- Partial risk sharing: neither substitution to bank’s risk, nor incentive to weaker risk assessment
- Profitability of banks loan portfolio: the guarantee scheme should aim both at mitigating credit risk (by sharing losses), and decreasing the risk weighting of assets for the capital adequacy ratio (Basel 1 or 2 on credit risk)
- Sustainability of the scheme : volume driven activity, wide risk dispersion, reasonable management costs
With this approach :
- the guarantor avoids constraining banks with impacts on credit rates, maturity, decrease of collaterals, or more risk acceptance
- expected losses are the same (or close) to the bank’s (market conditions)
For banks starting an SME activity, guarantee scheme can be offered with other incentives as credit lines and technical assistance.
The guarantee scheme then becomes one of the bank’s tools of an SME market approach, to be combined with :
*development of new products (for example combined product to SMEs : term loan, overdraft, credit card, non financial services).
* development of new risk analysis and decision methods (statistic approach with credit scoring tools, criteria based both on financial information and qualitative appreciation of the client such as history of the SME).
Different appoaches on a guarantee scheme for SME banking
9
Risk-related barriers are the primary difficulty
banks face in lending to SMEs
(source Dalberg 2011)
“Most important” reasons limiting bank lending to SMEs
(# out of 33 respondents from 26 banks, asked to select up to three)
Ris
kC
os
tR
eve
nu
e
Source: Stakeholder survey results in Kenya, Tanzania, South Africa and Ghana
9
7
6
1
1
2
1
10
6
8
1
1
5
1
2
1
3
1
1
0 5 10 15 20 25 30
Taxes and regulation make
some products unprofitable
Transaction/operating
costs are too high
Upfront SME product
investment costs are prohibitive
Other markets are
more lucrative
The SME market size is
too small /not compelling
Limited enforcement /
collection options
Lack of effective
risk sharing solutions
Difficulty in establishing
credit-worthiness of SMEs
1
8
6
8
1
2
2
Kenya
South Africa
Ghana
Tanzania
9
10
3 - ARIZ solutions for financial institutions:
Deal by deal- Credit scheme that are out of portfolio eligibility
criterias
-any company and investment loan
- MFIs
A Guarantee of a
portfolio of SME loans
-Definition of a maximum amount of portfolio
covering two years of new loans activity
-Once the criteria and loan ranges are defined,
all the loans of the banks are automatically
included
ARIZ INDIVIDUAL
GUARANTEE FOR A
SINGLE DEAL
ARIZ PORTFOLIO
GUARANTEE
11
Potential Beneficiaries of the guarantee
All SMEs and MFIs,
All business sectors (except real estate, tobacco, alcohol,
weapons…),
Start-ups or development projects,
Fresh loans financing medium term investments (overdrafts are
excluded)
Loans denominated in EUR, USD or local currency
12
Portfolio guarantee : - Either on a new or on a growing loan portfolio,
- Once criteria's defined (i.e. segments to cover) , all
matching new loans are automatically guaranteed with
50% on final loss : systematic risk share, automatic process
linked to internal credit decision process
- Semi annual report on guaranteed loans.
Clients and loans targeted :
- All sectors, all registered business, including starts ups,
including individual entrepreneurs ;
- term loans from 1 to 5 years on asset financing, but can
include working capital linked to the investment ;
- loans from 10 000 EUR to 300 000 EUR in local currency,
or deal by deal approach with a guarantee up to 2 M EUR.
Risk covered :
- ARIZ shares final loss in any case of default.
Claim procedures follows banks procedures :
- claim when bank decides acceleration,
- payment of 50% of indemnity immediately,
- file closed (balance payment) when bank
decides to write off the loan
How can ARIZ guarantee scheme be part of the banks SME market tools ?
13
ARIZ 2008 2009 20102010
cumulated
Amounts
guaranteed by
ARIZ25 102 150 277
Funds mobilized 50 202 310 562
Total Investments 63 253 387 702
Number of SMEs 73 640 936 1649
Number of jobs
created or
maintained5 222 32 307 36 796 74 325
Africa, a priority region: an update on the impact of ARIZ SME Guarantee Fund
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Thank you for your attention !Contact :
+33 1 53 44 40 41