Asia Pacific Trade Facilitation Forum September 2014, BITEC Bangkok, Thailand

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1 Asia Pacific Trade Facilitation Forum September 2014, BITEC Bangkok, Thailand

2 Innovative trade financing initiatives for SMEs Asia Pacific Trade Facilitation Forum September 2014, Bangkok, Thailand Dr Mohammad Saeed Senior Trade Facilitation Adviser

3 2 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

4 3 Importance of SMEs and Access to Finance as a Major Constraint SME impact on GDP & employment Formal SMEs contribute up to 45% of employment and up to 33% of GDP in developing economies Low access to finance rate 63% of the SMEs do not have access to finance High unmet credit needs The unmet credit needs of the SMEs in the formal sector in emerging markets are estimated between $900 billion and $1.1 trillion Sources: IFC 2010 Report, IFC-McKinsey Research 2010

5 4 SMEs Access to Finance Barriers 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.

6 5 Some SME Financing Solutions Besides equity/debt based financing, grants and government aid, the key financing solutions for SMEs are: Trade Financing Instruments Pre-shipment finance Post shipment finance Factoring Leasing Inventory financing Value Chain Financing Crowdfunding Key presentation focus

7 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

8 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

9 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)

10 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

11 ITC bridging the gap between SMEs and FSPs ITC A2F Programme 10 National, regional & international DFIs Trade-Related Technical Assistance Services & Finance Private Sector Development FMCs and TSIs Equipped with tools SMEs Credit Lines & Guarantee Funds Training and tools (LOANCOM, Online platform) SME Financing FSPs

12 11 ITC s A2F TA as a complementary solution (ct d) 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

13 12 Case Studies Country Zambia Project description In , the African Development Bank (AfDB) put a line of credit at two commercial banks (Investrust Bank and Zanaco) to finance small agribusinesses in Zambia Achieved results to date 70 SMEs coached during and after the loan through 20 local FMCs 50% of SMEs to secure loans Default rate of the two banks reduced to 0 Fiji Since 2012, ITC has been implementing an EC funded programme designed to alleviate poverty in Fiji's sugar cane belt by supporting income generating opportunities within non-sugar agriculture 12 SMEs mentored before, during and after funding 9 SMEs secured funding (loans/grants) for a total value of $600,000 FSPs now willing to finance SMEs with ITC A2F Technical Assistance.

14 13 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.

15 14 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.

16 15 Thank you for your attention For Further information, questions or comments please contact Mr. Rajesh Aggarwal: Acting Director, Division of Business & Institutional Support Chief, Trade Facilitation and Policy for Business Mr. Torek FARHADI: Senior Adviser, Trade Finance for SMEs Mr. Yaya Ouattara: Adviser, Access to Finance for SMEs Or consult our web page:

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

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