1. Enhancing MSE Access to Finance: EBRD Experience
Raymond Conway
Senior Banker and Head of Office 1

2. Financial intermediation is low
Low level of intermediation reflects:
Lack of confidence in banks and banking systems
Low risk capacity of banks
Insufficient capital to fund growth
Inadequately developed banking skills
Poor institutional environment 2

3. Objective in MSE Finance
Provide sustainable access to financial services to Micro and Small Enterprises (MSEs) not catered for by the formal financial sector
Typical environment at project start defining approach to MSE Finance:
Low level of financial intermediation (banks as exchange bureaus with limited/no lending operations)
Limited lending skills
Lending decision based on collateral, connections, size, or government instructions

4. Objective in MSE Finance (Cont’d)
Undercapitalised and high level of non-performing loans
Risk aversion: banks view SME lending as high risk given the poor portfolio quality
Post war situation/Ethnic conflicts
High levels of poverty, especially in rural areas
Flight of capital and work force
OVERALL…..HIGHLY UNDERBANKED ECONOMIES

5. MSE Finance covers Loan Range
Micro Loans typically between $50 and $10,000
Small Loans typically between $10,000 and $200,000
Medium up to $500,000
Overall average loan size $6,000
Average Micro Loan size $2,300
MSE lending through existing commercial banks
43 partner banks in 14 countries
MSE lending through specialised microfinance institutions
12 “Greenfield” MSE Banks set up by EBRD et al., delivering wide range of financial services to MSEs
1 microfinance bank of Opportunity Int’l ‘replicating’ above model
1 NGO (TA only), and 1 NGO (loan funds).

6. EBRD’s “Credo” in Improving MSE Finance
Ensure fast and wide outreach
Broad regional coverage of lending and training operations, including remote and depressed areas (so far: about 700 branches/outlets)
Broad range of clients: all economic sectors, all sizes (up to typically 100 employees)
Broad range of loan products: working capital/investment loans, short/long term, local and FX currencies, cash disbursement and transfer etc.; including loans under $2,000 within 24 hours
Ensure commercial viability of MSE lending as building block for sustainability
- Create efficient and streamlined lending procedures
- Commercial pricing of loan products
- Roll-out MSE lending to branch network: mass scale lending

7. EBRD’s “Credo” in Improving MSE Finance (contd)
3. Integration of MSE lending operations into formal financial system as standard service
4. Efficient use of Technical Assistance funds: with clear and measurable performance benchmarks
5. Donor Co-ordination and Harmonization - in On-lending, Project Management, and TA-Institution Building:
Japan, US, EU, G-7, UK, Canada, Switzerland, et al. provide TA.
KfW, IFC, FMO and others participate in equity and/or loans.
Investors and donors need to build upon each other for efficiency and outreach.

8. Results as of 30 September 2004
Lending results overall
690,000 loans disbursed for $4.5 billion
30,000 loans disbursed for $171 million monthly
90% of borrowers are first time borrowers
50% women borrowers
Equal access for ethnic minorities
95% of loans disbursed outside capital cities
Arrears over 30 days as a % of outstanding portfolio: 1.0%
Strong year on year growth: >100%
Loans to SMEs commercially priced
Microbanks avg ROE 14%

9. Institution Building Results (contd)
More than 9,000 banking staff intensively trained (on the job, minimum one year)
700 MSE departments established from scratch in outlets/branches
MSE lending, including loans <3,000, integral part of banks’ services
Back office functions established
Lending technology is based on merit of business, not collateral and on direct marketing activities (“go where the client is, don’t wait that he/she comes to you”)
Partner banks finance further outreach and expansion

10. Ingredients to improve MSE finance
Intensive Institution building: focus on training well qualified lending personnel, putting in place streamlined and well monitored lending procedures, and replacing collateral-based lending with proper credit analysis
Strict attention to Terms & Conditions of MSE lending to:
i) lower transactions cost for banks and borrowers, and
ii) increase the boundaries of who’s ‘bankable’ (active direct marketing)
Technical Assistance to cover initial start-up training costs and regional expansion on a declining scale as local experts start to replace external experts. Banks always co-finance (offices, transport, taking over cost of loan officers, etc.)

11. Ingredients to improve MSE finance (contd)
Critical Mass, i.e. volume and efficiency needed for MSE lending to make good business sense and achieve financial viability
Commitment of partner banks is essential (demonstration effect)
Availability of Funding Sources : IFI refinancing, deposits, potential to mobilize funds in the commercial market via syndications, issuing bonds, etc.
Patient Development-Oriented Equity in the case of microfinance banks

12. Other issues in more difficult environments
Exposure Issues: Undercapitalisation of banks limits on-lending capacity (first-loss, risk sharing, and co-financing funds needed to leverage EBRD funding).
Technical Capacity is scarce and far more extensive intervention required
Lack of basic skills in all spheres (e.g. credit risk rating and provisioning, accounting and MIS, treasury, internal audit)
Institution building is needed across all banking spheres
Broader intervention might be a plus, e.g. facilitating equity investment, Trade Finance Programme and other products
Legal and Regulatory Environment: Key impediments must be tackled (e.g. adverse pledge laws and bureaucratic procedures for collateral registration/notarisation, interest rate caps).

13. EBRD Next Steps for Increasing Access to Finance
Increase rural lending and village outreach, e.g. mobile micro-banks at ProCredit Georgia;
Farm Lending – specialised loan officers (crop/climate patterns)/modified group methodologies;
Push extremes – particularly, express micro loans (under $2,000, no collateral, 24 hrs.) and longer term fixed asset loans as borrowers grow;
Partner Banks - continue to include new banks as long as sufficient TA is available: this is a long-term proposition. Mature partners to continue business without consultants’ (80% of branches have ‘graduated’);
Microbanks - increase deposit mobilisation and gain independence from IFIs; diversify creditors; widen branch networks, increase financial services for the ‘poor’; and
Continue to push TA efficiency for measurable results

14. Conclusion
Commercial approach to lending assistance for institution building
Various complementary approaches
Role of public sector: banking regulatory framework, strong legal environment, no market distortion, information (initiate credit bureau)
Strengthen financial sector at large: foreign entry, consolidation (equity finance)
Promote strong governance: confidence building
Special EBRD focus on Early Transition Countries 14