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NEWS ABOUT WORLD BANK GROUP SMALL AND MEDIUM ENTERPRISE INITIATIVES Vol.1, No. 2 July 2000 Public Disclosure Authorized

From to the Caucasus Partnership with Shorebank Chorebank is a small, for-profit, U.S.-based financial iNAME: jservices holding company that emphasizes commu- Shorebank Corporation nity banking. It is distinguished by its history of success in inner-city neighborhoods of Chicago, , , and other low-income markets frequently neglected by mainstream U.S. lenders. Chicago, , USA Affiliates offer these marginalized communities a full

Public Disclosure Authorized range of commercial banking services, including S I Z E: $1 billion in assets deposit taking, real estate finance, venture capital, and 'I F C PA R T N E R I N : Azerbaij an, long-term small business lending. The result: more than ~'5IFC P A R T N E R I N: Azerbaijan, $1 million a year in profits for shareholders from .Georgia and Kenya;other possible financing minority-owned businesses that would initiatives under consideration in India and otherwise have great difficulty attracting capital. Chicago's leading business newspaper has praised Shorebank for "using capitalist tools to advance the S I N C E 1998 social good."

R 0 L E : Provides donor-funded In 1983 a key shareholder, the , management support and training to suggested that Shorebank take its experience overseas. local. banks The bank began in .It worked first in Bangladesh by advising donors of two leading Public Disclosure Authorized Bangladeshi microfinance institutions, -SMEFACTS ' T R A C K R E C 0 R D: Shorebank's and BRAC. It then joined the International Finance is a publication of the presence gave IFC the confidence it needed Corporation (IFC) and others several years later as a World Bank Group to extend $10 million in SME credit lines shareholder in the commercialized Kenyan microlender SME Department. to local banks in these volatile frontier K-Rep. economies. Subloans to date have helped Directorb In 1990 Shorebank became active in lending to small HaroldRosen and medium enterprises(SMEs) in Central and Eastern -and Azerbaijan. Europe and the former Soviet Union by playing an

For Information SME portfolio management role. Since then it has: Contact: * managed a $47 million small business lending Rob Wright program under the auspices of the Polish-American -Rwright@itcorg hTel.4,73 c2027997E n terp rise Fu n d Tel. #202 473 7997 Public Disclosure Authorized . "Fax'#-2025223742 ' * managed a $26 million SME credit line, funded by the European Bank for Reconstruction and Development, to Russian banks

Fl L t~JU (J '~(lu~ * assisted the Romanian-American Enterprise Fund in Out on the Frontier

IFC BANKS IN GEORGIA, LOCAL SMEs * $10 MILLIONIN LONG-TERM AZERBAIJAN . MORETHAN 120 SUBLOANS MARKEr RATELOANS * TAKEFULL REPAYMENT RISK * STRONGREPAYMENT RATES * MOVEFROM INFORMAL TO FORMAL

SHOREBANK * MANAGEMENTSUPPORT, TRAINING

USAID * $6 MILLIONGRANT

a similar but smaller program that involved $5 million rities of 5 to 30 months. Nonperforming loan rates have of IFC financing. been low (4.7 percent) in Georgia and still acceptable (10 percent) in Azerbaijan's far more difficult business In early 1997 the U.S. Agency for International environment despite the regional economic fallout from Development (USAID) crafted a five-year grant the August 1998 Russia crisis. Working with the partici- program to strengthen SMEs and microenterprises in pating banks has also helped many borrowers move the three Caucasus republics of Armenia, Azerbaijan, from the informal to the formal sector and begin pay- and Georgia. At the time all were in the early stages of ing taxes. transition to market economies and were recovering from regional and internal wars as well as natural Reaching this point has required sustained effort by all disasters. Their financial institutions were extremely sides. Yet as an investment-oriented institution with weak and unable to provide the development capital limited access to donor funds, IFC could never have that local entrepreneurs so badly needed. worked with Shorebank with the intensity necessary in these countries without the involvement and support While IFC had little experience in the Caucasus at the of USAID. "It was a win-win deal for everybody," says time, it too wanted to help as many local SMEs as IFC's Mark Rozanski. possible out could not find any local banks with the necessary credit management skills. The proposed Lessons Learned USAID program thus became a natural ally. When IFC learned that Shorebank was seeking to manage the The IFC-Shorebank partnership has already yielded USAID program, it proposed a partnership, offering to some important insights. make lines of credit available to local banks in the three countries that the Chicago institution would help First, in some high-risk frontier economies where finan- manage and train. cial sectors are shaky and support needs are enormous, linking up with a donor-funded program can be a cost- Once USAID selected Shorebank to provide the effective way for IFC to leverage the development technical assistance, IFC identified banks in Georgia impact of its financing. and Azerbaijan to receive long-term, Russian-speaking resident advisers. Arriving in early 1998, they worked Second, having long-term advisers in local banks who to build important local skills in credit risk manage- speak the language and carry the respect of rrmanage- ment, such as the preparation and evaluation of ment can be a great plus. business plans, cash flow analysis, and loan documen- tation, administration, and monitoring. And finally, while Shorebank's focus thus far has been on credit management, where it has expertise The IFC-Shorebank teamwork in Georgia and and experience, client banks frequently also need Azerbaijan has worked well. It has enabled local banks support in equally important areas such as information to make loans to 125 small companies, many of which technology, treasury operations, and deposit taking. had never before practiced the financial discipline nec- In such cases a more comprehensive approach has to essary to obtain commercial bank financing. The loans, be adopted with the technical assistance provider. which average $40,000, are at market rates with matu-