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Ecosystem Supporting SMEs and SME Banking QAMAR SALEEM SENIOR SME BANKING SPECIALIST IFC BANK ADVISORY SERVICES, EMENA NOVEMBER 24 TH, 2014.

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Presentation on theme: "Ecosystem Supporting SMEs and SME Banking QAMAR SALEEM SENIOR SME BANKING SPECIALIST IFC BANK ADVISORY SERVICES, EMENA NOVEMBER 24 TH, 2014."— Presentation transcript:

1 Ecosystem Supporting SMEs and SME Banking QAMAR SALEEM SENIOR SME BANKING SPECIALIST IFC BANK ADVISORY SERVICES, EMENA NOVEMBER 24 TH, 2014

2 2 Key Messages  Sizeable SME population in MENA region (19-23 million) largely lacking access to credit ($ billion financing gap)  SME finance from the banking sector is low in MENA (8%); Jordan was estimated at 10%. Multiple access to finance challenges inhibit growth  Banks as well as SMEs face various obstacles which inhibit easy access to finance for this underserved segment  IFC as part of G20 SME Finance sub-group recently reviewed global SME finance practices & reviewed 164 models  Significance of legal & regulatory framework, financial infrastructure, public sector interventions & capacity building for banks emphasized  IFC as a knowledge leader in SME finance has a range of services and knowledge collateral available to support SME development

3 3 SOURCE: McKinsey-IFC MSME Database 2011 There are million Micro Small & Medium Enterprises in the MENA facing a financing gap of $ billion Total19-23 Informal Micro (1-4 employees) Very small (5-9 employees) Small (10-49 employees) Medium ( employees) Number of MSMEs in MENA by size Millions Formal SME’s (>5 employees) by country ‘000 SOURCE: IFC-McKinsey database 2011, Country statistical offices Jordan Kuwait28-35 Qatar10-12 UAE80-90 Yemen60-70 Iraq Saudi Arabia Sudan Morocco Egypt Algeria Formal SMEs 10%

4 4 Unemployment amongst Youth and limited financial inclusion of Women remain key areas of concern in the region SOURCE: IFC, Education for Employment Report, 2011 SOURCE: IFC. Strengthening Access to Finance for Women-Owned SMEs in Developing Countries Youth unemploymentWomen in Business

5 5 SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011 While SME finance has 10% share in Jordan, it is heavily medium enterprise focused; ~$2 billion finance gap needs to be addressed 75% Korea

6 6 SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011 However, there are multiple obstacles faced by financial institutions – information asymmetry, collateral, & enabling environment are key issues % of banks responding that obstacle is very important or important for SME Financing

7 7 SOURCE: SMEs in MENA: Leveraging Growth Finance for Sustainable Development (Citi Foundation and Shell Foundation) There are various barriers for SMEs as well to obtain funding – collateral, pricing, advisory requirements being the key areas

8 8 IFC completed a review of leading SME finance practices and models as part of our work with the G20  G20 SME finance Sub Group identified successful practices & policy measures for SMEs in 2011  Work involved review of 164 different models globally and subsequent policy requirements Key Recommendations from the G20 Sub-Group  Developing specific country strategies  Developing supporting legal & Regulatory framework  Building reliable data sources for SME finance  Strengthening the financial infrastructure  Effective government support mechanisms  Address specific market failures e.g. women and sustainable energy finance  Building the capacity of financial institutions SME Finance Policy Guide – issued October 2011 by IFC

9 9 Country level strategies and supportive legal & regulatory environment are needed to enhance access to finance for SMEs  Ensure effective collection & monitoring of data for efficiency of measures  Strengthen credit reporting to even the playing field between small and big banks  Avoid over restrictive licensing requirements to significantly increase competition levels  Support non-FI alternatives to bank lending in the market e.g. leasing and factoring Case Study: SME Corporation, Malaysia  Single dedicated agency to formulate and coordinate overall policies & strategies for SMEs  Malaysia Incorporated (established 1983) and PEMUDAH task force (launched 2007) for public- private sector collaboration  Bling (business linkages) program to facilitate SMEs supplying to large companies  Launch of SCORE ( A diagnostic tool to rate and enhance competitiveness of SMEs) in 2007  INNOCERT (Innovation Certification for Enterprise Rating and Transformation Programme) program 1

10 10 Financial infrastructure needs to be strengthened for improved transparency of SMEs  Accounting and audit requirements need a balance between transparency & regulatory simplicity  Credit bureau & registries need complimentary systems for personal and business information from all players (i.e. FI and Non-FI)  SME rating agencies offer a potential alternative, but need a certain critical market size (e.g. India) Case Study: SME Rating Agency of India  India’s 1 st rating agency for MSME’s  Diversified equity ownership by 11 banks allowed lenders to accept rating and extend financial and non-financial benefits  SMEs are bucketed by size for peer comparisons  Rating fee < $1155, subsidized by the government by 75%  SMERA forecast to reach out to over 80,000 SMEs over the next 5 years 2

11 11 ….and financial infrastructure can be strengthened for venture capital and private equity access to the SME market  Secured transaction regimes should allow for a wide range of enforceable collateral & out of court enforcement options  Improve corporate governance practices should allow venture Capital/ private Equity access to SMEs  SME stock Exchanges have only proven marginally useful due to low volumes and a lack of investor interest Case Study: INOVAR Program, Brazil  Objective: to strengthen investment in new technology SMEs and to establish Venture capital  Created a research and information dissemination platform and developed mgt capacity to accelerate VC investment  Established a VC portal where investors and entrepreneurs register  Allows for the provision of business plans and joint due diligence for VC funds  20 venture forums established and over $1 billion in VC/ PE investment made in SMEs 2

12 12 Effective public sector interventions needed to widen opportunities, build SME capacities and avoid market distortions  Credit guarantees can be highly effective, but subsidies should be minimized to clear market failure areas  Government procurement can link SMEs into supply chain finance, providing they are paid on time  MSME capacity measures e.g. training should ideally be on a commercial/near-commercial basis and become scalable Case Study: FOGAPE, Chile  Outreach– 30,000 guarantees issued (1,800 per million people)  Finance – Targeted to small businesses, low ceilings  Distribution – Through its partner lending institutions  Coverage – 70-80%, higher for investment loans  Approach – Portfolio/program Lending  Fees- risk-based (1-2%)  Delinquency - Net loss rate = 1.5% 3

13 13 SOURCE: World Bank-A review of Credit Guarantee Schemes in MENA region ….currently credit guarantee schemes outreach in MENA is low – benchmark country averages (2,080/million people; 1.2% of GDP) 3 Operation Mechanism Individual N/A Individual Hybrid Individual

14 14 SOURCE: World Bank-A review of Credit Guarantee Schemes in MENA region ….benchmark countries schemes exhibit higher scale and proficiency 3 Operation Mechanism Portfolio Auction Hybrid Portfolio Hybrid Portfolio Hybrid

15 15 Specific market failures like financial services to Women-in-business & Sustainable energy finance (SEF) need to be addressed Case Study: Women Entrepreneur Package, Garanti Bank, Turkey  Objective to meet businesswomen’s network, training and financial needs  Provision of customized suite of services and a support loan and financial training  Reached out to 8,400 women and $156 m USD lending disbursed  Economic impetus - 31 to 38% of SMEs in developing countries are owned by women – MENA average is 12-15%  Women owned SMEs is a profitable opportunity but requires a tailored methodology  Key approaches adopted for SEF are a) legal and policy reforms, b) lending facilities targeting banks and/or directly SMEs; c) technical assistance to raise awareness 4 Case Study: Erste, Czech Republic  FINESA (Financing Energy Saving Applications) developed. IFC supported bank, identified SEF potential in Czech market- identified SEF potential in Czech market (10M people), $7.3 billion over 6 years  CS became leading bank in Czech sustainable energy market, with a $650M (Euro 500M) portfolio, new deposit accounts valued at $10 million In Collaboration with IFC

16 16 Banks can play a leading role but capacity of financial institutions needs to be enhanced to effectively manage SME business 5 SOURCE: IFC Analysis Key areas where core competencies are required for successful SME banking

17 17 ….SME Banking can be the most profitable business segment in the Bank but performance varies considerably between winners and losers SME Banking profitability comparisonWinners vs. Losers in SME Banking SOURCE: IFC, SME Banking Knowledge Guide SOURCE: Mckinsey Research 5

18 18 IFC provides a combination of Investment and Advisory Services for optimal results ADVISORY INVESTMENT Capacity Building for FIs Build capacity of FIs in strategy, market segmentation, credit risk management, product development through new approaches and systems to scale up their financing for SMEs on a sustainable basis Promote sub-sector focus: women-owned SMEs, sustainable energy SME projects, agri SMEs, leasing, etc Raise awareness on best practices in the SME Finance space Financial Infrastructure Develop credit reporting infrastructure based on country needs Support development of secured transactions, collateral registries, legal and regulatory framework Build capacity of public/private stakeholders through advice and training SME Financing & Investments Equity Investments in Financial Institutions / Equity Funds for SMEs Funded lines to expand investment and working capital lines especially in illiquid markets Blended finance options to support the expansion of IFC’s risk appetite (e.g. grace periods, performance based pricing, subordination, higher risk /lower security or in limited cases, local currency positions) [for selected projects] Focus underserved segments, e.g., gender, fragile/conflict, agri, climate Risk Mitigation & Enhancements Risk Sharing Facilities / Partial Credit Guarantees to: -Enhance risk taking capacity and provide capital relief via low risk weightings -Avoid FX mismatches and encourage domestic resources for SME financing

19 19 International Finance Corporation Bank Advisory Services, EMENA 24th Floor, Nile City Tower (North) 2005C Corniche El Nil Ramlet Boulac Cairo – Egypt


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