Presentation at the SMME Award Conference,CapeTown

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FINANCING OF SMMEs (AN ASSESSMENT OF SADC DFIs)

• Presentation at the SMME Award Conference,CapeTown
  
• 23rd October, 2008
• by
• JW Nyamunda
• Programme Manager SME Development

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Introduction

• Studies have revealed that more than 50 of
  African economies are predominantly SMMEs
  (interpreted to include the informal sector). The
  reasons for focusing on SMMEs are various, among
  these are
• Employment generation and poverty alleviation
  capacity according to the Organization of
  Economic Co-operation and Development (OECD,
  2000), SMMEs account for 60 to 80 of jobs in
  both developed and developing economies and for
  most new jobs created and
• Engine of economic growth and development SMMEs
  are a vehicle for increased private sector
  participation in economies multi-sectoral and
  promote forward and backward linkages they
  provide the ideal industrial base for economic
  diversification and specialisation and increase
  competitiveness of the domestic market and they
  are critical for increased export drive.

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FINANCING SMMEs

• What are the Issues?
• Access to Finance
• Unlocking Access

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SOURCES OF INVESTMENT
Country Internal Funds (New Investment) () From Banks (New Investment) () Firms with Bank loan () Collateral needed (of loan)
East Asia/Pacific 31 21 22.9 89.1
Latin America/pacific 54.2 19.8 57.6 143.8
Middle east/N. Africa 74.3 16.3 63.3 184.6
South Asia 57.3 22.8 52 101.6
SubSahara 66.3 20.6 43.2 147.2
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CLASSIFICATION OF SADC FINANCIAL SYSTEMS
Advanced Intermediate Primary
South Africa Mauritius Angola,Botswana, Lesotho, Swaziland,Malawi,Namibia,Tanzania, Zambia,Zimbabwe DRC, Madagascar Mozambique
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Bank Liquid Reserves to Bank Assets Ratio
Country 2001 2002
SubSahara 11 14
Kenya 10 8
Mozambique 14 14
Nigeria 24 18
Senegal 10 16
Tanzania 14 13
Zambia 17 23
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UNLOCKING ACCESS TO FINANCE

• Enhancing Risk Assessment and Management
• Addressing the Risk return Profile
• Addressing High Costs
• Meeting the Needs of SMMEs
• External Factor
• Perceptions of Banks by SMMEs

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Some Evidence from the Africagrowth Survey

• In terms of the location and accessibility of the
  banking facilities to the SMMEs, 70.59 indicated
  that they were satisfied as opposed to 29.41 who
  stated they were dissatisfied.
• Friendliness of the staff here, an overwhelming
  majority of 85.30 expressed that they were
  satisfied while 14.70 stated that they were
  dissatisfied.
• Access to credit a moderately high number of the
  respondents, representing 52.94, indicated their
  satisfaction whereas 47.06 expressed
  dissatisfaction.
• Financial advisory service here, about 35.29
  indicated that they were satisfied whilst
  majority of the respondents, about 64.71
  expressed dissatisfaction.
• Value vs. the service charge majority, 73.53,
  were dissatisfied with the service charges whilst
  about 26.47 expressed satisfaction.
• Overall relationship with the bank in this case,
  most of the respondents, 70.59 indicated that
  they were satisfied whilst the 29.42 indicated
  they were dissatisfied.

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Challenges From the Survey

• Difficulty in accessing competent banking staff
  on business issues
• Petty bureaucratic procedures resulting in delays
  in service delivery
• Long queues at enquiries
• Banks being not very supportive to SMMEs
• High bank charges and high demand for security

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DFIs AND DEVELOPMENT FINANCING

• Primary function of the DFIs was to intermediate
  development finance from the World Bank, other
  multilateral development banks (MDBs) and donor
  sources for investment in projects under various
  government-led sustainable growth and poverty
  alleviation initiatives.

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DEV. FINANCING Contd

• By mid-1980s, the relevance of DFIs began to be
  questioned by the MDBs and donor institutions.
  This followed the DFIs poor and deteriorating
  financial performance reflected by huge
  non-performing portfolios and for some,
  insolvency.

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DEV. FINANCING Contd

• Governments reacted in different ways to this
  situation with some DFIs being closed down while
  others were restructured to restore viability. In
  a few cases, some DFIs assumed commercial banking
  functions and thus deviated from their original
  mandate.

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DEV. FINANCING Contd

• Most African governments have remained committed
  to intervening and addressing the financing gaps.
  This has been achieved through the establishment
  of new and in a number of cases specialized or
  sector focused DFIs. In some quarters the gaps
  were viewed as transitional and that over time,
  as financial systems matured, the DFIs would
  evolve and assume commercial, investment or
  universal banking activities.

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SADC DFIs CLASSIFICATION
Sector Ind. Dev SMMEs Agric Infra Dev Housing Multi- Sector
DFIs 6 9 3 2 2 5
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DFIs Total Assets by Sector (2006-USD million)
Sector DFIs Total Assets
Agric 3,275
Ind. Dev 8,685
Infr. Dev 4,351
SMMEs 192
Multi-Sector 1,170
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SADC DFIs TRANSFORMATION

• Continued government subventions predominantly
  for DFIs in the SMMEs and rural agriculture
  sectors but these fell short of funding
  requirements due to fiscal constraints.
• Portfolio restructuring scaling down of lending
  activities and suspension of new projects with
  some governments opting to convert their loans to
  equity or preferential shares.
• Mandate change/Diversification of activities
  Some DFIs switched to commercial banking, placing
  them under the banking act and the direct
  supervision of central banks. This trend,
  however, has tended to exacerbate the
  availability of long-term finance for development
  projects, including those targeted at SMMEs.
  Among SADC DFIs that have commercial banking
  functions are the Agricultural Bank of Zimbabwe
  (Agribank), Tanzania Investment Bank (TIB) and
  Swaziland Savings and Development Bank
  (Swazibank).
• Closure and new DFIs Some governments opted to
  close non-performing DFIs altogether or
  alternatively to restructure and reassign them
  new mandates. These include, Namibia, Zimbabwe
  and, more recently Malawi and Tanzania.

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LENDING BY SADC DFIs
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DFIs Sectoral Lending (USD-Millions)
Sector 2003 2004 2005 2006 2007
Agric 2,202 2,607 2,946 2,707 2,534
Ind Dev 800 845 346 442 791
Infr Dev 1,847 2,608 2,493 2,785 2,861
SMMEs 187 276 767 610 252
Total 5,036 6,336 6,552 6,544 6,438
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SADC DFIs Lending to SMMEs-2005
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DFIs LENDING TO SMMEs(USD000)
DFI Bedco Sido TIB Sedco Idbz Ceda Ndb Fincorp Swazibank IDC RSA
To SMME 239 6,560 14,143 783 21 84,968 104,012 17,997 2,198 528,149
to SMME 100 100 70 100 2 100 100 100 2 72
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ROLE OF SADC DFI NETWORK

• Collaborate on cross-border in-country project
  financing
• Pool resources to mobilize intra-
  extra-regional funds for development projects
• Share experiences
• Where viable take equity in each others
  institutions
• Invest jointly in new structures where necessary
• Collaborate on appropriate institutional
  mechanisms to facilitate cooperation and
  development finance in SADC

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DFRCs Role Responsibilities

• Secretariat of Network
• Facilitator Coordinator of cooperation in
  Network
• Initiate fund raising strategies, both project
  oriented across the board
• Institutional strengthening
• Capacity building, including project-related
  secondments, mentorship training
• Policy Research Advisory Services

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DFRC SME PROGRAMME

• In recognition of the pivotal role SMMEs play in
  the development and growth of the private sector
  of member states and to the attainment of the
  SADC regions goals of employment generation,
  poverty eradication, gender empowerment and
  overall economic growth, the DFI Network through
  its Secretariat the DFRC has as part of its
  Strategic Business Plan agreed to focus on SMME
  development as one of its key focal areas. The
  core focus of the DFRC SMME programme is to
• Assure the DFI Network members sustainability
  through stronger SMME clients and
• Assist the DFI Network to aggressively promote
  private sector activity through SMME support and
  in doing so address the regional challenges of
  high unemployment, poverty and gender inequities.

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SME PROJECTS

• SMME MENTORING
• SME STANDARDS TRADE
• SME/BIG BUSINESS LINKAGES
• SME BUSINESS CONFIDENCE INDEX
• ADVISORY SERVICES-DFIs Credit Rating

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CONCLUSION

• SMMEs play an important role in the economic
  development of countries and hence the need for
  the sector to be supported and well developed. It
  is in this regard that the governments of SADC
  member states and the SADC DFI Network and its
  DFRC are investing quite substantially in this
  sector.

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THANK YOU

• QUESTIONS?