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Promoting Sustainable Developmentin Emerging & Developing Countries
via Non Sovereign Financing
Presentation Outline
1. AFD Non Sovereign Financing for Banks
2. Challenges and opportunities of SME Finance
3. AFD and Microfinance
AFD Non Sovereign Financing for Banks
Providing financing at market conditions or subsidized loans without any requirement of any State guarantee
Criteria for market based credit facilities: Only State Owned Banks are eligible Provide long term resources to viable financial institutions Help State Owned Banks develop their strategy and portfolio on sectors of common
strategic interest Ease the public debt burden and help SOB access market funding
Criteria for subsidized credit facilities: Privately Owned or State Owned Banks are eligible Subsidiarity (i.e. non competition with commercial banks or financial markets) Additionality:
Help banks to build capacity and experience on underserved markets, which are critical for development (energy & environmental projects, SME and small entrepreneurs, …)
Use the bank as an intermediary and a catalist to improve competitiveness (sector specific upgrading programs or CSR promotion projects)
AFD Non Sovereign Financing for Banks
Key Eligibility Criteria Strong governance & autonomous financial management Anti-Money Laundering / Terrorism Financing procedures in line with FATF 40 + 9 recommendations Availability or willingness to develop an adapted Environmental & Social Risk Management System Satisfactory risk rating based on AFD’s analysis and Ratings from International agencies (capital,
asset quality, management, profitability, sensitivity to market risks
Financial Tools : Non sovereign loans (concessional or market conditions) Technical Assistance (small grants) to help the implementation of the project, when needed
ARIZ Risk sharing scheme for SME financing
Financial terms: Maturity: from 10 to 15 years, grace periods Hard currencies (USD, EUR), local currencies Fixed or floating rate Unsecured Senior Lending with cross –default and a negative pledge to protect pari passu status
Credit Line Mechanism
Loan
AFD Bank
Eligible Client Eligible Client Eligible Client
Eligibility criteria
Credit Facility
Loan Loan
AFD credit line can be used by the Bank to finance Long term loans to renewable Energy projects which respects eligibility criteria (financial and technical)
The projects will be selected according to bank’s standard norms and procedures
The Bank takes the full risk on the final beneficiary, AFD does not interfere in the bank’s selection process
Partnership AFD-partner bank: the partner bank passes on the soft component of the loan (if any) or maturity to the final beneficiary: the loans to final clients should mirror the lower than market rate or extended maturity of the AFD credit facility.
AFD to implement capacity building for the bank if required
AFD Credit Line mechanism
The Currency Exchange Funds NV
Presentation of TCX TCX Offer in Laos
Features
• Established 2007
• Capital of USD740m
• AFD/Proparco is a prominent shareholder
• TCX is rated A- by S&P
Product
• Local Currency Loans
• Active trading capacity in 80 currencies
• Transaction sizes range from USD0,5m to USD50m
• Single currency limit up to USD150m
• Non Deliverable products available only
• Maximum maturity : 4 years
• AFD operates Non Deliverable Swap CCS
with TCX
• AFD remains the only institution dealing with
the client / partner in Lao PDR
• Clients receives LCY Facility at X% interest
• Interest Payments for 10-yr at LCY 7% settled
in USD
• Principal repaid in USD
Providing local currency funding
Presentation Outline
1. AFD Non Sovereign Financing for Banks
2. Challenges and opportunities of SME Finance
3. AFD and Microfinance
SME Banking opportunities and challenges
Core of economic growth Opportunities for banks
• Major part of the economic framework and the employment base in ASEAN countries : 90% of establishments, between 20-40% of total domestic output and employ between 75-90% of the domestic workforce.
• To ensure their development SMEs need financial services
• Around 75-90% of ASEAN SME rely on internal savings, retained earnings and borrowing from family, friends and money lenders (collectively known as ‘informal sector’) as opposed to the 3-18% which have access to formal sector finance
•SMEs provide a new target market and
business development opportunities
•SMEs offer an opportunity for risk portfolio
diversification as they are active in various
industry sectors and geographic locations
•An SME portfolio generates a stable income
and requires less complex asset-liability
management at the portfolio level. SMEs clients
are also potential personal client: cross-selling
opportunities.
Opportunities to finance SMEs
SME Banking opportunities and challenges
Barriers linked to SMEs Obstacles on the side of Financial Institutions
High rate of informal business which prevents them from access to credit
Insufficient managerial skills (management, accounting, marketing…),
Low equity contribution
Low value of assets offered as collateral (added to difficulties for banks to exercise this collateral) and impossibility to produce personal guarantees
• Financial institutions perceive risk as being high, whereas according to statistics on bankruptcies it is below the perceived risk
• Lack of client/market segmentation
• Organization, methods and tools to assess risk used by Banks are only tailored for Corporate customers and those used by microfinance institutions only for micro-enterprises
• Methods of risk analysis often lead to a restrictive asset based lending approach
Barriers to the SMEs financing
AFD’s Approach Towards SMEs
AFD’s Objective:
Tackling this market failure by bridging the gap of the « missing middle finance »
How?
A. By providing a risk-sharing tool to commercial banks (ARIZ guarantee lines)
B. By extending credit facilities at soft conditions to commercial banks engaged in an ambitious SME lending strategy
ARIZ – Partial Risk-Sharing Mechanism
To give SMEs and MFIs better access to financing through a program that encourages banks’ participation in a risk-sharing mechanism
Key Objective
Is targeted toward loans financing SME’s capital expenditures (i.e. medium term investments) or refinancing MFIs
Covers all risks including political risk and natural catastrophes
Potential beneficiaries All small and medium private companies and MFIsAll business sectors (except real estate, tobacco, alcohol and weapons),Start-ups or development projects
Applies to loans denominated in local currency, USD or EUR
Main Characteristics
AFD’s SME Credit Facility
Objectives
To promote the missing-middle finance due to major potential for contribution to economic growth and employment
To engage banks in an opportunity to increase market shares and enhance profitability
To build banks capacities in the approach towards SME clients
AFD’s Answer
Subsidized credit facilities and technical assistance scheme to implement a “downscaling” program
Integrate SME lending strategy into your institution’s business plan
Technical assistance and advisory services in the following main areas:
Staff training
Risk procedures and management
Operational Conditions to Be Eligible for a Subsidised Credit Facility from AFD Set SME lending objective of at least the amount of the credit facility
Allocate specific means (small coordinating team, mobilisation of network)
Use the “financial advantage” of the AFD credit facility to cover its specific risks and additional costs (technical assistance)
Presentation Outline
1. AFD Non Sovereign Financing for Banks
2. Challenges and opportunities of SME Finance
3. AFD and Microfinance
AFd and microfinance : more than 20 years of experience
Important Dates: AFD has been supporting Microfinance since 1988
1988: AFD’s first microfinance operations in Guinea and Burkina Faso 1995: AFD joins the Consultative Group to Assist the Poor (CGAP) 2002: A dedicated microfinance team is set up at AFD’s headquarters 2005: “Year of Microcredit” and AFD organizes the Paris International
Conference 2007: Proparco, AFD’s subsidiary, completes the range of products to finance
microfinance by offering equity investments, subordinated loans and commercial loans
2009: FISEA (Investment and Support Fund for Businesses in Africa) is launched. The fund makes equity investments in Sub-Saharan Africa, particularly in microfinance
2010: AFD adheres to the Client Protection Principles promoted by CGAP and ACCION International. AFD co-organizes the Marketplace on Innovative Financial Solutions for Development and Convergences 2015 conference in Paris.
Diversity of financial and non financial products
- 2 complementary microfinance facilities: Microfinance Investment Facility for loans and equity investments in LCY (30 MEUR) Technical Assistance Facility (20 MEUR)
- Credit lines at market rates (floating interest rate) through Proparco
- Guaranties: ARIZ & ad hoc
- Specific TA facility on AML and E&S risk management (max: 50 000 EUR)
-Research and Knowledge Management projects
- 2 complementary microfinance facilities: Microfinance Investment Facility for loans and equity investments in LCY (30 MEUR) Technical Assistance Facility (20 MEUR)
- Credit lines at market rates (floating interest rate) through Proparco
- Guaranties: ARIZ & ad hoc
- Specific TA facility on AML and E&S risk management (max: 50 000 EUR)
-Research and Knowledge Management projects
- Over 350 MEUR of cumulated commitments in microfinance
- 50 MFIs supported, mostly in rural areas
-In 2010, over 75 MEUR invested
- Over 350 MEUR of cumulated commitments in microfinance
- 50 MFIs supported, mostly in rural areas
-In 2010, over 75 MEUR invested
Strong growth of commitments
Million EUR
Evolution of AFD Group commitments on Microfinance
0
10
20
30
40
50
60
70
80
90
2002 2003 2004 2005 2006 2007 2008 2009 2010
Mill
ion
€
Grants Guarantees Local Currency Loans Hard Currency Loans Equity funding
Thank you !
Domestic and International Commercial
Banks
SME Banking opportunities and challenges
SMALL and MEDIUM
ENTERPRISES
SMALL ENTREPRISES
Usually / Frequently Unaddressed
Market by commercial banks
MICRO-ENTERPRISES MFIs
LARGE CORPORATIONS
The « Missing Middle Finance »
State or National
Development Banks
ARIZ Provides Two Types of Guarantees
ARIZ INDIVIDUAL GUARANTEE
ARIZ PORTFOLIO GUARANTEE
Targets the “Missing Middle” or “Mesofinance” sector
Guarantees up to 50% of loans between 10,000€ and 300,000€ with a maturity between 1 and 5 years
Defines a target group of final beneficiaries: by cluster, region, state, etc.
Delegation - ARIZ’s Portfolio Guarantee is a “guarantee line”: Guarantees are automatically issued by the bank with the loans provided these match the key qualification criteria defined by the bank and AFD
Issued on a deal-by-deal basis
Tailored to the bank’s needs
Guarantees any type of medium term investment (capex) loan
Guarantees maximum 50% of the loan (up to 75% for MFIs) with an upper limit of €2m (i.e. 50% of a €4m loan)
From 2 to 12 years maximum guarantee (starting at 1 yr for MFIs)
Technical Assistance Possible Points of ApplicationField Point of intervention Technical assistance examples
Strategy Implementation of SME strategy (marketing, commercial framework, product innovation, risk analysis, risk monitoring, etc.)
Coordination strategy
Resident technical assistance up to two years for coordination
Temporary technical assistance with specific expertise from external consultants (e.g. marketing, credit scoring, MIS, etc.)
Marketing SME’s market segmentation
New products definition
From « SME lending » to « SME banking »: enhanced cross-selling
Financing of SME’s market survey
Financing of surveys concerning socially value sectors ( ex. healthcare, education, etc.)
Support for implementation of new products (financial engineering, legal, etc.)
Implementation of dedicated marketing strategy
Commercial approach Re-engineering Training for methods in advising and supporting SMEs
Risk analysis Risk analysis methods review and implementation of cash flow based lending
Implementation or improvement of credit scoring tools (or « risk grading ») tailored for SMEs
Implementation of training for relationship managers and risk analysts
Risk monitoring Implementation of operational, administrative and supervision tasks
MIS (management information system) in line with the risk monitoring
Collection process improvement
Technical assistance for supervision and monitoring procedures
Intervention of IT consultants
Legal training
A multi-layered approach
MICRO
Support local MFIs at different stages
Transforming institutions
Bringing resources
Building capacity
Providing technical assistance
MICRO
Support local MFIs at different stages
Transforming institutions
Bringing resources
Building capacity
Providing technical assistance
MESO
Strengthen financial institutions
Commercial banks, Investments funds
Capacity building
… to use their financial resources and markets more
efficiently
MESO
Strengthen financial institutions
Commercial banks, Investments funds
Capacity building
… to use their financial resources and markets more
efficiently
Foster access to financial servicesFoster access to financial services
MACRO
Work alongside with central banks, MFIs networks and regulators
Creating an enabling legal and regulatory environment
Develop synergies between actors
Contribute to the debate and foster knowledge on microfinance
Organize and take part in main conferences on microfinance
MACRO
Work alongside with central banks, MFIs networks and regulators
Creating an enabling legal and regulatory environment
Develop synergies between actors
Contribute to the debate and foster knowledge on microfinance
Organize and take part in main conferences on microfinance
Support the development of the People’s credit fund (PCF) - ViêtnamSupport the development of the People’s credit fund (PCF) - Viêtnam
PCF is a network of 1000 rural cooperatives, with an outreach to 1,2 millions small producers, aiming at providing them with acess to financial services and to a sustainable financial situations. PCF is refinanced by the Central Credit Fund (CCF).
Important projects in Asia
AFD financial commitments: - 30 M EUR concessional credit line, 20 years, to finance a new financial product : long term investment loans for rural small businesses and micro-entrepreneurs- 500 000 EUR grant for technical assistance to the PCF
Objectives :- Support the growth of PCF -Support the diversification of PCF loan products to longer term Investment Loans-Support the management of the network and the quality of operations
Implementation details : -Allocation of the credit line and of the grant to the MoF (sovereign loan), then on-lending to the CCF, on-lending to the PCF- Transfer of the management of the grant to the CCF
AFD financial commitments: - 30 M EUR concessional credit line, 20 years, to finance a new financial product : long term investment loans for rural small businesses and micro-entrepreneurs- 500 000 EUR grant for technical assistance to the PCF
Objectives :- Support the growth of PCF -Support the diversification of PCF loan products to longer term Investment Loans-Support the management of the network and the quality of operations
Implementation details : -Allocation of the credit line and of the grant to the MoF (sovereign loan), then on-lending to the CCF, on-lending to the PCF- Transfer of the management of the grant to the CCF
Support the First Microfinance Bank (FMFB) in AfghanistanSupport the First Microfinance Bank (FMFB) in Afghanistan
FMFB is one the most important MFIs in Afghanistan. Member of AKAM and applying the best practices of the sector.
AFD Financial Commitments : Granting of 2 Credit lines to refinance FMFB activities: - Credit line of 4 M USD, 10 years, market rate - Concessional Credit Line of 1 M EUR in LCY, 8 years
Objectives:-Strengthen the portfolio growth and financial performance of FMFB- Foster LCY micro-credit offer - Promote the access of women to financial services
Implementation details : - USD Credit Line at market rate, dedicated to the refinancing of traditional lending activities- Concessional Credit line, exchange risk transferred to AFD, to promote LCY loans, in particular to women
AFD Financial Commitments : Granting of 2 Credit lines to refinance FMFB activities: - Credit line of 4 M USD, 10 years, market rate - Concessional Credit Line of 1 M EUR in LCY, 8 years
Objectives:-Strengthen the portfolio growth and financial performance of FMFB- Foster LCY micro-credit offer - Promote the access of women to financial services
Implementation details : - USD Credit Line at market rate, dedicated to the refinancing of traditional lending activities- Concessional Credit line, exchange risk transferred to AFD, to promote LCY loans, in particular to women
Important projects in Asia
Presentation Outline
1. AFD Non Sovereign Financing for Banks
2. Challenges and opportunities of SME Finance
3. AFD and Microfinance
4. Agricultural Finance Innovations
Financing the agricultural sector: obstacles
In most of the countries of AFD’s intervention, the financial needs of the agricultural sector are not covered. This situation leads to a lack of development, poverty in rural areas and absence of food security.
Difficulties for the financial institutions to finance the agricultural sector :
1 High delivery cost, proximity
2 Weak farm practices and farmers
3 Lack of banking technology
4 Collateral
5 Exogenous Risks (climate, price volatility)
6 Weak collaboration among farmers
Financing the agricultural sector : innovations and solutions
Innovation Constraints targeted Applicability
Member-owned localised finance (e.g.SCAs), rural banks, microfinance
1 Delivery cost, Proximity
3 Banking technology4 Collateral6 Weak farmer
organisations
All agricultureRural households
Agricultural leasing 3 Banking technology4 Collateral
Standardised equipment with a 2nd hand market
Credit guarantees 4 Collateral All agriculture
Value chain finance, including contract financing and outgrower schemes
1 Delivery cost2 Farm practices3 Banking technology4 Collateral5 Exogenous price risk6 Weak farmer
organisations
Export cropsRelatively long and complex value chains,
such as speciality crops with quality requirements
Integrated in wider value chain development actions
Agricultural factoring 3 Banking technology4 Collateral
Export cropsProduct where payment takes time
Financing the agricultural sector : innovations and solutions
Innovation Constraints targeted Applicability
Warehouse receipt finance 2 Farm practices3 Banking technology4 Collateral5 Exogenous price risk
Non-perishable crops such as grains, coffee, cashews, sesameFrozen meat and fish
Price smoothing 5 Exogenous price risk Export crops
Technology:Mobile banking (cell phone, mobile van), Biometrics
1 Delivery cost, Proximity Rural households
Insurance (index) 1 Delivery cost4 Collateral5 Exogenous risks
Crops (index)Animals (not index)
Extension servicesFinancial literacy
2 Weak farm practices5 Exogenous risks6 Weak farmer organisations
All agricultureRural households
AFD’s tools to support agricultural finance
AFD can work with agricultural development banks, commercial banks, MFIs, Business Developement Services, Farmers Organisation and partners with smallholders as much as agroindustries.
Objective Tools
Provide funds to Financial Institutions and to their clients which conditions are adapted to
the needs of the agricultural sectorSupport their geographical expansion
Credit lines
Deepen FI’s knowledge of the specificities of the agricultural sector and strenghthen their
capacities to respond to the demandTechnical Assistance
Strengthten the financial structure and the business capacities of FI’s clients from the
agricultural sector : farmers, farmers’ organisation, SMEs for transformation,
distribution, etc.
FISEA (equity investment fund)
Support FI’s clients from the agricultural sector in structuring their investments and
evaluating their financial needsTechnical Assistance
Credit Risk Sharing for banks with growing agricultural finance activities
Garantie ARIZ
Financial innovation : research, pilot projects
Ghana Rubber Outgrower Scheme
Importance of AFD envolvement Between 1986 and 1990: participation to the rehabilitation of plantations and creation
of a new factory
Since 1995: Plantation Projects to Small Holders, 4 successive phases
Period Finance by AFD AreaNo. of
Small HoldersProduction surplus
Phase 1 1995-2000 1,2 M€ 1 200 ha 400 1 550 t/yr
Phase 2 2000-2005 5,9 M€ 2 850 ha 500 3 250 t/yr
Phase 3 2006-2012 8,6 M€ 7 000 ha 1 750 11 800 t/yr
Phase 4 2010-2015 14 M€ 10 500 ha 3 500 17 850 t/yr
TOTAL 1995-2015 29,7 M€ 21 550 ha 6 150 34 450 t/yr
AFD
Local Banks
Small HoldersTechnical Operator
GREL
Investment Financing, cash advance
Loan Repayment
Sale of the production
Seedlings, InputsTecchnical Assistance
Loan in EURO
Loan in EURO
CECAM Madagascar : warehouse receipts and leasing
CECAM : major microfinance network of Madagascar for the number of clients, branches and loan portfolio
AFD has supported CECAM since its creation through, grants, guarantees and a concessional credit line.
CECAM offers specific products to cover agricultural sector’s needs for financing: Warehouse receipts systems - Grenier Commun Villageois (GCV) : credit granted
to the farmers based on warehouse receipts, to cover their financial needs between two harvets.
Leasing solution - Location Vente Mutualiste (LVM) : CECAM owns the equipment untill the credit has been completely reimbursed.
Harvets credits with possibility of in fine reimbursement
Those products account today for 90% of CECAM’s loan portfolio and are strongly contributing to its growth (+17,4% in 2010).
offshore
onshore
❶
AFD(lender)
Client(borrower)
Principal in USD
FX Spot Market
Principal in USD
Principal in LCY
LCY Income
Product/Service
TCX (hedge provider)
USD 3%
LCY 7%
❶
Interest Payments for 10-yrat LCY 7% settled in USD
Principal repaid in USD❸
Interest Payment at LCY 7%
USD equivalent
Principal repaid at LCY 7%
Principal repaid in USD
❶❷
❷
❸
The synthetic Local Currency Loan