ENHANCING ACCESS TO FINANCE FOR SMEs (Key Regional Insights & Leading Practices) Qamar Saleem

1. ENHANCING ACCESS TO FINANCE FOR SMEs (Key Regional Insights & Leading Practices) QamarSaleem Senior SME Banking Specialist, MENA IFC Advisory Services March 19th, 2014

2. Key Messages • Sizeable SME population in MENA region (19-23 million) largely lacking access to credit ($210-240 billion financing gap) • SME finance from the banking sector is low in MENA (8%); Oman only 2%. Multiple access to finance challenges inhibit growth • Serving SMEs can be profitable with ROEs ranging from 20-40% amongst some of the best practice banks • 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. There are 19-23 million Micro Small & Medium Enterprises in the MENA facing a financing gap of $210-240 billion Number of MSMEs in MENA by size Millions “Formal” SME’s (>5 employees) by country ‘000 • Egypt • 200-250 • Medium • (50-250 employees) • 0.4-0.5 • Morocco • 200-250 • Small • (10-49 employees) • Algeria • 180-200 • 0.8-0.9 Formal SMEs 10% • Iraq • 150-190 • Very small • (5-9 employees) • 0.9-1.0 • Sudan • 140-160 • Saudi Arabia • 120-140 • Micro • (1-4 employees) 4.2-5.2 • Yemen • 60-70 • UAE • 80-90 • Informal • 12.9-15.7 • Oman • 10-12 • Total • 19-23 • Kuwait • 28-35 • Jordan • 16-20 SOURCE: McKinsey-IFC MSME Database 2011 SOURCE: IFC-McKinsey database 2011, Country statistical offices

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

5. SME finance has ~2% share in Oman, one of the lowest in the region SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011

6. Serving SMEs can be profitable - a review of leading SME banks indicates that ROEs from 20% to 40% can be targeted SME segment return on equity, % 25 Cze- ch bank 1 Sou- th Afri- can bank 1 Mor- occ- an bank 1 Cze- ch bank 2 Cze- ch bank 3 Chi- nese bank 1 Braz- lian bank 1 Indo- nes- ian bank 1 Nige- rian bank 1 Cze- ch bank 4 Chi- nese bank 2 Chi- nese bank 3 Chi- nese bank 4 Col- omb- ian bank 1 Nige-rian bank 2 Eth- Iop- ian bank 1 Bra- zil- ian bank 2 Eth- iop- ian bank 2 Rus- sian bank 1 Rus-sian bank 2 Sou- th Afri- can bank 2 Uni- tedEmi- rates bank Indo- nes- ian bank 2 Rus- sian bank 3 Rus- sian bank 4 Colo- mbian bank 2 -5 -4 5 6 6 1 6 6 6 16 12 14 12 14 11 9 18 14 19 19 22 24 27 28 28 71 Low RoE <15% Mid-range RoE 15-30% High RoE 30%+ Source: McKinsey Survey; Emergingbank interviews

7. 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 SOURCE: Union of Arab Banks/World Bank Financial Flagship Report 2011

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

9. 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 • Building the capacity of financial institutions • Address specific market failures e.g. women and sustainable energy SME Finance Policy Guide – issued October 2011 by IFC

10. Country level strategies and supportive legal & regulatory environment are needed to enhance access to finance for SMEs 1 • 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

11. Financial infrastructure needs to bestrengthened for improved transparency of SMEs 2 • 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 (ie 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 1st 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

12. ….and financial infrastructure can be strengthened for venture capital and private equity access to the SME market 2 • 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

13. Effective public sector interventions needed to widen opportunities, build SME capacities and avoid market distortions 3 • 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/programLending • Fees- risk-based (1-2%) • Delinquency - Net loss rate = 1.5%

14. 3 ….currently credit guarantee schemes outreach in MENA is low – benchmark country averages (2,080/million people; 1.2% of GDP) SOURCE: World Bank-A review of Credit Guarantee Schemes in MENA region

15. Banks can play a leading role but capacity of financial institutions needs to be enhanced to effectively manage SME business 4 Key areas where core competencies are required for successful SME banking SOURCE: IFC Analysis

16. ….and serving SME segment is much more than lending, best practice banks follow a differentiated approaches 4 • Optimal revenue mix should be targeted into a 3-way revenue distribution (deposit, transactional, lending) • Phased lending growth possible using product programs, modelling tools, strong portfolio monitoring and collections framework • Liability and transactional product bundles needed; best practice SME Banks have liability 2-3 times the assets • Sophisticated sales & service model to increase market coverage & sales effectiveness • Managing costs through alternative channels usage, automation, RM productivity/ certification and client coverage models • Differentiate through unique segment solutions to attract higher customer wallet • Case Study: • Wells Fargo, USA • Outreach– 764,200 small businesses served • Finance – $20.2 billion in loans; average loan size $26k • Distribution – Through its branch network, market alliances & heavy use of alternate channels • Products – 43 offered; 7 Merchant, 8 Asset, 3 Liability, 5 Alt. Channels, 9 Advisory, 9 Insurance, 2 Payroll • Resource Center – extensive business counselling services and tools offered

17. Specific market failures like financial services to Women-in-business & Sustainable energy finance (SEF) need to be addressed 5 • 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 • 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 • 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, 1700+ new deposit accounts valued at $10 million In Collaboration with IFC

18. 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 • Capacity Building for FIs IFC provides a combination of Investment and Advisory Services for optimal results • 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 • Financial Infrastructure • ADVISORY • INVESTMENT • 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 • SME Financing & Investments • 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 • Risk Mitigation & Enhancements

19. Supported by innovative tools … SME Banking Knowledge Guide: Outlines leading practices and success factors for profitable SME banking operations. Guide has been translated into Arabic, Chinese, French, Russian and Spanish. SME Banking CHECK Diagnostic Tool: A guide to assess SME banking operations and design relevant advisory services projects. SME Banking Training Program: IFC offers two courses: An introduction or Scaling up course. The three day course consists of modules, case studies and exercises covering the following areas: business models for SME Banking, identifying Market Opportunities, Customer Management, Products & Services, Sales, Credit Risk Management, IT & MIS, SME Banking Benchmarking:An online SME Benchmarking Survey, automatically benchmarks SME banking practices. Market Segmentation Tool: Generates information that can be used by the Bank to make a decision whether to invest in developing its SME operations, identify target SME segments, and decide how to target them, design & sell products Customer Management Best Practice Guide:The guide outlines key success factors in better serving the SME clients and allowing banks to maximize the revenue opportunity. It is primarily a technical publication, intended for bank directors and managers interested in acquiring the key capabilities to enhance growth and revenue, as well as building and retaining profitable customer relationships amidst ever-increasing competition for the SME segment. Assessing & Mapping the Global Gap in SME Finance: A joint IFC & McKinsey report that assesses and maps the global gap in SME finance, including the number of enterprises by region, size and formality, as well as SME’s access to credit and value of the credit gap. Customer Management Tools: provision of wallet sizing, du pont model and revenue projection models for the SME segment

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