IFC Financial Institutions Group

Supply Chain Finance for SMEs

Qamar Saleem Senior Banking Specialist , EMENA

October 222nd 2014 There exists $2.1-2.6 Trillion global SME credit gap, formal & informal

Source: IFC Enterprise Finance Gap Database (2011)

2 For “formal” enterprises, $1 trillion SME finance gap in emerging markets Central Asia & Eastern Europe Gap Estimate: 170,061 USD MM

Middle East & North Africa 27% Gap Estimate: 294,148 USD MM 58% 16% East Asia 31% Gap Estimate: 167,523 USD MM 61% 9% South Asia Gap Estimate: 14,884 USD MM 32% Latin America Gap Estimate: 235,292 USD MM 41% 51% 61% 6% Sub-Saharan Africa 21% Gap Estimate: 80,085 USD MM 7%

65% 14% 21% 7% 72%

Size of the pie roughly relates to the size of the Gap in terms of Number of SMEs

Source: IFC & McKinsey Database (2011) 3 Financing Constraint seen as the top growth impediment amongst SMEs

Percent of Enterprises citing biggest obstacle (SMEs between 5 -100 employees)

In 71% of countries SMEs cite Access to Finance as the biggest obstacle….

Source: Enterprise Surveys 4 IFC completed a review of leading SME finance practices and models as part of our work with the G20

. G20 SME finance Sub Group identified successful practices & policy measures for SMEs in 2011

. Work involved review of 164 different models globally and subsequent policy requirements

Key Recommendations from the G20 Sub-Group

. Developing supporting legal & Regulatory framework for facilitating alternate finance (e.g. supply chain)

. Building reliable data sources for SME finance

. Strengthening the financial infrastructure

. Effective government support mechanisms

. Address specific market failures e.g. women and non SME Finance Policy Guide – issued October 2011 by IFC . Building the capacity of financial institutions

5 Supportive legal & regulatory environment and alternate finance through e.g. can be highly effective

Case Study: NAFIN, . Support and legislate non-FI alternatives Mexico to lending e.g. supply chain finance  “Productive chains” program allows . The public sector is a major buyer of SMEs to use big buyer receivables for goods & services from SMEs, and can more finance

effectively link SMEs to supply chain  By 2009, nearly 500 Corporates finance through contractual and payment involved, and $60 Billion in finance relationship extended to more than 80,000 SMEs through 21 and non-banks . Electronic security and signature laws, and market facilitation platforms, can Case Study: Chile Compra, facilitate supply chain finance Chile

 Chile Compra is a public, electronic . Strengthen credit reporting to even the system for purchasing and hiring, with playing field between small and big banks more than 850 purchasing organizations

 MSMEs provide 55% percent of total . Capacity building for FIs and SMEs to purchases, and their participation in significantly enhance scalability government purchases is double their overall share in the Chilean economy 6 Why we should focus on supply chain finance for SMEs

• More than 27 million formal Small, Very Small and Medium Enterprises in Developing countries, of which 39% and 22% are unserved and underserved respectively1 • Addressing the SME needs through appropriate partners, products and processes is key to accelerate job creation. The World Bank estimates that 600 million jobs are needed by 2020

Large enterprises are served by the banks, micro – by Typical formal small and lower end of medium MFIs, while SME segment is lacking an access to finance enterprises are suppliers/buyers of large corporates

Large

Banks Medium

Small

MFIs Micro

1 Source: IFC Enterprise Finance Gap Database IFC Enterprise Finance Gap definition of MSMEs: Micro – 1-4 employees, Very Small – 5-9 employees, Small – 10-49 employees, Medium – 50-250 employees 7 SCF proposition typically falls under “Supplier finance” and “Buyer Finance” categories but both linked to large reputable corporate entities (Anchor)

Buyer Finance Sub- Suppliers Suppliers Anchor Distributors Retail Supplier Finance Buyer Finance Financing the procurement side of the corporate Financing the sales and distribution side of the business corporate business Suppliers to the Anchor are financed Buyer/Distributors to the Anchor are financed Key Benefits for small supplier: Key Benefits for small buyer:  Ability to access finance which would be more  Reduce their cost of working capital challenging, collateral heavy and many times not possible  Give them flexibility of accelerating their cash flows on a standalone basis. This will potentially generate thereby improving their liquidity growth in the retailer business, which results in higher purchases from anchor.  Reduce hassles of following up for payments  Strengthening of relationship with suppliers by ensuring certainty of supply  Receivable financing, allowing open account trade, reduces the cost of transaction processing, comparing to  Avail finance at more competitive rates given corporate the cost of LSs / Inland LCs. linkage  Assured funding linked to actual business needs  Avoid delays in receipt of payment  Easy to access the bank for further incremental limits as  Match funding based on the quantum of purchase orders these are linked to Anchor sales and unlikely to be easily declined.  Minimize cost of collections

8 Multiple opportunities exist for Banks to become involved in the supply chain financing, however traditional receivable finance most commonly preferred Buyer Finance Pre Post Post Anchor Shipment Shipment Shipment

Financing the sales and distribution side Financing the procurement side of the corporate business of the corporate business Purchase Order Finance Reverse Buyer / Distributor Finance

. The anchor initiates the program, . Made available to a Supplier usually the bank deals with 1 buyer . Bank finances distributor based on a Purchase Order and multiple suppliers received from a Buyer after presentation of . Financing bank takes an . Financing typically covers the assignment of the receivables authenticated delivery working-capital needs of the which have been approved by the note/invoice Supplier, including raw buyer . Key risk mitigation: the materials, wages, packing costs, and other pre-shipment Receivable Finance /Factoring anchor agrees on a first loss repayment in the case of expenses in order to allow it to . Bank approaches each single fulfil delivery against the supplier to finance their default and can also agree relevant Purchase Order receivables to establish a stop-supply . The Supplier’s bank provides . The most common form involves clause (but only when the finance to the Supplier treating factoring of ‘Whole Turnover’ or distributor is very dependent the Purchase Order as evidence significant element (75-90%) of a on the seller) of a good source of repayment seller’s portfolio of open account trading receivables

9 9 Only a few banks and FIs have set-up successful and scalable supply chain finance solutions, but this is an opportunity mostly untapped

Purchase Receivables Buyer / Agriculture Capacity Order / Invoice Factoring Distribution Supply Building/ Finance Discounting Finance Chain Business Training

SCF product category offered by FI 1010 While SCF offers an attractive opportunity, banks are confronted with challenges across 4 main areas

Revenue Cost ► Market sizing complexities ► Skill gap bridging ► Sales methodologies ► Sales outfit ► Building for scaling ► Operational burden ► Product structure ► Channels usage

Supply Chain Finance (FI Dilemma) Risk Anchor ► Policy & program ► Sensitivities ► Assessment tools ► Selection mechanism ► Portfolio management ► Technology usage ► Collections framework ► Engagement plan

11 There is a need for FIs to better leverage SCF Ecosystem & synergize activities

Regulators Industry Central Banks, Ministry of Industry Associations Finance Networks TWIST, ISO, ICC SWIFT, ACH, other clearing house associations Banks NBFI

Technology Wells Fargo, HSBC, Citi Insurance Providers, GE Logistics Capital, Factoring (FCI), Platforms Leasing and Financing Providers Companies Vendors, Logistical Financing Platforms, Trade SMEs firms, 3PL Carriers Logistic Network platforms, Invoicing / Payment Platforms Specialized Corporations Investors

Market PE, VC, HFs e.g. Coca Cola, Advisors Analytics MFIs Nestle etc. IFC, PwC, KPMG, ChainLink ChainFinance, Bain, McKinsey Solution Multilaterals Providers Software / IT vendors: IBM, Oracle, EBRD, WBG, EIB – providing SCF investment SAP, Taulia and advisory solutions for the banks

12 12 IFC through its Global Trade Supplier Finance (GTSF), is helping FIs tap this market opportunity

Funding and risk mitigation for banks’ supply chain finance clientele

• Provides banks with 1. Buyer 2. Supplier views additional credit capacity to uploads invoices and requests support clients’ suppliers invoices early payment of (automated approved from higher-risk countries Emerging process) SCF invoices Buyer market • Provides funded and platform suppliers unfunded risk-sharing of up to 100% of a client’s 3. Financier accepts accounts receivable early payment requests 5. Financier pays discounted invoice amount • IFC may also provide liquidity and discount A/R Bank itself 6. Buyer pays full invoice amount on due date (automated transfers 4. IFC provides funding or • A/R is discounted using established) guarantee coverage market-based pricing Program • IFC accepts bank proposed Mobilization partners discount rate on risk-shared receivables $1.6 Billion commitments 700+ suppliers financed 7 Countries supported

13 IFC through its Distributor Finance Program is also facilitating access to finance for SME buyers/distributors

Financing corporates’ emerging-market distribution chains Benefits to Bank: IFC ROLE • Risk-mitigation: portfolio • Funded or unfunded risk-sharing facilities and management tool partial guarantees • Strengthening business • Capacity building: IFC’s Advisory Services, including line with global corporate SME Management Services, can engage to improve clients financial sustainability of distributors • Capacity expansion in BANK ROLE distributor finance Bank Origination and monitoring in: business • Receivables-based financing to seller Focus: food, agribusiness, • Overdrafts or loans to distributors/sub-distributors health, energy efficiency, • Floor-planning and equipment financing, including infrastructure, and end-user financing pharmaceuticals

SELLER provides some contractual support: first loss or counter- Seller Distributor Sub -distributor End customer guarantee, stop (anchor) in emerging market in emerging market in emerging market shipment clause, etc.

14 IFC also provides supply chain finance program building advisory services to FIs by building capacity across 5 key areas

Anchor Monitoring & 1 Market Sizing 2 Engagement & 3 Sales Approach 3 Credit Process 3 Portfolio Product Plan Management

. Market . Assessment of . Assessment of . Assessment of . Portfolio Opportunity Corporate clients sales origination Credit Process Monitoring and sizing in SCF with large and closure . Product Program Collections . Identify industries supplier/ . Corporate anchor design with Review with cluster local distributor sales approach financial . Development of buying and sales opportunities design projections portfolio risk and respective . Design anchor . After sales . Review legal monitoring criteria opportunity size selection/engage approach advise- environment for for the Supply . Review client’s ment strategy (i.e. Corporate, enforceability of Chain product SME portfolio to . SCF product supplier/distributor claims program and an early warning assess payment selection with onboarding) . Anchor and SME linkages phased approach system . Product and documentation framework magnitude for the bank implementation . Recourse/non . Development of . Review corporate . Design products team structure recourse portfolio and and launch plans standardized . Joint meetings for mechanism collections and establish Anchor including IT launching the pilot linked platform advice . Technology and operation program systems usage processes opportunities . Anchor/suppliers . Onboarding due diligence program

15 15 SCF Advisory is part of IFC’s SME Banking advisory services where we have implemented 84 advisory projects globally worth $50 million from 2007-13

AgroInvest Ceska Sporitelina Bank (Czech Republic) (Tajikistan)

Finterra CHUEE (Mexico) Energy Bank Muscat Efficiency Banco Atlantida (Oman) (China) and Ficohsa Atlantic bank (Honduras) (Belize) FMB and NSB Bank (Malawi) Bank of St Lucia Access Bank

(St Lucia) (Nigeria)

Dewan (India)

16 16

IFC’s SME Banking advisory services are supported by innovative tools

SME Banking Knowledge Guide: Outlines SME Banking CHECK Diagnostic Tool: leading practices and success factors for profitable SME banking operations. Guide A guide to assess SME banking has been translated into Arabic, Chinese, operations and design relevant French, Russian and Spanish. advisory services projects.

SME Banking Training Program: IFC offers two courses: An introduction or Scaling up course. The three day course SME Banking Benchmarking: An online consists of modules, case studies and SME Benchmarking Survey, exercises covering the following areas: automatically benchmarks SME banking business models for SME Banking, identifying practices. Market Opportunities, Customer Management, Products & Services, Sales, Credit Risk Management, IT & MIS, Market Segmentation Tool: Generates Customer Management Best Practice information that can be used by the Guide: The guide outlines key success Bank to make a decision whether to factors in better serving the SME clients and invest in developing its SME allowing banks to maximize the revenue operations, identify target SME opportunity. It is primarily a technical segments, and decide how to target publication, intended for bank directors and them, design & sell products managers interested in acquiring the key capabilities to enhance growth and revenue, as well as building and retaining profitable customer relationships amidst ever- Assessing & Mapping the Global Gap increasing competition for the SME segment. in SME Finance: A joint IFC & McKinsey report that assesses and maps the global gap in SME finance, Customer Management Tools: provision including the number of enterprises by of wallet sizing, du pont model and region, size and formality, as well as revenue projection models for the SME SME’s access to credit and value of the segment credit gap.

17 IFC’s blend of Investment and Advisory solutions are targeted towards enhancing access to finance for SMEs

• Build capacity of FIs in strategy, market segmentation, credit risk management, product development through new approaches and systems to Capacity scale up their financing for SMEs on a sustainable basis

Building for FIs • Promote sub-sector focus: women-owned SMEs, sustainable energy SME projects, agri SMEs, leasing, etc • Raise awareness on best practices in the SME Finance space

• Develop credit reporting infrastructure based on country needs ADVISORY Financial • Support development of secured transactions, collateral registries, legal and Infrastructure regulatory framework • Build capacity of public/private stakeholders through advice and training

• Equity Investments in Financial Institutions / Equity Funds for SMEs • Funded lines to expand investment and working capital lines especially in illiquid markets SME Financing • Blended finance options to support the expansion of IFC’s risk appetite & Investments (e.g. grace periods, performance based pricing, subordination, higher risk /lower security or in limited cases, local currency positions) [for selected projects] • Focus underserved segments, e.g., gender, fragile/conflict, agri, climate

INVESTMENT Risk Mitigation • Risk Sharing Facilities / Partial Credit Guarantees to: & • Enhance risk taking capacity and provide capital relief via low risk Enhancements weightings • Avoid FX mismatches and encourage domestic resources for SME financing 18 18 Thank You