Promoting Sustainable Development in Emerging & Developing Countries via Non Sovereign Financing

Presentation Outline



1. AFD Non Sovereign Financing for Banks



2. Challenges and opportunities of SME Finance



3. AFD and Microfinance

AFD Non Sovereign Financing for Banks



Providing financing at market conditions or subsidized loans without any requirement of any State guarantee



Criteria for market based credit facilities:

 Only State Owned Banks are eligible   Provide long term resources to viable financial institutions Help State Owned Banks develop their strategy and portfolio on sectors of common strategic interest  Ease the public debt burden and help SOB access market funding 

Criteria for subsidized credit facilities:

 Privately Owned or State Owned Banks are eligible   Subsidiarity (i.e. non competition with commercial banks or financial markets)

Additionality:

 Help banks to build capacity and experience on underserved markets, which are critical for development (energy & environmental projects, SME and small entrepreneurs, …)  Use the bank as an intermediary and a catalist to improve competitiveness (sector specific upgrading programs or CSR promotion projects)

AFD Non Sovereign Financing for Banks



Key Eligibility Criteria

 Strong governance & autonomous financial management  Anti-Money Laundering / Terrorism Financing procedures in line with FATF 40 + 9 recommendations   Availability or willingness to develop an adapted Environmental & Social Risk Management System Satisfactory risk rating based on AFD’s analysis and Ratings from International agencies (capital, asset quality, management, profitability, sensitivity to market risks

Financial Tools :

 Non sovereign loans (concessional or market conditions)  Technical Assistance (small grants) to help the implementation of the project, when needed  ARIZ Risk sharing scheme for SME financing

Financial terms:

    Maturity: from 10 to 15 years, grace periods Hard currencies (USD, EUR), local currencies Fixed or floating rate

Unsecured Senior

Lending with cross –default and a negative pledge to protect pari passu status

Credit Line Mechanism

AFD

Credit Facility

Bank

Loan

Eligible Client

Eligibility criteria Loan

Eligible Client

Loan

Eligible Client

AFD Credit Line mechanism

 AFD credit line can be used by the Bank to finance Long term loans to renewable Energy projects which respects eligibility criteria (financial and technical)  The projects will be selected according to bank’s standard norms and procedures  The Bank takes the full risk on the final beneficiary, AFD does not interfere in the bank’s selection process  Partnership AFD-partner bank: the partner bank passes on the soft component of the loan (if any) or maturity to the final beneficiary: the loans to final clients should mirror the lower than market rate or extended maturity of the AFD credit facility.  AFD to implement capacity building for the bank if required

The Currency Exchange Funds NV

Providing local currency funding

Presentation of TCX TCX Offer in Laos

• • • •

Features

Established 2007 Capital of USD740m AFD/Proparco is a prominent shareholder TCX is rated A- by S&P • • • •

Product

Local Currency Loans Active trading capacity in 80 currencies Transaction sizes range from USD0,5m to USD50m Single currency limit up to USD150m • Non Deliverable products available only • Maximum maturity : 4 years • AFD operates Non Deliverable Swap CCS with TCX • AFD remains the only institution dealing with the client / partner in Lao PDR • Clients receives LCY Facility at X% interest • Interest Payments for 10-yr at LCY 7% settled in USD • Principal repaid in USD

Presentation Outline



1. AFD Non Sovereign Financing for Banks



2 . Challenges and opportunities of SME Finance



3. AFD and Microfinance

SME Banking opportunities and challenges

Opportunities to finance SMEs

Core of economic growth Opportunities for banks

• •

Major part of the economic framework and the employment base in ASEAN countries

: 90% of establishments, between 20-40% of total domestic output and employ between 75-90% of the domestic workforce.

• To ensure their development SMEs need financial services Around

75-90%

of ASEAN SME rely on

internal savings, retained earnings and borrowing from family,

friends and money lenders (collectively known as ‘informal sector’) as opposed to the

3-18% which have access to formal sector finance

• SMEs provide a

new target market

and business development opportunities • SMEs offer an opportunity for

risk portfolio diversification

as they are active in various industry sectors and geographic locations • An SME portfolio generates a

stable income

and requires less complex asset-liability management at the portfolio level. SMEs clients are also potential personal client: cross-selling opportunities.

SME Banking opportunities and challenges

Barriers to the SMEs financing

Barriers linked to SMEs



High rate of informal business which prevents them from access to credit

 Insufficient managerial skills

(management, accounting, marketing…),

  Low equity contribution Low value of assets offered as collateral

(

added to difficulties for banks to exercise this collateral

) and impossibility to produce personal guarantees

• • • •

Obstacles on the side of Financial Institutions Financial institutions perceive risk as being high, whereas according to statistics on bankruptcies it is below the perceived risk

Lack of client/market segmentation Organization, methods and tools to assess risk used by Banks are only tailored for Corporate customers

and those used by microfinance institutions only for micro-enterprises Methods of risk analysis often lead to a

restrictive asset based lending approach

AFD’s Approach Towards SMEs

AFD’s Objective:



Tackling this market failure by bridging the gap of the « missing middle finance » How?

A.

By providing a risk-sharing tool to commercial banks (ARIZ guarantee lines) B. By extending credit facilities at soft conditions to commercial banks engaged in an ambitious SME lending strategy

ARIZ – Partial Risk-Sharing Mechanism

Key Objective



To give SMEs and MFIs better access to financing

through a program that encourages banks’ participation in a risk-sharing mechanism 

Is targeted toward loans financing SME’s capital expenditures (i.e. medium term investments) or refinancing MFIs



Covers all risks catastrophes including political risk and natural Main Characteristics



Potential beneficiaries

 All small and medium private companies and MFIs  All business sectors (except real estate, tobacco, alcohol and weapons),  Start-ups or development projects 

Applies to loans denominated in local currency, USD or EUR

AFD’s SME Credit Facility

Objectives

   To promote the missing-middle finance due to major potential for contribution to economic growth and employment To engage banks in an opportunity to increase market shares and enhance profitability To build banks capacities in the approach towards SME clients

AFD’s Answer

   Subsidized credit facilities and technical assistance scheme to implement a “downscaling” program Integrate SME lending strategy into your institution’s business plan Technical assistance and advisory services in the following main areas:  Staff training  Risk procedures and management

Operational Conditions to Be Eligible for a Subsidised Credit Facility from AFD

 Set SME lending objective of at least the amount of the credit facility  Allocate specific means (small coordinating team, mobilisation of network)  Use the “financial advantage” of the AFD credit facility to cover its specific risks and additional costs (technical assistance)

Presentation Outline



1. AFD Non Sovereign Financing for Banks



2. Challenges and opportunities of SME Finance



3. AFD and Microfinance

AFd and microfinance : more than 20 years of experience



Important Dates: AFD has been supporting Microfinance since 1988



1988:

AFD’s first microfinance operations in Guinea and Burkina Faso 

1995:

AFD joins the Consultative Group to Assist the Poor (CGAP) 

2002:



2005:

A dedicated microfinance team is set up at AFD’s headquarters “Year of Microcredit” and AFD organizes the Paris International Conference 

2007:

Proparco, AFD’s subsidiary, completes the range of products to finance microfinance by offering equity investments, subordinated loans and commercial loans 

2009:

FISEA (Investment and Support Fund for Businesses in Africa) is launched. The fund makes equity investments in Sub-Saharan Africa, particularly in microfinance 

2010:

AFD adheres to the Client Protection Principles promoted by CGAP and ACCION International. AFD co-organizes the Marketplace on Innovative Financial Solutions for Development and Convergences 2015 conference in Paris.

Diversity of financial and non financial products - 2 complementary microfinance facilities:  Microfinance Investment Facility for loans and equity investments in LCY (30 MEUR)  Technical Assistance Facility (20 MEUR) - Credit lines at market rates (floating interest rate) through Proparco - Guaranties: ARIZ &

ad hoc

- Specific TA facility on AML and E&S risk management (max: 50 000 EUR) -Research and Knowledge Management projects

Strong growth of commitments 60 50 40 30 90 80 70 20 10 0 2002 Grants

Evolution of AFD Group commitments on Microfinance Million EUR

2003 2004 Guarantees 2005 2006 Local Currency Loans 2007 2008 Hard Currency Loans 2009 2010 Equity funding

Over 350 MEUR of cumulated commitments in microfinance

-

50 MFIs supported, mostly in rural areas

-

In 2010, over 75 MEUR invested

Thank you !

SME Banking opportunities and challenges

The « Missing Middle Finance »

LARGE CORPORATIONS SMALL and MEDIUM ENTERPRISES SMALL ENTREPRISES MICRO ENTERPRISES Domestic and International Commercial Banks Usually / Frequently Unaddressed Market by commercial banks State or National Developm ent Banks MFIs

ARIZ Provides Two Types of Guarantees ARIZ INDIVIDUAL GUARANTEE

 Issued on a deal-by-deal basis  Tailored to the bank’s needs  Guarantees any type of medium term investment (capex) loan  Guarantees maximum 50% of the loan (up to 75% for MFIs) with an upper limit of €2m (i.e. 50% of a €4m loan)  From 2 to 12 years maximum guarantee (starting at 1 yr for MFIs)

ARIZ PORTFOLIO GUARANTEE

 Targets the “

Missing Middle

” or “

Mesofinance” sector



Guarantees up to 50% of loans between 10,000 € and 300,000€ with a maturity between 1 and 5 years



Defines a target group

of final beneficiaries: by cluster, region, state, etc.



Delegation

ARIZ’s Portfolio Guarantee is a

“guarantee line”

: Guarantees are

automatically issued by the bank with the loans

provided these match the key qualification criteria defined by the bank and AFD

Field

Technical Assistance Possible Points of Application

Point of intervention Technical assistance examples Strategy Marketing



Implementation of SME strategy (marketing, commercial framework, product innovation, risk analysis, risk monitoring, etc.)



Coordination strategy



SME’s market segmentation



New products definition



From « SME lending » to « SME banking »: enhanced cross-selling



Resident technical assistance up to two years for coordination



Temporary technical assistance with specific expertise from external consultants (e.g. marketing, credit scoring, MIS, etc.)



Financing of SME’s market survey



Financing of surveys concerning socially value sectors ( ex. healthcare, education, etc.)



Support for implementation of new products (financial engineering, legal, etc.)



Implementation of dedicated marketing strategy Commercial approach Risk analysis Risk monitoring



Re-engineering



Training for methods in advising and supporting SMEs



Risk analysis methods review and implementation of cash flow based lending



Implementation or improvement of credit scoring tools (or « risk grading ») tailored for SMEs



Implementation of operational, administrative and supervision tasks



MIS (management information system) in line with the risk monitoring



Collection process improvement



Implementation of training for relationship managers and risk analysts



Technical assistance for supervision and monitoring procedures



Intervention of IT consultants



Legal training

A multi-layered approach Foster access to financial services MICRO

Support local MFIs at different stages

Transforming institutions Bringing resources Building capacity Providing technical assistance

MESO

Strengthen financial institutions

Commercial banks, Investments funds

Capacity building

… to use their financial resources and markets more efficiently

MACRO

Work alongside with central banks, MFIs networks and regulators

Creating an enabling legal and regulatory environment Develop synergies between actors

Contribute to the debate and foster knowledge on microfinance

Organize and take part in main conferences on microfinance

Important projects in Asia

Support the development of the People’s credit fund (PCF) - Viêtnam

PCF is a network of 1000 rural cooperatives, with an outreach to 1,2 millions small producers, aiming at providing them with acess to financial services and to a sustainable financial situations. PCF is refinanced by the Central Credit Fund (CCF).

AFD financial commitments:

-

30 M EUR concessional credit line,

20 years, to finance a new financial product : long term investment loans for rural small businesses and micro-entrepreneurs

500 000 EUR grant

for technical assistance to the PCF

Objectives :

- Support the growth of PCF -Support the diversification of PCF loan products to longer term Investment Loans -Support the management of the network and the quality of operations

Implementation details :

-Allocation of the credit line and of the grant to the MoF (sovereign loan), then on-lending to the CCF, on-lending to the PCF - Transfer of the management of the grant to the CCF

Important projects in Asia

Support the First Microfinance Bank (FMFB) in Afghanistan

FMFB is one the most important MFIs in Afghanistan. Member of AKAM and applying the best practices of the sector.

AFD Financial Commitments :

-

Granting of 2 Credit lines to refinance FMFB activities: Credit line of 4 M USD,

10 years, market rate

Concessional Credit Line of 1 M EUR

in LCY, 8 years

Objectives:

-Strengthen the portfolio growth and financial performance of FMFB - Foster LCY micro-credit offer - Promote the access of women to financial services

Implementation details :

- USD Credit Line at market rate, dedicated to the refinancing of traditional lending activities - Concessional Credit line, exchange risk transferred to AFD, to promote LCY loans, in particular to women

Presentation Outline



1. AFD Non Sovereign Financing for Banks



2. Challenges and opportunities of SME Finance



3 . AFD and Microfinance



4. Agricultural Finance Innovations

Financing the agricultural sector: obstacles

 In most of the countries of AFD’s intervention, the financial needs of the agricultural sector are not covered. This situation leads to a lack of development, poverty in rural areas and absence of food security.



Difficulties for the financial institutions to finance the agricultural sector : 1

High delivery cost, proximity

2

Weak farm practices and farmers

3

Lack of banking technology

4

Collateral

5

Exogenous Risks (climate, price volatility)

6

Weak collaboration among farmers

Financing the agricultural sector : innovations and solutions

Innovation

Member-owned localised finance (e.g.SCAs), rural banks, microfinance Agricultural leasing Credit guarantees Value chain finance, including contract financing and outgrower schemes Agricultural factoring

Constraints targeted

1 Delivery cost, Proximity 3 Banking technology 4 Collateral 6 Weak farmer organisations 3 Banking technology 4 Collateral 4 Collateral 1 Delivery cost 2 Farm practices 3 Banking technology 4 Collateral 5 Exogenous price risk 6 Weak farmer organisations 3 Banking technology 4 Collateral All agriculture Rural households

Applicability

Standardised equipment with a 2 nd market hand All agriculture Export crops Relatively long and complex value chains, such as speciality crops with quality requirements Integrated in wider value chain development actions Export crops Product where payment takes time

Financing the agricultural sector : innovations and solutions

Innovation

Warehouse receipt finance

Constraints targeted

2 Farm practices 3 Banking technology 4 Collateral 5 Exogenous price risk

Applicability

Non-perishable crops such as grains, coffee, cashews, sesame Frozen meat and fish Price smoothing Technology: Mobile banking (cell phone, mobile van), Biometrics Insurance (index) 5 Exogenous price risk 1 Delivery cost, Proximity 1 Delivery cost 4 Collateral 5 Exogenous risks Export crops Rural households Crops (index) Animals (not index) Extension services Financial literacy 2 Weak farm practices 5 Exogenous risks 6 Weak farmer organisations All agriculture Rural households

AFD’s tools to support agricultural finance

Objective Provide funds to Financial Institutions and to their clients which conditions are adapted to the needs of the agricultural sector Support their geographical expansion Deepen FI’s knowledge of the specificities of the agricultural sector and strenghthen their capacities to respond to the demand Strengthten the financial structure and the business capacities of FI’s clients from the agricultural sector : farmers, farmers’ organisation, SMEs for transformation, distribution, etc.

Support FI’s clients from the agricultural sector in structuring their investments and evaluating their financial needs Credit Risk Sharing for banks with growing agricultural finance activities Financial innovation : research, pilot projects Tools Credit lines Technical Assistance FISEA (equity investment fund) Technical Assistance Garantie ARIZ AFD can work with agricultural development banks, commercial banks, MFIs, Business Developement Services, Farmers Organisation and partners with smallholders as much as agroindustries.

Ghana Rubber Outgrower Scheme



Importance of AFD envolvement



Between 1986 and 1990: participation to the rehabilitation of plantations and creation of a new factory



Since 1995: Plantation Projects to Small Holders, 4 successive phases Phase 1 Phase 2 Phase 3 Phase 4 TOTAL Period 1995-2000 2000-2005 2006-2012 2010-2015 1995-2015 Finance by AFD 1,2 M € 5,9 M € 8,6 M € 14 M € 29,7 M € Area 1 200 ha 2 850 ha 7 000 ha 10 500 ha 21 550 ha No. of Small Holders Production surplus 400 1 550 t/yr 500 1 750 3 250 t/yr 11 800 t/yr 3 500 6 150 17 850 t/yr 34 450 t/yr

AFD

Loan in EURO

Local Banks

Loan in EURO

Investment Financing, cash advance Loan Repayment Small Holders Seedlings, Inputs Tecchnical Assistance Sale of the production Technical Operator GREL

CECAM Madagascar : warehouse receipts and leasing



CECAM : major microfinance network of Madagascar for the number of clients, branches and loan portfolio



AFD has supported CECAM since its creation through, grants, guarantees and a concessional credit line.



CECAM offers specific products to cover agricultural sector’s needs for financing:



Warehouse receipts systems - Grenier Commun Villageois (GCV) : credit granted to the farmers based on warehouse receipts, to cover their financial needs between two harvets.



Leasing solution - Location Vente Mutualiste (LVM) : CECAM owns the equipment untill the credit has been completely reimbursed.



Harvets credits with possibility of in fine reimbursement



Those products account today for 90% of CECAM’s loan portfolio and are strongly contributing to its growth (+17,4% in 2010).

The synthetic Local Currency Loan

offshore

TCX

(hedge provider) onshore ❶ LCY 7% USD 3% ❶ Principal in USD LCY Income Product/Service

AFD

(lender)

Client

(borrower) ❷ Interest Payments for 10-yr at LCY 7% settled in USD ❸ Principal repaid in USD ❸ Interest Payment at LCY 7% Principal in LCY ❷ USD equivalent ❶ Principal in USD FX Spot Market