1. Workshop on SME Finance – Reaching Scale: A dialogue between global practitioners and East African Bankers 26 – 27 June 2007, Dar es Salaam, Tanzania A practical example from Mozambique Socremo - Banco de Microfinanças

2. Structure of the Presentation Country Features Socremo – Banco de Microfinanças SME Business Experience Policy Environment Technical Assistance / Support Key Lessons

3. Human Resources Banking Sector Microfinance Industry Infrastructure Business Environment 12 commercial banks, including 3 microfinance banks Shallow banking system with low lending propensity Underdeveloped industry with narrow product range Very limited statistics information, Around 66,696 active clients, USD 29.5 m portfolio (9 MFIs) Difficult investment environment (high bureaucracy) Restrictive (old) labour law and property right high taxes & charges Relatively good infrastructure in Maputo and Beira Bad road links and erratic power/water supply elsewhere Telecommunications access increasing (mobile phones) One of the main problem for private business Low tertiary enrolment rates General Country Features Population of app. 21 million, growth 1.8% p.a. GDP growth 9.8%, Inflation 12.8% in 2006 GDP per capita around USD 310

4. Vision To provide - in a transparent, professional and sustainable way – financial services to low and middle income groups, with special focus on micro and small entrepreneurs. To be the house bank of low and medium income groups in Mozambique Mission Socremo – Banco de Microfinanças

6. Socremo has developed from a only credit given MFI to a profitable commercial Bank, offering a range of credit and deposit products through its network of 8 branches, with total number of staff of 254 (2006). Socremo – Banco de Microfinanças

7. Ownership Structure Diversification of ownership; reducing the shareholding of the government; Including reputable and experience investors; Surpassing minimum capital requirement for com. banks. Socremo – Banco de Microfinanças Governance Structure International best practice organisation structure; Clear defined rules for each organ; Policies and procedures for all areas; Comprehensive MIS. Legal Environment Overage, inflexible laws and regulations; Especially the labour law is very restrictive and there are no clear property rights. Microfinance Industry No microfinance policies and regulations; Limited coordination between stakeholders within the sector.

8. SME Business Experience

11. Excurse: Microfinance Bank of Azerbaijan

12. Graduation of old (good) micro clients; Unserved demand in the market; Additional income source; Strong synergies with microlending; Good additionally with existing products and good cross-selling perspectives; Important for economic development and social stability / job creation. SME Business Experience Product Design Continue building on existing credit history; Increase amounts/terms; Flexible interest rates regime (dependent on collateral availability, quality, quantity). Why targeting SME market

13. Stricter due diligence process, higher documentation requirements; Temporary centralisation of decision-making process (for training), later gradual release of lending authorities to branch level. SME Business Experience Loan Officer Build-up of specialised and dedicated team of SME loan officer out of the pool of experienced micro loan officer; Establish a separate unit within the Credit Department; Introduction of specific incentive scheme for SME loan officer. Procedures

14. Pledging of vehicles (not practiced by other banks in Mozambique); Introduction of obligatory promissory note as additional collateral instrument for loans above USD 10,000 equivalent; Own evaluator to cut costs and escape corruption. SME Business Experience Collateral Challenges

15. Drawing on existing client base; Reliance on assessment principles of micro-technology, looking at the real economic situation rather than official financial statements; Quick processing time with minimum formal and documentation requirements; Application of the same strict enforcement procedures as used for micro clients (PAR 1 day control); Incentive System for loan officers; Acceptance of vehicles as pledged collateral; Assignment of an experienced branch manager as head of the SME unit within the Credit Department. SME Business Experience Contribution to Success

16. Finding the right balance between controlling by applying higher documentation requirements on the one hand and avoiding too rigid formalism on the other hand. SME Business Experience Challenges Addressed Introducing standardised assessment procedures and forms taking into account the average level of complexity of a typical Mozambican SME while at the same time leaving flexibility for simpler (or more complex) assessments in case of need. Main Challenges

17. No direct role of the government; Business registration and taxation requirements very onerous, preventing business from doing official business; Lack of rules and bad implementation of collateral registration; Intransparent and long court procedures, especially court enforcement procedures. Policy Environment Government Role and Actions

18. Since 2005 Socremo is managed by LFS Financial Systems GmbH under a Management Service Contract; Financed by different partners, including DFID, KfW, seco, and AfriCap. Technical Assistance / Support Refinancing Partners Socremo cooperates with Triodos International Fund Management B.V., Deutsche Bank Microfinance Funds, and Standard Bank, Maputo. Technical Assistance

19. Build-up SME business with experienced lenders (=micro loan officers); Build-up dedicated group of specialists with own procedures and own incentive scheme; Start with pilot branches and centralised decision making, branch out only when a sufficient number of staff (incl. branch managers) has undergone training. Key Lessons Three main Lessons

20. Start with smaller maximum amounts to gain experience; Create incentives for clients to provide better collateral (e.g. by making pricing dependant on collateral); Apply usual principles of responsible loan officers and client graduation; Take reality serious when defining documentation requirements and analysis (e.g. include related businesses). Key Lessons Advice Policy Makers Ease business registration and taxation requirements. Advice Financial Institution

21. Thank you for your attention! Christoph Diehl Access Microfinance Holding AG Linienstraße 126 10115 Berlin Germany Tel.: +49-(0)30-30 87 47 34 Fax: +49-(0)30-30 87 47 50 christoph.diehl@accessholding.com www.accessholding.com christoph.diehl@accessholding.com www.accessholding.com christoph.diehl@accessholding.com www.accessholding.com