AFD

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AFDs approach to SME finance

• Pierre Jacquet
• French Development Agency (AFD)
• Presentation at the
• German Marshall Fund of the United States
• 22 october 2007

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Outline

• Vantage point a bilateral development agency
  interested in making finance and markets work
  for the poors and in contributing to global
  governance
• The  missing middle  obstacles to SME
  development
• Examples of various solutions

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Background What is AFD? (1/4)A development
Agency

• The French Bilateral Development Agency
• The main Operator for French bilateral
  Development Assistance
• Untied aid
• Headquarters in Paris and Marseilles, 41 field
  offices
• Partnerships with multi and bi-lateral donors
• staff exchanges with KFW, EIB, ADB, WB group
• close relationships with European donors, JBIC,
  AfDB, DAC members, etc.
• Active in over 60 emerging and developing
  countries and in French overseas territories
  Africa, Mediterranean, Asia, Latin America
  (Brazil), Caribbean

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Background What is AFD? (2/4)A development Bank

• Development Bank
• Public financial institution, under French
  banking regulation
• UN Global Compact member
• Comprehensive Range of Financial and non
  financial Tools
• Grants, concessional and non-concessional loans,
  equity, quasi-equity, guarantees
• Technical assistance
• Large Customer Basis
• Sovereign, non sovereign public, private, PPP
• Balance Sheet Total 16bn
• AAA rating

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Background What is AFD? (3/4)A strong increase
in commitments
AFD has doubled the volume of its commitments
over the last five years
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Background What is AFD? (4/4)A expansion of
AFDs geographical coverage
Amman (2006)
Cairo (2007)
Today
Lagos ?
Luanda ?
Djakarta (2007)
Saana (2007)
Dehli (2007)
Brasilia (2007)
Port Louis (2006)
Islamabad (2007)
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AFDs vision of ODAA public policy for
globalisation

• Solving collective problems
• with a North-South dimension

Evolving development challenges

• Multiple actors
• (providers and recipients)
• States
• Development agencies
• IFIs,
• Local governments,
• Foundations,
• NGOs
• Public and private companies

• N/S poverty gap Inequalities ? MDGs
• Development through Growth ? GDP
• New targets
• ? Global Public Goods

? ODA as a catalyser of development finance
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AFDs visionA new public service for
globalisation
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SMEs in developing countries What about Africa ?

• Subsaharan growth of 5,6 in 2006
• Significant increase of investments in Africa
• 10 times as many companies listed on subsaharan
  stock exchanges in 2007 than in 2000
• Creation of panafrican investment funds (US 3
  bn in 2007)
• SMEs, backbone of the economy in developing
  countries
• Senegal 80 of the companies have less than 20
  employees
• But very limited funds accessible to SMEs
• Private Credit to GDP averages 18 in Africa (27
  in South Asia and 109 in developed countries)
• IFC finance typically goes to large-sized
  companies

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Obstacles to private sector development

• Poor and insufficient infrastructure
• First handicap to business for 43 of African
  companies access to electricity and factor
  costs
• Infrastructure needs estimated at US 29 bn per
  year
• AFD 554 million in 2007 to finance new
  infrastructure
• Business environment
• Poor governance, corruption, weak, inefficient
  regulation, underdeveloped legal systems
• Gender discrimination
• Lack of training, standards and management skills
• Access to finance (loans and equity)
• Predominance of the informal economy
• Limited funds, lack of adequate financial
  instruments
• Lack of training

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Capacity building

• Enhancing competitiveness in Tunisia (program
  called  mise à niveau  of companies)
• Capacity building for an MFI (Zakoura) and its
  customers in Morocco training for management,
  exercizing rights, gender equality, healty
• Support to SME development in Vietnam
  (co-financing with AsDB and KfW)
• Improving the legal and regulatory environment,
  notably with respect to land tenure
• Simplification of the financial documentation
  necessary to access bank credit
• Develop technical standards to improve acess to
  markets for exports

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developing accessibility and deepening the
financial sector

• 1. Deepening our intervention in the microfinance
  sector
• Since 1988, 267 million invested mainly in
  Africa (50 institutions)
• CGAPs June 2006 Peer review recommends to
  increase AFDs operations and finance support
• The goal scaling up existing MFIs
• 2. Reaching SMEs through innovative schemes
• Making commercial banks operations accessible
• Risk sharing schemes through guarantee funds
• Access to equity
• 3. Strengthening direct support to banks or on
  financial markets

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by using a wide range of financial tools

• AFD is able to use a wide range of tools
• Financial instruments equity, quasi-equity,
  soft loans, mobilizing local resources through
  credit enhancement, risk sharing schemes,
  subsidies
• Non-financial tools capacity building

• PROPARCO, a branch dedicated to private sector

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1. Strengthening MFIsExample of Al Amana in Morocco

• Al Amana 404.000 clients (12/2006), first MFI
  in MENA
• But very small loans (in average 200) and only
  to solidarity groups ? no effect on SMEs
  development
• AFD objective help Al Amana to serve more SMEs,
  develop new products and change scale
• AFD operates through a combination of
  concessional and private, financial and
  knowledge-based instruments
• A direct long term 10 million soft loan to the
  MFI
• Quasi-equity through PROPARCO ( 10 million)
• Random impact evaluation (with MIT) on rural areas

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1. Strenghtening MFIs Example of the financial
bond issue by Faulu Kenya, MFI in Africa

• Amount 500M KES ( 5,52M 03/12/03)
• Maturity 5 years
• 25 of the risk supported by the subscribers
  (commercial banks and institutional investors)
• 75 guaranteed by AFD
• 24 000 beneficiaries

Conclusion guarantees as a means to catalyze
local institutions access to the local financial
market The guarantee problem (DAC/OECD)
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2. Reaching SMEs through innovative schemes
Example of a guarantee fund ARIZ Fund

• Danone leader in its market extending the reach
  to the bottom of the pyramid.
• Mechanism dedicated SPV 90 invested in low risk
  assets, 10 invested in high risk  bottom of the
  pyramid  assets.
• ARIZ (AFD fund) guaranteeing 50 of the equity
  risk investment.

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2. Reaching SMEs through innovative schemesUOBs
ASEAN-PRC providing equity in SMEs

• UOBs ASEAN-PRC investment fund to promote the
  development of small and medium enterprises in
  Asean countries and China with a total size of
  USD 60M
• PROPARCO invested USD 5 M in the fund (2003) and
  sits on the Investment Committee
• A unique combination of a strong private sponsor,
  UOB bank of Singapore, and major public
  institutions ADB, China Development Bank,
  Proparco, Swiss SIFEM.
• A new concept in the region Private Equity for
  SMEs, with a focus on regional integration (most
  other funds target large transactions)
• A complete success three years on high impacts,
  several SMEs have already IPOed in Singapore,
  good leverage on UOBs network and DFIs SME
  private equity experience

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2. Reaching SMEs through innovative schemes
Finance and support entrepreneurship in Africa

• A rather unique approach financing SME and VSE
  in Africa
• Launched in 2002
• Mobilized around 17m from private investors and
  international institution
• Launched by seasoned Private Equity
  professionals, looking to bring high Private
  Equity standards to mesofinance
• Brought financing to 15 SMEs in Africa and 8
  IMF worldwide
• Proparco invested 5m together with EIB in 2006

• Long term commitment to support entrepreneurs in
  terms of financing and management
• Deeply involved in the definition and the
  assessment of the business plan
• Hands-on follow-up of the company requested and
  appreciated by the entrepreneur based on trust
  and solid human relationships
• No pressure on the entrepreneur regarding the
  timeline of exit

• Balanced investment strategy to ensure financial
  sustainability
• Partly invested in short and medium term debt
  financing to well established IMFs, in order to
  secure a minimum flow of revenues for IP
• Partly invested in long term equity financing to
  young companies, with promising/adequate business
  models and sustainable business plans

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3. Strengthening banksExample of credit lines in
Lebanon

• Decision taken in September 06, immediately after
  the conflict ended
• First three credit agreements signed in January
  07
• Non sovereign concessional loans, in tranches
  banks must use concessionality to provide more
  favorable credit conditions to their SME clients
  affected by the conflict (physical damages and /
  or losses in activity) with auditing mechanisms
  to monitor the use of funds prior to the
  disbursement of following tranches

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and an increasing trend in figures Local
government, private sector, NGOs
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Expected impacts of 2006 commitments
Impact
Action
AFD participation in direct SME
finance Financing microfinance institutions
Subsidized loans for investment in overseas
departments and territories

• 630 million raised for 1,500 enterprises
• 1.54 million new beneficiaries
• 132 million of investment generated 3,500 jobs
  for 1,430 enterprises

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More to comeWhen and how to use public money
for private sector development

• Adapting to volatility counter-cyclical loans
  (cotton)
• Transferring resources to compensate for market
  gaps environmental line of credit for banks
• Covering risk for the poorest
• Reinventing non-sovereign tools in fragile states

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• Thank you