1. SUPPORTING SMALL AND MEDIUM ENTERPRISES (SMEs) IN AFRICA THE ROLE OF CREDIT GUARANTEE SCHEMES SEMINAR: SMEs FINANCIAL INCLUSION:- SME Finance Basel II/ Basel III Case of Guarantees Schemes as Credit Risk Mitigation VENUE: CAIRO,EGYPT DATE: 11 TH – 12 TH MAY 2016 PRESENTED BY : ZAC BENTUM

2. SME Finance Basel II/ Basel III Case of Guarantees Schemes as Credit Risk Mitigation CHARACTERISTICS OF SMEs:  Small and Medium Enterprises (SME’s) account for more than 95% of all firms in Africa.  Engine of growth : Economic Social Poverty alleviation  SMEs are wealth-creators.  SMEs in Africa usually start with 1-4 employees and do not expand beyond 10 employees. Eg. “of a study of 116 firms in Nigeria over a 30 year period, only 2 of 21 firms that originally had fewer than 10 employees graduated above that number. Ref: Kirby (1993).

3. CHARACTERISTICS OF SMEs: (contd)  SMEs in Africa do not survive for long. o A study conducted over a 30 year period on SMEs in Eastern Nigeria showed that 50% of those SMEs did not make the 50 th year mark. Ref: Onyeiwu (1992). o SME failure rate is 75% in South Africa. Ref: Okawale / Garwe (2010)  SME growth is influenced by owner/manager characteristics eg. age, education and previous experience.

4. CHALLENGES  Lack of access to finance  Lack of adequate collateral  Insufficient government support  High interest rates  Lack of information technology/systems  Lack of managerial/ experience/ business skills  Lack of training  Lack/ Bad credit history  Information asymmetry  High tax regimes  Cumbersome legal regimes - licensing  Access to markets  Ghanaian eg. oil/ gas industry

5. The characteristics and challenges of the SMEs create obstacles to SME growth and do not make them attractive to the financing community. Empirical evidence have shown that in economies where there is ease of access to credit (ie to SMEs) high economic growth have been recorded. BANK LENDING TO PRIVATE SECTOR (SME)PERCENTAGE (%) OF GDP High - Income Countries168% Middle – Income Countries83% Low – Income Countries43%

6.  A catalyst that increases bank financing to SMEs is a “Credit Guarantee Scheme” - A scheme in which a third party (eg. Government) undertakes to settle the credit taken by a borrower in case of default.

7. Note  For such schemes to be widely acceptable and provide the necessary comfort to the financing institution i.e the banks should pass the Basel II/ III recognition text.  Guarantee institution in developing their products should ensure that:  Legal certainty for the purchaser, a bank or other Financial Institution (i.e legally enforceable).  Clearly documented collateral transaction

8. Note (contd)  The purchaser i.e Bank has a right to liquidate/ take legal possession in a timely manner in the event of default.  The collateral must be registered – Collateral Registry  The Guarantee should be:  Direct  Explicit  Irrevocable  Unconditional  There should not be the need for legal recourse  Avoid maturity mismatch – where the guarantee runs for a shorter period than the facility maturity date.

9. MANAGING THE RISKS  Risk Identification – all risks associated with a facility before and after approval and issuance are identified. - Due diligence - Inspection  Risk Assessment - identified risks are assessed for the probability of occurrence as well as their impact  Risk Control - Strategies are developed to minimize or eliminate occurrence as well as the impact

10. MANAGING THE RISKS (contd)  Risk Control - Strategies are developed to minimize or eliminate occurrence as well as the impact  Review of Control Measure- periodically monitor and review the control measures to ensure that risks are within manageable levels

11. NB: Facilities are categorized as:  20 largest exposures  50 largest exposures  Guarantees flagged under “Watchlist”  Guarantees with peculiar characteristics  “Watchlist” - facilities that remain on the books for 6 months or more without movements etc  Credit Administration Policies – guidelines, policies and procedures to follow in approving credit guarantees.

12. PHILOSOPHY  Our Credit risk mitigating is a collateral lending approach, thus every guarantee issued is against a recoverable asset both moveable, immovable as well as cash–assets.  Our credit guarantee products are partial – thus sharing the risk with the Financing Institution.  Our products include: - Counter guarantees - Co-guarantees/ syndication

13. AN ENABLING ENVIRONMENT Having a robust and innovative Financial Services Industry supported by:  A Strong Legal Regime  Credit Reporting / Reference Bureaux eg. Xdsdata, Dun & Bradstreet, Hudsonprice Data Solution  Efficient Collateral Registry  Establishment of a Deposit Protection Scheme.

14. EXIM PRODUCTS A Bank Credit Guarantee Credit Guarantee cover for pre and post shipment Credit Guarantee for export proceeds against non- insurance risk on NTEs Local Credit Line Guarantee for Microfinance Institutions Credit Guarantee for Refinance Credit Syndication Guarantee – risk sharing Machinery Credit Guarantee Machinery Leasing Guarantee

15. Contract Awarding Agencies B  Bid Bond  Advance Mobilisation Guarantee  Advance Payment Guarantee  Seed Fund Guarantee

16. There are 31 (+ 4 representative Banks) Commercial/ Universal Banks in Ghana, and Exim works with all of them, but only a few are active/ regular participants in the programmes.

17. DOCUMENTATION  Security Sharing Agreement  Terms and Conditions Guiding the Credit Guidance Scheme  The Guarantee Document

18. Conclusion The impact and success of African Credit Guarantee Schemes to assist SME access to credit has been dependent on: Size of the Fund - Credit Guarantee Schemes should maintain adequate economic and guarantee funds commensurate with the risks they undertake. Good Corporate Governance – This would enable credit guarantee schemes operate effectively and efficiently and be accountable for the management of resources.

19. Conclusion (contd) Effective Risk Management - This would guide the underwriting processes as well as ensuring effective internal audit function. Credit Reporting/ Reference - Introduction of credit bureau in the financial system, reduces the information asymmetry issues. Establishment of an efficient Collateral Registry. Deposit Protection Scheme – This ensures an appropriate legal framework for the financial markets.

20. Thank You

21. Part II

22. SUPPORTING SMALL AND MEDIUM ENTERPRISES (SMEs) IN AFRICA THE ROLE OF CREDIT GUARANTEE SCHEMES SEMINAR: SMEs FINANCIAL INCLUSION:- GUARANTEE SCHEMES INTERNATIONAL BEST PRATICE. VENUE: CAIRO,EGYPT DATE: 11 TH – 12 TH MAY 2016 PRESENTED BY : ZAC BENTUM

23. TABLE OF CONTENTS  INTRODUCTION - AFRICA AT A GLANCE  CHARACTERISTICS /CHALLENGES OF SME’S IN AFRICA  WHY CREDIT GUARANTEES  BENEFITS OF CREDIT GUARANTEE SCHEME  GUARANTEE MODELS  FORMS OF CREDIT GUARANTEE SCHEMES  CASE STUDIES  AFRICAN GUARANTEE FUND  GUARANTEE FUND FOR PRIVATE INVESTMENT IN WEST AFRICA ( GARI)  AGRICULTURAL CREDIT GUARANTEE SCHEMES – NIGERIA  EXIMGUARANTY COMPANY GHANA LIMITED  CONCLUSIONS

24. INTRODUCTION AFRICA AT A GLANCE Population of Africa : 1.2 billion 54 sovereign states : Population growth rate : + 2% GDP of Africa : US$2,449 billion GDP growth : 5.2% GDP per capita : US$2320 Contribution of Agric to GDP : 32% Contribution of Agric to Employment : 65% Financial services industry : US$107 billion

25. AFRICA AND THE WORLD Indicators WorldEuropeAsiaSouth AmericaAfrica Population (bn) 7.3 0.7 4.2 0.4 1.2 GDP (US$ billion)77,30222,80425,374 4,473 2,449 GDP Growth (%) 3.8 1.1 7.9 5.5 5.2 GDP per capital (US$)10,88027,525 6,090 10,153 2,320 Poverty % ≤ US$ 1.00---- 39 Ext Debt % GDP 60.7

26. CHARACTERISTICS/CHALLENGES OF SME’S IN AFRICA CHARACTERISTICS: Small and Medium Enterprises (SME’s) account for more than 95% of all firms in Africa. Engine/Drivers of growth : Economic Social Poverty alleviation SMEs are wealth-creators SMEs account for SMEs in Africa usually start with 1-4 employees and do not expand beyond 10 employees. Eg. “of a study of 116 firms – Nigeria over a 30 year period, only 2 of 21 firms that originally had fewer than 10 employees graduated above that number ref. Kirby (1993). SMEs in Africa do not survive for a long time. A study conducted over a 30 year period on SMEs in Eastern Nigeria showed that 50% of those SMEs did not make the 50 th year mark. Ref: Onyeiwu (1992) SME failure rate is 75% in South Africa. Ref: Okawale and Garwe (2010) SME growth is influenced by owner/manager characteristics eg. Age, education and previous experience

27. CHALLENGES: Lack of access to finance Lack of adequate collateral -150% Insufficient government support High interest rate Lack of information technology/systems Lack of managerial/experience/business skills Lack of training Poor infrastructure – roads, telecom, electricity, water supply etc. Lack/bad credit history Information asymmetry High tax regimes/inflation Cumbersome legal regimes - licensing Access to markets Ghanaian example oil/gas industry

28. WHY CREDIT GUARANTEES: These challenges create obstacles to the SME growth and do not make them attractive to the financing community. Empirical evidence have shown that in economies where there is ease of access to credit (ie to SMEs) high economic growth have been recorded. Because the challenges of lack of access to finance for the SMEs is primarily due to weaknesses in the enabling environment, African government have therefore found it imperative and are motivated to devise structures and mechanisms that afford the private sector/SMEs easy access to credit. A catalyst that increases bank financing to SMEs. One such scheme is a “Credit Guarantee Scheme” for SMEs. A scheme in which a third party (the government) undertakes to settle the credit taken by a borrower in case of default. BANK LENDING TO PRIVATE SECTOR (SMEs)PERCENTAGE (%) OF GDP High - Income Countries168% Middle -Income Countries83% Low - Income Countries43%

29. BENEFITS OF CREDIT GUARANTEE SCHEME:- Protect the interest of the lender (ie Bank/Financing institution) from the chance of non-payment by the borrower/SME. Facilitates access to credit Eliminates the need for collateral Ensures proper project appraisal since the financing institution takes a share of the risk (partial guarantees) Identifies clear cash flow pattern of the SME

30. GUARANTEE MODELS:- Individual loan guarantees - CGS provider assesses the loan after a referral by the Bank. Portfolio guarantees - they rely on the bank’s loan approval processes - more flexible target borrower/loan - faster utilization FORMS OF CREDIT GUARANTEE SCHEMES Coverage: Regional National Sectorial Funding: Donor sponsored Specialized eg GARI Regionaleg AGF Nationaleg Exim/ACGS

31. CASE STUDIES: CS 1. AFRICAN GUARANTEE FUND – a market friendly Guarantee Scheme for African SMEs founded in June 2012. Funded by AfDB with Spain and Denmark as partners Location: Nairobi, Kenya Guarantees: » Portfolio/individual » Bank fund raising » Equity Capacity Building Products : » SME financial product offering » Bankable SME segment » Banks appraisal capacity

32. CS 1. AGF (contd) Guarantee Capital - US$50m / US$66m Target:- To generate approximately US$2billion of new lending. - 10,000 African SMEs (per 5year Strategy Plan) As per their 2014 Accounts: Guarantee Portfolio: US$171m SMEs supported: 300 Countries: 23 Average Financing Tenor: 55 months Available Financing: US$400m

33. CS 2. GUARANTEE FUND FOR PRIVATE INVESTMENTS IN WEST AFRICA (GARI) Incorporated: 1994 Funded: – French Development Agency (AFD) – European Investment Bank (EIB) – Deutsch Development Organisation (DEG) – Secrѐtariated’Etatàl’Econome (SECO) – 23 Commercial Banks Location:Lome, Togo Coverage: ECOWAS Region Guarantee Capital: US$26m Maximum Coverage: 60% - 75% Maximum Cover: US$6m Target : » Start ups » Modernisation » Capacity upgrade » Restructuring

34. CS 2. GARI (contd) Tenor : 60 months (2 -10years) Acceptance Rate : 70% Applications approved : 361 Guarantee amounts: US$700 Available financing : US$1.8billion (14 Countries including): Ivory Coast Togo Ghana Benin Senegal Burkina Faso Niger Nigeria Cameroon Sierra Leone These interventions no doubt has had a very positive impact in the African region but a lot still needs to be done. The presentation does not give the number of jobs or employment created or sustained because data in this area is sketchy, but it can be reasonably assumed that the numbers are high.

35. CS 3. AGRICULTURAL CREDIT GUARANTEE SCHEME - NIGERIA Nigeria: The Agriculture Credit Guarantee Scheme (ACGS) In Nigeria, like most of Africa, the activity in agriculture sector is by SMEs. Financing SMEs in the Agric Sector is probably even worse than financing other SME activity for example in Commerce. Bank lending to the Agric Sector %: 2012 - 2014 Agric as a percentage of total Bank lending 4.0% Reasons for this lack of support is the same as stated for the SME sector in general but more emphasis on: Lack of required technology and infrastructure Inability to assess and price the risk associated with agric sector

36. CS 3. ACGS (contd) Agric however has a high potential in Nigeria and Africa Agric Employment : 65% Population Growth Rate : 2.5% Agric Share of Non-Oil Exports : 70% Total Land Area : 98.3m Hectares Cultivable Land Area : 84.0m Hectares (40% utilized) Large Internal Market :170 million people (2.5% growth rate) Large Surface Market (with untapped irrigation potential): 279 billion cubic meters. Nigeria’s Top Agric Imports: (World largest importer of US Wheat, World 2 nd largest importer of Rice) Wheat- US$ Rice-US$ Sugar-US$ Fish-US$ With this huge potential and the apparent lack of support from the financing institutions, the Government intervened with known policies to include the establishment of the ACGS in order to mitigate these deficiencies and afford SMEs the needed credit guarantees to access the much needed credit to help overturn the current trend.

37. CS 3. ACGS (contd) Established in : 1977 Funded : Central Bank of Nigeria 40% Federal Government of Nigeria 60% Guarantee Capital : US$ 30 million Target Coverage : 75% maximum Maximum Single Coverage : US$ 250,000 (N50m) Coverage : 900,000 farmers Guaranteed Portfolio : US$ 370m (N75billion)

38. CS 4. EXIMGUARANTY COMPANY GHANA LIMITED Incorporated : 1994 Funded : Bank of Ghana, Ecobank, National Investment Bank, Social Security and National Insurance Trust (SSNIT) and Ministry of Finance. Location : Accra (Kumasi/Takoradi) Coverage : National Guarantee Capita : US$10,million Maximum Coverage : 75% Target : All sectors

39. Avg Tenor : 18 – 24 months Acceptance Rate : 65% Applications Approved : 5,617 Guarantee amounts : GH¢359,326,836 = US$100m Available financing : SME supported : 1,000 CS 4. EXIM (contd)

40. CONCLUSION The impact and success of African Credit Guarantee Schemes to assist SME access credit has been dependent on. 1. Size of the Fund - Credit Guarantee Schemes should maintain adequate economic and guarantee funds commensurate with the risks they undertake. 2. Good Corporate Governance – This would enable credit guarantee schemes operate effectively and efficiently and be accountable for the management of resources. 3. Effective Risk Management Practices - This would guide the underwriting processes as well as ensuring effective internal audit function. 4. Credit Reporting/Reference Institutions - Introduction of credit bureau in the financial system, reduces the information asymmetry issues. 5. The establishment of an efficient collateral registry. Deposit protection scheme – This ensures an appropriate legal framework for the financial markets.

41. CONCLUSION (contd) It is also important to recognise the impact in terms of: Additionality Sustainability Increased volume of lending to SME sector. Catalysed ventures into new markets. Renewed understanding /partnership between CGS and Banks to SME financing.

42. THANK YOU