UNNExT workshop on Paperless trade facilitation for Small and Medium-sized Enterprises

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1 UNNExT workshop on Paperless trade facilitation for Small and Medium-sized Enterprises 2-4 February 2015 United Nations Conference Center (UNCC) Bangkok, Thailand

2 Innovative financing and ITC solutions Inventory financing, value chain financing, crowd funding UNNExT workshop on paperless trade facilitation for SME Enterprises 2-4 February 2015 Dr Mohammad Saeed Senior Trade Facilitation Adviser

workshop on paperless trade facilitation for SME

3 3 Access to Finance vs Trade Finance Trade Finance It refers to a wide range of tools that determine how cash, credit, investments and other assets can be used for trade 1 Access to Finance It is defined as an absence of price and nonprice barriers in the use of financial services 2 1. How to Access Trade Finance, ITC THE IBRD World Bank 2008

Access to Finance It is defined as an absence of price and nonprice barriers in the use

4 4 SMEs have limited access to finance Most SMEs are start-up businesses with inadequate collateral; Lack of key financial management competencies; Poor quality of business plans; No clear understanding of banking lending requirements; Lack of time and the required resources from Financial Services Providers (FSPs) to effectively address SMEs financial needs. 63% of the SMEs do not have access to finance

of banking lending requirements; Lack of time and the required resources from Financial Services

5 5 Some SME Financing Solutions Besides equity/debt based financing, grants, government aid, and common trade finance instruments, the key financing solutions for SMEs are: Inventory financing Purchase Order Finance Warehouse receipt Value Chain Financing Crowdfunding

instruments, the key financing solutions for SMEs are: Inventory

6 Inventory Financing: Purchase Order Finance 6 What is purchase order finance (POF) about? Purchase Order Finance (POF) is a transaction-specific form of working capital/trade financing. It is an advance against the value of a purchase order or contract to enable the borrower/supplier to pay for inputs, raw materials, packaging, goods for resale, shipping, insurance, etc. POF Case study: Moroccan hand bag firm In the framework of the ITC s EnACT Programme, a Moroccan hand bag firm was helped to sell to Lancel Paris Lancel-Paris issued a Euro 125,000 purchase order This purchase order was taken by the Moroccan firm to Attijari Bank and got a Euro 50,000 credit line to start making the handbags

It is an advance against the value of a purchase order or contract to enable the borrower/supplier to pay for inputs, raw materials, packaging, goods for resale, shipping,

7 7 Inventory Financing: Warehouse receipt What is a warehouse receipt? What is its key use? Document certifying the quality and quantity of a specified commodity placed into a secure storage environment It is issued by a licensed warehouse operator It should specify: location of warehouse, name of depositor, commodity type, quality and quantity, date of delivery, storage charges Most warehouse receipts are issued in negotiable form Warehouse receipts can be used as secure collateral for inventory financing When backed by a suitable legal framework, warehouse Farmers, traders and millers can raise finance against them Thus increasing liquidity in agricultural markets Finally, it allows transfer of ownership without physical delivery Source: ITC, UNCTAD

warehouse, name of depositor, commodity type, quality and quantity, date of delivery, storage charges Most warehouse receipts are issued in negotiable form Warehouse receipts can be used as

8 8 Value Chain Finance (VCF) What is purchase VCF VCF consists of financial services and products flowing through value chain participants to address and alleviate constraints to growth 1 VCF can be grouped into three main types of vehicles: The provision of credit, savings, guarantees or insurance to or among value chain actors; The creation of strategic alliances through financing extended by a combination of value chain actors and financial institutions; The offering of tools/services to manage price, production or marketing risks. Case study: Santo Cristo de Bagazán Credit Union (SCBCU) SCBCU provides VCF to coffee growers and growers associations 2 Production loans provide growers with finance to cover costs of production, resulting in increased quality and yield Short-term commercialization loans provide growers associations with capital to buy more coffee from producers, which in turn, increases association s bargaining power with the buyer on behalf of the growers Under this arrangement coffee grower earnings have increased on average by 53% 1. Fires, WOCCU Value Chain Finance 2009, USAID)

a combination of value chain actors and financial institutions; The offering of tools/services to manage price, production or marketing risks.

9 9 Crowdfunding What is purchase crowdfunding The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet 1 Crowdfunding is just getting started but hit $3 billion globally in 2013, doubling over the previous year 2 The industry will grow at a compound annual growth rate of 100% over the near term 2 Crowdfunding case studies Angaza Solar Energy in Tanzania Angaza raised USD $15,000 to facilitate the manufacturing and sales of 1000 Solar Home Systems in the Mwanza region of Tanzania Pollinate Energy India Non-profit social enterprise that aims to provide access to affordable clean energy to poor people living in slums Raised USD $10,500 via crowdfunding 1. Forbes Deloitte Review of crowdfunding for development initiatives, Evidence on Demand, July 2013

Crowdfunding case studies Angaza Solar Energy in Tanzania Angaza raised USD $15,000 to facilitate the manufacturing and sales of 1000 Solar Home Systems in the Mwanza region of Tanzania Pollinate

10 10 ITC A2F Findings Innovative SME financing solutions like Value Chain Finance can be very effective if value chains are well organized; Funding is effective when there is a good mentorship throughout the loan process; Commercial banks are more and more ready to finance SME mentoring; Tiding loans to mentoring prevents credit default and makes SMEs sustainable; Guarantee funds /credit lines should cover no more than 80% of loans: SMEs should have their stake in the projects.

are more and more ready to finance SME mentoring; Tiding loans to mentoring prevents credit default and makes SMEs

11 ITC bridging the gap between SMEs and FSPs ITC A2F Programme 11 FMCs and TSIs Equipped with tools SMEs National, regional & international DFIs Credit Lines & Guarantee Funds FSPs

12 12 ITC s A2F TA as a complementary solution Capacity building for SMEs Building SMEs capacities in accessing finance Trained FMCs provide coaching to SMEs before, during and after the loans Training for FSPs Training FSPs to better address the financial needs of SMEs And providing credit scoring tool when applicable Credit Mobilization Mobilizing credit lines/ guarantee funds schemes With DFIs to partially make up for SME collateral requirements ITC also provides various tools to SMEs, TSIs and FMCs, as well as Credit scoring tools to FSPs

SMEs And providing credit scoring tool when applicable Credit Mobilization Mobilizing credit lines/ guarantee funds schemes With DFIs to

13 13 ITC Access to finance publications Title of publication Business Navigator on e-finance for SME exporters in developing countries How to Access Trade Finance Islamic Banking Export Credit Insurance and Guarantee Schemes: A practical guide for Developing and transition economies Finance for Trade Financing Service Exports

for SME exporters in developing countries How to Access Trade Finance Islamic Banking Export

14 14 ITC Access to finance publications (con d) Title of publication Foreign Exchange Derivatives and Risk Management in Developing Countries How to Approach Banks: A guide to Short term Trade Credit How to Evaluate Trade Credit Requests: A Guide for Bankers and the Scorecard Trade Finance Pointers Methodology, Interpretation and Theoretical Considerations Trade Finance: A Legal Guide for Cross-border transactions "Finance and Guarantees in International Trade" The Glossary of Trade Finance Terms

How to Approach Banks: A guide to Short term Trade Credit How to Evaluate Trade Credit Requests: A Guide for Bankers and the Scorecard Trade

15 15 A2F Tools for MSMEs, TSIs and FSPs LOANCOM LOANCOM stands for loan competency and is credit scoring software customized to the credit assessment criteria of the bank. It helps financial services providers (FSPs) to automate their loan application process How-toapproach Bank Selfchecker Self-assessment tool to guide the MSME manager in the determination of their financial needs and to test the MSME manager s readiness to approach banks SME FinCheck Self-assessment to evaluate SME manager s ability to run a company successfully. Questions will test knowledge and competencies in both business and financial management Available on ITC website

It helps financial services providers (FSPs) to automate their loan application process How-toapproach Bank Selfchecker Self-assessment tool to guide the MSME

16 A2F Tools for MSMEs, TSIs and FSPs (con d) 16 SME FinAccess Self-assessment tool targeting MSMEs aiming to help determine / define the financial needs of the business and to test their readiness to make representations to the banks SME LoanCalc This software is an amortization schedule calculator. It lets the user estimate their monthly loan repayments. It also determines how much of their repayments will go towards the principal and how much will go towards interest Available on ITC website

This software is an amortization schedule calculator. It lets the user estimate their monthly loan repayments.

17 More about Loancom, the SME Credit Scoring Tool for Banks 17 Credit scoring tool used to assess SMEs Developed for 16 financial institutions to date in Africa and Asia Helps to make a quick informed and objective loan decision Assessment result shall complement the Loan Officer s own decision Can be accessed on remote drives by different users with given rights

make a quick informed and objective loan decision Assessment result shall complement the

18 18 Details of LoanCom structure 1. Profile/ Information on the SME LoanCom Structure 2. Financial Competences Analysis 3. Non Financial Parameters Analysis 2.1. Financial Track Record of the SME 2.2. Loan Application 2.3. Guaranty Mechanisms 2.4. Payment and Reimbursement Timeframe 3.1. Strategy 3.2. Marketing 3.3. Production 3.4. Transaction 3.5. Management

Financial Track Record of the SME 2.2. Loan Application 2.3. Guaranty Mechanisms 2.4.

19 SME and Project Information 19

20 Financial Parameters 20

21 Financial Parameters (cont.) 21

22 Non Financial Parameters 22

23 Profile and Financial Graphical Report 23

24 Non Financial Graphical Report 24

25 25 ITC A2F Recommendations Governments to create/promote a One-stop Shop for SMEs with all SME related services; Set up Credit Bureaus to help check SME credit history; Develop business clusters and cooperatives model which is the preferred financing channel; FSPs and DFIs to bound loans /grants to compulsory coaching of certified and registered Business Development Services Providers (FMCs); Train FSPs staff (Credit Risk Officers) to better address agribusiness risks.

26 26 Thank you for your attention Consult our web page:

Asia Pacific Trade Facilitation Forum 2014. 24 25 September 2014, BITEC Bangkok, Thailand

Asia Pacific Trade Facilitation Forum 2014 24 25 September 2014, BITEC Bangkok, Thailand Innovative trade financing initiatives for SMEs Asia Pacific Trade Facilitation Forum September 2014, Bangkok, Thailand