How SMEs Can Access Finance Through The African Development Bank

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Small, micro, and medium enterprises known as SMEs are the backbone of any economy in a country.  They are non-subsidiary, independent firms or organizations that are invested in employing a large populace of the labor force.

Small firms usually have fewer than 50 employees, while micro-enterprises have at most 10, or in some cases 5, workers. But they represent about 90% of businesses and more than 50% of employment worldwide. And also contribute up to 40% of national income (GDP) in emerging economies.

Globally, SMEs are recognised as the critical stimulators of economic growth due to their potential to create jobs, boost production, generate income and reduce poverty.   

Though these SMEs contribute significantly to employment ratio, one of their setbacks is inadequate financing. This is because of how SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on more internal funds, or cash from friends and family, to launch and fund the daily operations of their business.

 African Development Bank

The African Development Bank Group (AfDB or ADB) or Banque Africaine de Développement (BAD) is a multilateral development finance institution that was founded in 1964. It includes three entities, namely: The African Development Bank, the African Development Fund and the Nigeria Trust Fund.

How SMEs can access finance through the African Development Bank
African Development Bank Group

This Bank’s sole mission and vision statement involve fighting poverty and improving living conditions. It achieves this by promoting the investment of public and private capital in projects and programs. These will, in turn, contribute to the economic and social development of the region.

The organisation’s aim also revolves around providing financial assistance to African governments and private companies investing in the regional member countries (RMC). One of the objectives of this body is to spark sustainable economic development and social progress in its regional member countries.

The African Development Bank is also focused on offering investment, advisory services, and technical services. These are based on country-specific development needs.  Such support covers infrastructure, governance, disaster recovery and management, education, energy and health development. 

How SMEs can access Finance through the Africa Development Bank

With a desire to deepen financial systems in African countries, the African Development Bank has approved an additional US$10 million equity investment through the African Guarantee Fund for SMEs. The scheme was established to fund and give access loans to small and medium-sized enterprises across Africa. Thereby stimulating private enterprise development and sustainable job creation.

The African Guarantee Fund was designed in 2012 by the African Development Bank. It did this in collaboration with the Danish Ministry of Foreign Affairs and the Spanish Agency for International Development Cooperation.  Subsequently, the French Development Agency and the Nordic Development Fund joined the scheme. 

The idea was founded on the mandate of bridging the financing gap for local SMEs in high-impact sectors. It also seeks to promote job creation by providing financial guarantees to financial institutions. As such, it covers their lending to SMEs thus catalyzing private sector resources for financing SMEs.

It has also collaborated with 84 financial intermediaries, enabling banks to increase available financing for lending to SMEs by about US $1.2 billion. Over 8,600 SMEs have benefitted from AGF guaranteed loans, creating nearly 86,510 jobs. Approximately 60% of these jobs have been for youth and 30% for women.

The goal is mostly to support SME sub-projects. These are well-diversified spanning all economic sectors, including manufacturing, commerce/trade, services, tourism, construction, agriculture, and transport, etc. The plan is for a country’s economy to benefit from the SME sub-projects to be financed under this facility. In addition, the project is likely to induce the transfer of technology, development of local entrepreneurship, and enhancement of technical skills.

Areas of Focus / Sub-Sectors

There are areas of concern for the African Guarantee Fund while fueling the SMEs financing; they are streamlined to two lines of activities:

Partial Credit Guarantees:

This area is solely focused on providing partial guarantees for financial institutions in African countries, who in exchange will increase debt and equity investments for SMEs. Based on an assessment of the needs of financial institutions and SMEs in the region, AGF will offer three types of guarantees with different fee structures:

a. Portfolio and individual loan guarantees.

b. Bank fundraising guarantees; and

c. Equity guarantees.

Capacity Development:

African Guarantee Fund will contract a separate entity to help financial institutions develop their capacity to appraise and manage SME portfolios.  A portion of its budget will be allocated to capacity building, with financial institution partners covering most of the costs. Also, the capacity development of SMEs will be managed and implemented through existing local service providers.

Target Beneficiaries (SMEs qualified to access the loan)

The definition of SMEs varies across countries and financial institutions. However, the African Guarantee Fund has mapped out qualifying characteristics for SMEs other than the one defined by the banking sector of member countries. As such, the AGF will target all African SMEs with a valid operating license regardless of sector, industry, location, and ownership. The AGF will have a rigorous partner selection process, with partner financial institutions demonstrating a clear commitment to growing their SME portfolio and improving financial product offerings to the segment.

However, the African Guarantee Fund has roll-out its operations in these regions in three phases. The countries that have been identified through the AGF preparation phase and are characterised as ‘transition economies’ in terms of economic diversification and export orientation include Ghana, Mali and Senegal in West Africa, Cameroun in Central Africa, Kenya, Tanzania and Uganda in Eastern Africa, and Mozambique and Zambia in Southern Africa.

AGF’s products are expected to have a scalable positive impact in the following three ways:

·         To improve SME financial product offerings by helping banks to address working capital and long-term financing needs of SMEs.

·         Expand bankable SME segments and to change the Bank’s perception of bankable SMEs and permanently increase their exposure to SMEs.

·         Increase Banks’ capacity to appraise SMEs and also provide technical assistance and strategies to develop SME engagement further.

Conclusion

AGF aims to solely improve access to credit for SMEs as they start and grow their businesses. It also mobilizes substantial financial resources for African SMEs. This way, it contributes to private sector development, job creation, and ultimately poverty reduction. It will provide support to financial institutions by easing access to liquidity and strengthening their capacity to create credit for SMEs.

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