Promoting Sustainable Development
in Emerging & Developing Countries
via Non Sovereign Financing
Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance
AFD Non Sovereign Financing for Banks
 Providing financing at market conditions or subsidized loans without any
requirement of any State guarantee
 Criteria for market based credit facilities:
 Only State Owned Banks are eligible
 Provide long term resources to viable financial institutions
 Help State Owned Banks develop their strategy and portfolio on sectors of common
strategic interest
 Ease the public debt burden and help SOB access market funding
 Criteria for subsidized credit facilities:
 Privately Owned or State Owned Banks are eligible
 Subsidiarity (i.e. non competition with commercial banks or financial markets)
 Additionality:
 Help banks to build capacity and experience on underserved markets, which are

critical for development (energy & environmental projects, SME and small
entrepreneurs, …)
Use the bank as an intermediary and a catalist to improve competitiveness (sector
specific upgrading programs or CSR promotion projects)
AFD Non Sovereign Financing for Banks
 Key Eligibility Criteria




Strong governance & autonomous financial management
Anti-Money Laundering / Terrorism Financing procedures in line with FATF 40 + 9 recommendations
Availability or willingness to develop an adapted Environmental & Social Risk Management System
Satisfactory risk rating based on AFD’s analysis and Ratings from International agencies (capital,
asset quality, management, profitability, sensitivity to market risks
Financial Tools :
 Non sovereign loans (concessional or market conditions)
 Technical Assistance (small grants) to help the implementation of the project, when needed
 ARIZ Risk sharing scheme for SME financing
Financial terms:




Maturity: from 10 to 15 years, grace periods
Hard currencies (USD, EUR), local currencies
Fixed or floating rate
Unsecured Senior Lending with cross –default and a negative pledge to protect pari passu status
Credit Line Mechanism
Credit Facility
AFD
Bank
Eligibility criteria
Loan
Eligible Client
Loan
Eligible Client
Loan
Eligible Client
AFD Credit Line mechanism

AFD credit line can be used by the Bank to finance Long term loans to renewable Energy
projects which respects eligibility criteria (financial and technical)

The projects will be selected according to bank’s standard norms and procedures

The Bank takes the full risk on the final beneficiary, AFD does not interfere in the bank’s
selection process


Partnership AFD-partner bank: the partner bank passes on the soft component of the loan
(if any) or maturity to the final beneficiary: the loans to final clients should mirror the lower
than market rate or extended maturity of the AFD credit facility.
AFD to implement capacity building for the bank if required
The Currency Exchange Funds NV
Providing local currency funding
Presentation of TCX
Features
•
•
•
•
TCX Offer in Laos
• Non Deliverable products available only
Established 2007
• Maximum maturity : 4 years
Capital of USD740m
• AFD operates Non Deliverable Swap CCS
AFD/Proparco is a prominent shareholder
with TCX
TCX is rated A- by S&P
• AFD remains the only institution dealing with
Product
the client / partner in Lao PDR
•
•
•
Local Currency Loans
• Clients receives LCY Facility at X% interest
Active trading capacity in 80 currencies
• Interest Payments for 10-yr at LCY 7% settled
Transaction sizes range from USD0,5m to
USD50m
in USD
•
Single currency limit up to USD150m
• Principal repaid in USD
Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance
SME Banking opportunities and challenges
Opportunities to finance SMEs
Core of economic growth
•
•
•
Major part of the economic framework and
the employment base in ASEAN countries :
90% of establishments, between 20-40% of total
domestic output and employ between 75-90% of
the domestic workforce.
Opportunities for banks
•SMEs provide a new target market and
business development opportunities
•SMEs offer an opportunity for risk portfolio
diversification as they are active in various
To ensure their development SMEs need
financial services
Around 75-90% of ASEAN SME rely on internal
savings, retained earnings and borrowing
from family, friends and money lenders
(collectively known as ‘informal sector’) as
opposed to the 3-18% which have access to
formal sector finance
industry sectors and geographic locations
•An SME portfolio generates a stable income
and requires less complex asset-liability
management at the portfolio level. SMEs clients
are also potential personal client: cross-selling
opportunities.
SME Banking opportunities and challenges
Barriers to the SMEs financing
Barriers linked to SMEs




Obstacles on the side of Financial
Institutions
•
Financial institutions perceive risk as
being high, whereas according to
statistics on bankruptcies it is below
the perceived risk
Insufficient managerial skills (management,
accounting, marketing…),
•
Lack of client/market segmentation
Low equity contribution
•
Organization, methods and tools to assess
risk used by Banks are only tailored for
Corporate customers and those used by
microfinance institutions only for
micro-enterprises
•
Methods of risk analysis often lead to a
restrictive asset based lending approach
High rate of informal business which
prevents them from access to credit
Low value of assets offered as collateral
(added to difficulties for banks to exercise this
collateral) and impossibility to produce
personal guarantees
AFD’s Approach Towards SMEs
AFD’s Objective:
 Tackling this market failure by bridging the gap of the
« missing middle finance »
How?
A. By providing a risk-sharing tool to commercial banks (ARIZ
guarantee lines)
B. By extending credit facilities at soft conditions to commercial
banks engaged in an ambitious SME lending strategy
ARIZ – Partial Risk-Sharing Mechanism
Key Objective
 To give SMEs and MFIs better access to financing through a
program that encourages banks’ participation in a risk-sharing
mechanism
 Is targeted toward loans financing SME’s capital
expenditures (i.e. medium term investments) or refinancing
MFIs
 Covers all risks including political risk and natural
catastrophes
Main
Characteristics
 Potential beneficiaries
All small and medium private companies and MFIs
All business sectors (except real estate, tobacco, alcohol
and weapons),
Start-ups or development projects
 Applies to loans denominated in local currency, USD or
EUR
AFD’s SME Credit Facility
Objectives

To promote the missing-middle finance due to major potential for contribution to economic growth and
employment

To engage banks in an opportunity to increase market shares and enhance profitability

To build banks capacities in the approach towards SME clients
AFD’s Answer

Subsidized credit facilities and technical assistance scheme to implement a “downscaling” program

Integrate SME lending strategy into your institution’s business plan

Technical assistance and advisory services in the following main areas:

Staff training

Risk procedures and management
Operational Conditions to Be Eligible for a Subsidised Credit Facility from AFD

Set SME lending objective of at least the amount of the credit facility

Allocate specific means (small coordinating team, mobilisation of network)

Use the “financial advantage” of the AFD credit facility to cover its specific risks and additional costs
(technical assistance)
Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance
AFd and microfinance : more than 20 years of
experience
 Important Dates: AFD has been supporting Microfinance since 1988
 1988: AFD’s first microfinance operations in Guinea and Burkina Faso
 1995: AFD joins the Consultative Group to Assist the Poor (CGAP)
 2002: A dedicated microfinance team is set up at AFD’s headquarters
 2005: “Year of Microcredit” and AFD organizes the Paris International
Conference
 2007: Proparco, AFD’s subsidiary, completes the range of products to finance
microfinance by offering equity investments, subordinated loans and
commercial loans
 2009: FISEA (Investment and Support Fund for Businesses in Africa) is
launched. The fund makes equity investments in Sub-Saharan Africa,
particularly in microfinance
 2010: AFD adheres to the Client Protection Principles promoted by CGAP and
ACCION International. AFD co-organizes the Marketplace on Innovative
Financial Solutions for Development and Convergences 2015 conference in
Paris.
Diversity of financial and non financial products
- 2 complementary microfinance
facilities:
 Microfinance Investment Facility for
loans and equity investments in LCY (30
MEUR)
 Technical Assistance Facility (20 MEUR)
- Credit lines at market rates (floating
interest rate) through Proparco
- Guaranties: ARIZ & ad hoc
- Specific TA facility on AML and E&S
risk management (max: 50 000 EUR)
-Research and Knowledge
Management projects
Million €
Strong growth of commitments
90
Evolution of AFD Group commitments on Microfinance
80
Million
EUR
70
60
- Over 350 MEUR of cumulated
commitments in microfinance
50
- 50 MFIs supported, mostly in
rural areas
40
30
-In 2010, over 75 MEUR invested
20
10
0
2002
Grants
2003
2004
Guarantees
2005
2006
Local Currency Loans
2007
2008
Hard Currency Loans
2009
2010
Equity funding
Thank you !
SME Banking opportunities and challenges
The « Missing Middle Finance »
Domestic and
International
Commercial
Banks
LARGE
CORPORATIONS
SMALL and
MEDIUM
ENTERPRISES
SMALL
ENTREPRISES
MICROENTERPRISES
Usually / Frequently
Unaddressed
Market by
commercial banks
State or
National
Developm
ent Banks
MFIs
ARIZ Provides Two Types of Guarantees
ARIZ INDIVIDUAL
GUARANTEE
Issued on a deal-by-deal basis
Tailored to the bank’s needs
Guarantees any type of medium
term investment (capex) loan
Guarantees maximum 50% of the
loan (up to 75% for MFIs) with an
upper limit of €2m (i.e. 50% of a
€4m loan)
From 2 to 12 years maximum
guarantee (starting at 1 yr for
MFIs)
ARIZ PORTFOLIO
GUARANTEE
 Targets the “Missing Middle” or
“Mesofinance” sector
 Guarantees up to 50% of loans
between 10,000€ and 300,000€
with a maturity between 1 and 5
years
 Defines a target group of final
beneficiaries: by cluster, region,
state, etc.
 Delegation - ARIZ’s Portfolio
Guarantee is a “guarantee line”:
Guarantees are automatically
issued by the bank with the
loans provided these match the
key qualification criteria defined by
the bank and AFD
Technical Assistance Possible Points of Application
Field
Point of intervention
Technical assistance examples
Strategy
 Implementation of SME strategy
 Resident technical assistance up to two years
(marketing, commercial framework,
product innovation, risk analysis, risk
monitoring, etc.)
Marketing
 Coordination strategy
 SME’s market segmentation
 New products definition
 From « SME lending » to « SME
banking »: enhanced cross-selling
for coordination
 Temporary technical assistance with specific
expertise from external consultants (e.g.
marketing, credit scoring, MIS, etc.)
 Financing of SME’s market survey
 Financing of surveys concerning socially
value sectors ( ex. healthcare, education, etc.)
 Support
for implementation of new products
(financial engineering, legal, etc.)
 Implementation of dedicated marketing
strategy
Commercial approach
 Re-engineering
 Training for methods in advising and
supporting SMEs
Risk analysis
 Risk analysis methods review and
implementation of cash flow based
lending
 Implementation or improvement of credit
 Implementation of training for relationship
managers and risk analysts
scoring tools (or « risk grading ») tailored
for SMEs
Risk monitoring
 Implementation of
operational,
administrative and supervision tasks
 MIS (management information system) in
line with the risk monitoring
 Collection process improvement
 Technical assistance for supervision and
monitoring procedures
 Intervention of IT consultants
 Legal training
A multi-layered approach
Foster access to financial services
MACRO
MICRO
Support local MFIs at
different stages
Transforming institutions
MESO
Work alongside with central banks,
MFIs networks and regulators
Strengthen financial
institutions
Creating an enabling legal and
regulatory environment
Commercial banks,
Investments funds
Develop synergies between actors
Capacity building
Contribute to the debate and foster
knowledge on microfinance
Bringing resources
Building capacity
Providing technical
assistance
… to use their financial
resources and markets more
efficiently
Organize and take part in main
conferences on microfinance
Important projects in Asia
Support the development of the People’s credit fund (PCF) - Viêtnam
PCF is a network of 1000 rural cooperatives, with an outreach to 1,2 millions small
producers, aiming at providing them with acess to financial services and to a
sustainable financial situations. PCF is refinanced by the Central Credit Fund (CCF).
AFD financial commitments:
- 30 M EUR concessional credit line, 20 years, to finance a new financial product : long
term investment loans for rural small businesses and micro-entrepreneurs
- 500 000 EUR grant for technical assistance to the PCF
Objectives :
- Support the growth of PCF
-Support the diversification of PCF loan products to longer term Investment Loans
-Support the management of the network and the quality of operations
Implementation details :
-Allocation of the credit line and of the grant to the MoF (sovereign loan), then on-lending to the
CCF, on-lending to the PCF
- Transfer of the management of the grant to the CCF
Important projects in Asia
Support the First Microfinance Bank (FMFB) in Afghanistan
FMFB is one the most important MFIs in Afghanistan. Member of AKAM and
applying the best practices of the sector.
AFD Financial Commitments :
Granting of 2 Credit lines to refinance FMFB activities:
- Credit line of 4 M USD, 10 years, market rate
- Concessional Credit Line of 1 M EUR in LCY, 8 years
Objectives:
-Strengthen the portfolio growth and financial performance of FMFB
- Foster LCY micro-credit offer
- Promote the access of women to financial services
Implementation details :
- USD Credit Line at market rate, dedicated to the refinancing of traditional lending activities
- Concessional Credit line, exchange risk transferred to AFD, to promote LCY loans, in particular to
women
Presentation Outline

1. AFD Non Sovereign Financing for Banks

2. Challenges and opportunities of SME Finance

3. AFD and Microfinance

4. Agricultural Finance Innovations
Financing the agricultural sector: obstacles
 In most of the countries of AFD’s intervention, the financial needs of the agricultural sector
are not covered. This situation leads to a lack of development, poverty in rural areas and
absence of food security.
 Difficulties for the financial institutions to finance the agricultural sector :
1 High delivery cost, proximity
2 Weak farm practices and farmers
3 Lack of banking technology
4 Collateral
5 Exogenous Risks (climate, price volatility)
6 Weak collaboration among farmers
Financing the agricultural sector : innovations and solutions
Innovation
Constraints targeted
Applicability
Member-owned localised finance
(e.g.SCAs), rural banks, microfinance
1 Delivery cost,
Proximity
3 Banking technology
4 Collateral
6 Weak farmer
organisations
All agriculture
Rural households
Agricultural leasing
3 Banking technology
4 Collateral
Standardised equipment with a 2nd hand
market
Credit guarantees
4 Collateral
All agriculture
Value chain finance, including contract
financing and outgrower schemes
1 Delivery cost
2 Farm practices
3 Banking technology
4 Collateral
5 Exogenous price risk
6 Weak farmer
organisations
Export crops
Relatively long and complex value chains, such
as speciality crops with quality
requirements
Integrated in wider value chain development
actions
Agricultural factoring
3 Banking technology
4 Collateral
Export crops
Product where payment takes time
Financing the agricultural sector : innovations and solutions
Innovation
Constraints targeted
Applicability
Warehouse receipt finance
2 Farm practices
3 Banking technology
4 Collateral
5 Exogenous price risk
Non-perishable crops such as grains,
coffee, cashews, sesame
Frozen meat and fish
Price smoothing
5 Exogenous price risk
Export crops
Technology:
Mobile banking (cell phone, mobile
van), Biometrics
1 Delivery cost, Proximity
Rural households
Insurance (index)
1 Delivery cost
4 Collateral
5 Exogenous risks
Crops (index)
Animals (not index)
Extension services
Financial literacy
2 Weak farm practices
5 Exogenous risks
6 Weak farmer
organisations
All agriculture
Rural households
AFD’s tools to support agricultural finance
Objective
Tools
Provide funds to Financial Institutions and to
their clients which conditions are adapted to
the needs of the agricultural sector
Support their geographical expansion
Credit lines
Deepen FI’s knowledge of the specificities of
the agricultural sector and strenghthen their
capacities to respond to the demand
Technical Assistance
Strengthten the financial structure and the
business capacities of FI’s clients from the
agricultural sector : farmers, farmers’
organisation, SMEs for transformation,
distribution, etc.
FISEA (equity investment fund)
Support FI’s clients from the agricultural
sector in structuring their investments and
evaluating their financial needs
Technical Assistance
Credit Risk Sharing for banks with growing
agricultural finance activities
Garantie ARIZ
Financial innovation : research, pilot projects
AFD can work with agricultural development banks, commercial banks, MFIs, Business
Developement Services, Farmers Organisation and partners with smallholders as much as
agroindustries.
Ghana Rubber Outgrower Scheme
 Importance of AFD envolvement

Between 1986 and 1990: participation to the rehabilitation of plantations and creation
of a new factory

Since 1995: Plantation Projects to Small Holders, 4 successive phases
No. of
Period
Finance by AFD
Area
Phase 1
1995-2000
1,2 M€
1 200 ha
400
1 550 t/yr
Phase 2
2000-2005
5,9 M€
2 850 ha
500
3 250 t/yr
Phase 3
2006-2012
8,6 M€
7 000 ha
1 750
11 800 t/yr
Phase 4
2010-2015
14 M€
10 500 ha
3 500
17 850 t/yr
TOTAL
1995-2015
29,7 M€
21 550 ha
6 150
34 450 t/yr
Small Holders
Production surplus
AFD
Loan in EURO
Local Banks
Loan in EURO
Loan Repayment
Investment Financing,
cash advance
Seedlings, Inputs
Tecchnical Assistance
Small Holders
Sale of the production
Technical Operator
GREL
CECAM Madagascar : warehouse receipts and
leasing
 CECAM : major microfinance network of Madagascar for the number of clients,
branches and loan portfolio
 AFD has supported CECAM since its creation through, grants, guarantees and a
concessional credit line.
 CECAM offers specific products to cover agricultural sector’s needs for financing:
 Warehouse receipts systems - Grenier Commun Villageois (GCV) : credit granted
to the farmers based on warehouse receipts, to cover their financial needs
between two harvets.
 Leasing solution - Location Vente Mutualiste (LVM) : CECAM owns the equipment
untill the credit has been completely reimbursed.
 Harvets credits with possibility of in fine reimbursement
 Those products account today for 90% of CECAM’s loan portfolio and are strongly
contributing to its growth (+17,4% in 2010).
The synthetic Local Currency Loan
❶
TCX
(lender)
(hedge provider)
offshore
AFD
LCY 7%
❷
❶
USD 3%
Principal in USD
Interest Payments for 10-yr
at LCY 7% settled in USD
❸
onshore
LCY Income
Principal repaid in USD
Client
(borrower)
Product/Service
❸
Principal in LCY
❷
USD equivalent
Interest Payment
at LCY 7%
FX Spot Market
❶
Principal in USD