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ARIZ AFD’s CREDIT GUARANTEE

SCHEME on SME market

Disclaimer : this overview is for discussion purpose only. 06-07 June 2011

AfDB - EMRC SME Forum - Lisbon, June 2011

Bridging the Missing Middle Gap in Africa

Plenary Session 8: International partnerships to facilitate SME growth

Nicolas Hertkorn– Senior Investment Officer, hertkornn@afd.fr

Agence Française de Développement,

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Presentation of ARIZ guarantee scheme

1 – AFD group overview

2 – Approaches on guarantee schemes for SME banking

3 – ARIZ guarantee scheme

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1 – AFD Group overview

AFD : French Operator for Bilateral Overseas Development AssistanceCreated in 1941

AAA rated State Owned Financial Institution (under French banking regulation)

Large network in 60+ Countries

€ 7 Billion new commitments in 2010

Wide Range of Financing Tools and clientsNon sovereign loans to the private and public sectors (concessional or market conditions)

Sovereign loans (from very concessional to market conditions)

Equity financing

Guarantees on loans in EUR, USD and local currencies (“ARIZ”)

Grants (for study funds, technical assistance and projects)

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Countries of operation & mandates

– Africa, Mediterranean countries, SE Asia, Caribbean

– Strong focus on Africa

– Rapid geographical expansion since 2005: India, China,

Thailand, Philippines, Brazil, Mexico, Columbia…

Global Public Goods

Poverty alleviation

National solidarity

Green & inclusive growth

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Domestic

and

International

Commercial

Banks

2. To fight exclusion: Building Bridges between SMEs and financial institutions

SMALL and

MEDIUM

ENTERPRISES

MICRO-to-SMALL

ENTREPRISES

Frequently

unaddressed Market

by Commercial

Banks

MICRO-

ENTERPRISESMFIs

LARGE

CORPORATIONS

AFD’s programms on

bridging the gap of the

« missing middle finance »

by providing :

1. support to local initiatives

aimed at strengthening SMEs

2. technical and financial

assistance to up-scaling MFI’s

3. a risk-sharing tool to

commercial banks :

ARIZ guarantee scheme

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Each Bank builds it’s own experience on SME market, on it’s own way …

…but all state that it needs a step by step learning approach, requiring to

invest among several years before measuring risk and profitability…

….and all banks need to invest in particular on :

Client approach : defining the targeted market, knowing the customers and building an

accurate segmentation, offering tailored products that fit to each segment;

Risk assessment with new decision making processes : replacing case by case credit

analysis based on financial statements, with a statistic approach using credit scoring tools

and simple but accurate financial and non financial information;

Cost management and profitability : new processes and risk management are volume

driven, closer to retail banking than corporate banking. There is a need to invest on

standardized & simple processes, which efficiency is linked to a significant increase of

SME loan portfolio.

Banks need an appropriate environment : global governance (justice, financial

statements&auditors), adapted bank regulation (risk weight on assets), fiscal issues,

guarantee scheme

Lessons learned shared at the IFC…

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1. Partial credit guarantee as a tool for policy makers (government, donors) to support a lending activity with specific targets

- sector oriented : agriculture, reniewable energies

- post conflict economies

- economic crises (countercyclic)

Specific approaches (risk concentration)

Expected losses are high (higher than a profitable bank lending activity would allow)

Guarantee as a public subsidy : The guarantee is used as a tool to secure loans that would not be granted by bank without guarantee because of high risk, or unknown risk, or weak collaterals.

Guarantor’s conditions : interest rates, maturity, collaterals

Different appoaches on a guarantee scheme for SME banking

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2. Guarantee scheme as an institutional approach for the SME banking market :

- Lending segmentation approach : Guarantee scheme is implanted on a full segment of lending activity, all loans (partially) covered : risk dispersion, statistical risk approach

- Institutional stability : Guarantee scheme is designed for long term use on SME market

- Attractive product : easy to use (industrial process ) and cost effective (i.e. also low cost of risk for the scheme)

Guarantee scheme must thus fit following requirements :

- Simple but effective design: rules fitting to bank credit process (automatic cover, quick indemnty process)

- Partial risk sharing: neither substitution to bank’s risk, nor incentive to weaker risk assessment

- Profitability of banks loan portfolio: the guarantee scheme should aim both at mitigating credit risk (by sharing losses), and decreasing the risk weighting of assets for the capital adequacy ratio (Basel 1 or 2 on credit risk)

- Sustainability of the scheme : volume driven activity, wide risk dispersion, reasonable management costs

With this approach :

- the guarantor avoids constraining banks with impacts on credit rates, maturity, decrease of collaterals, or more risk acceptance

- expected losses are the same (or close) to the bank’s (market conditions)

For banks starting an SME activity, guarantee scheme can be offered with other incentives as credit lines and technical assistance.

The guarantee scheme then becomes one of the bank’s tools of an SME market approach, to be combined with :

*development of new products (for example combined product to SMEs : term loan, overdraft, credit card, non financial services).

* development of new risk analysis and decision methods (statistic approach with credit scoring tools, criteria based both on financial information and qualitative appreciation of the client such as history of the SME).

Different appoaches on a guarantee scheme for SME banking

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Risk-related barriers are the primary difficulty

banks face in lending to SMEs

(source Dalberg 2011)

“Most important” reasons limiting bank lending to SMEs

(# out of 33 respondents from 26 banks, asked to select up to three)

Ris

kC

os

tR

eve

nu

e

Source: Stakeholder survey results in Kenya, Tanzania, South Africa and Ghana

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7

6

1

1

2

1

10

6

8

1

1

5

1

2

1

3

1

1

0 5 10 15 20 25 30

Taxes and regulation make

some products unprofitable

Transaction/operating

costs are too high

Upfront SME product

investment costs are prohibitive

Other markets are

more lucrative

The SME market size is

too small /not compelling

Limited enforcement /

collection options

Lack of effective

risk sharing solutions

Difficulty in establishing

credit-worthiness of SMEs

1

8

6

8

1

2

2

Kenya

South Africa

Ghana

Tanzania

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3 - ARIZ solutions for financial institutions:

Deal by deal- Credit scheme that are out of portfolio eligibility

criterias

-any company and investment loan

- MFIs

A Guarantee of a

portfolio of SME loans

-Definition of a maximum amount of portfolio

covering two years of new loans activity

-Once the criteria and loan ranges are defined,

all the loans of the banks are automatically

included

ARIZ INDIVIDUAL

GUARANTEE FOR A

SINGLE DEAL

ARIZ PORTFOLIO

GUARANTEE

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Potential Beneficiaries of the guarantee

All SMEs and MFIs,

All business sectors (except real estate, tobacco, alcohol,

weapons…),

Start-ups or development projects,

Fresh loans financing medium term investments (overdrafts are

excluded)

Loans denominated in EUR, USD or local currency

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Portfolio guarantee : - Either on a new or on a growing loan portfolio,

- Once criteria's defined (i.e. segments to cover) , all

matching new loans are automatically guaranteed with

50% on final loss : systematic risk share, automatic process

linked to internal credit decision process

- Semi annual report on guaranteed loans.

Clients and loans targeted :

- All sectors, all registered business, including starts ups,

including individual entrepreneurs ;

- term loans from 1 to 5 years on asset financing, but can

include working capital linked to the investment ;

- loans from 10 000 EUR to 300 000 EUR in local currency,

or deal by deal approach with a guarantee up to 2 M EUR.

Risk covered :

- ARIZ shares final loss in any case of default.

Claim procedures follows banks procedures :

- claim when bank decides acceleration,

- payment of 50% of indemnity immediately,

- file closed (balance payment) when bank

decides to write off the loan

How can ARIZ guarantee scheme be part of the banks SME market tools ?

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ARIZ 2008 2009 20102010

cumulated

Amounts

guaranteed by

ARIZ25 102 150 277

Funds mobilized 50 202 310 562

Total Investments 63 253 387 702

Number of SMEs 73 640 936 1649

Number of jobs

created or

maintained5 222 32 307 36 796 74 325

Africa, a priority region: an update on the impact of ARIZ SME Guarantee Fund

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Thank you for your attention !Contact :

hertkornn@afd.fr

+33 1 53 44 40 41