Building up capacities for successful lending to
Micro, Small and Medium-sized Businesses
Workshop on SME Financing
Dar es Salaam - June 26, 2007
Project locations
Shareholder Structure of ProCredit Holding
ProCredit Holding aims to expand the “frontier of finance”, i.e. to extend downward the
range of market segments served by formal and commercial financial institutions.
Capital base:
Voting capital
EUR 152 million
Non-voting capital
EUR 28 million
Share premium
EUR 36 million
Retained earnings / other reserves EUR 12 million
Total
EUR 228 million
84 %
16 %
Shareholder structure of voting capital:
21 %
18 %
5%
14 %
18 %
7%
3%
7%
1%
3%
1%
Omidyar Tufts
2%
TIAA-CREF and the Omidyar Tufts Microfinance Fund have invested EUR 40 mln in non-voting preference shares.
Overview of performance, all PCH group institutions
April 2007
Outstanding loan portfolio: Breakdown into loan size categories
2000-2007
Number
of loans
in `000
Volume
in EUR million
Medium loans:
Small loans:
Micro loans:
Micro micro loans:
Medium loans:
Small loans:
Micro loans:
Micro micro loans:
Return on equity: the PCH group worldwide
ProCredit Bank Examples in Africa:
Loan portfolio outstanding
Volume
in USD million
ProCredit Bank Examples in Africa: Number of loans outstanding
(Business and housing improvement)
Number
of loans
ProCredit Bank Examples in Africa:
Number of loans disbursed per loan officer
Number
of loans
Support for MSE lending to commercial bank
Project design (“Downscaling”)
International Financial
Institution
Provision of long term
credit lines for on
lending to MSE
Donor (USAID/EU)
funded technical
assistance,
co-financed by partner
banks
Technical assistance
provider
Consulting, training and
implementation
-> Capacity building
for MSE lending
-> Active support to
achieve tangible results
Partner Bank (sample)
Micro Loans
Small Loans
Medium Loans
Agricultural Loans
Typical terms of reference / project objectives
•
Modular and on-the-job training of MSE loan officers, supervisors, trainers,
managers and back officers
•
Ongoing supervision of MSE lending activities on a branch level assuming an
active and operational management approach,
•
Implementation of a MSE loan processing system including MIS,
•
Building up a MSE lending head office unit,
•
Designing and implementing internal control procedures,
•
Training of auditors,
•
Managing interfaces within the bank with the aim to embed MSE lending smoothly
into the bank’s operations,
•
Exiting (“Graduating”) the partner banks (branch, than region, than bank
altogether) ensuring that the bank conducts and expands sustainable MSE lending
without the Consultant’s input.
•
Represent EBRD/KfW (Apex) interest as creditor
IPC business support
IPC Consultants do not limit their input to training and advise. In fact, IPC takes active participation in all
steps of loan processing and interferes where necessary. Partner Banks therefore beyond pure consultancy
receive active business support. We believe that only in this way, and by entering into a constructive dialogue
with the partner bank’s management, change can be firmly implemented and tangible results be achieved .
Involved:
Measures:
Involved:
In case of timely repayment:
- Loan Officers
- Contact clients;
- Back Office
retain clients
Measures:
- Senior Loan Officers
- Head Office + Branch
Management
- Marketing Dept.
In case of delayed repayment additionally:
- Analyse client needs
and feedback
- Exchange experience
with other projects
and banks
- Branch Management - Visit clients
- Legal + other depts. - Possible legal action
Repayment /
Recovery
Involved:
-
Loan Officers
Back Office
Senior LOs
Branch Mgmt.
Involved:
Measures:
- Regular visits
- Check
repayment
information
Involved:
- Back Office
- Front Office
Product
design
Measures:
-
Prepare contracts
Check documents
Advise clients
Witness signatures
Monitoring
Client
Acquisition
Involved:
Disbursement /
Internal Control
Decision
Application
Involved:
Measures:
Measures:
- Direct promotion
- Advertising in
local mass media
Measures:
- Loan Officers
- Advise
- other bank staff
clients
Analysis
Involved:
- Credit Committee - Assess plausibility of
- Loan Officers
information and debt
capacity
- Take loan decision
- Set terms + conditions
- Loan Officers
- Marketing Dept.
- other bank staff
Measures:
- Loan Officers - Visit client’s premises
- Assess real creditworthiness
- Prepare case for
Credit Committee
Credit Policy and Technology
• Lending policy adapted to local market conditions for micro and small enterprises
• Goal to make partner bank the client’s core bank with majority share in the
companies banking business
• Main principles of lending activities:
– profitability, liquidity, independence of political, religious and other non-economic
factors
– Risk diversification
– Only financially sound companies with trustworthy management
– Clients need to fulfil a set of ethical and environmental criteria
– Portfolio mix: maintain diversified portfolio
• Credit decision based on the ability and willingness of borrower to repay, i.e. cashflow is of greater importance than asset value
• Combination of qualitative and quantitative analysis by the credit officer is of great
importance
• Final decision is always made by unanimous vote of the credit committee
MSE lending staff: recruitment and training
Recruitment:
•
•
•
•
Selection of staff conducted jointly by the consultants and the partner bank
Staff is recruited both internally and externally according to the same process and
procedures
Staff selection process consists of several phases, including pre-selection based on
applications and CV, group sessions, written tests and individual interviews
MSE full-time credit staff consist of:
– Branch level: loan officers, back office staff, MSE credit supervisors
– Head Office Level: MSE credit management, regional managers, back office staff
Training in MSE credit operations is ongoing and provided both in classroom sessions and
on-the-job to support partner banks to build up in-house training capacities for:
•
Loan officers, senior loan officers
•
Lower management: MSE credit supervisors, Regional Managers
•
Middle management: MSE credit management, branch managers, other ancillary
departments (Marketing, HR, Internal Audit)
•
Senior management
Development of MSE loan portfolios
IPC supported commercial banks typically manage to develop their MSE loan portfolios dynamically, achieving
significant growth. Average monthly net growth 2004: USD 20 Mio. 2005: USD 40 Mio. 2006: USD 70 Mio.
With 14,000 to 20,000 new additional MSE loans (net, by number) every quarter, IPC managed advisory
projects significantly impact on the client structure of partner banks. This induces significant changes in
the way these banks develop their business, formulate strategies and position themselves.
Other Key Achievements
•
Arrears (>30 days) are at all times low (<2%), across all partner banks and
project countries
•
More than 10,000 loan officers have been trained; roughly 4,600 currently
process MSE loans in the partner banks
•
Significant regional outreach: MSE credit departments for over 40 partner
banks have been created in 950 branches in 470 towns and cities across
the region
•
Close to 70% of all loans outstanding are for an amount below USD 10,000
•
Only 16-20% of the portfolio is financed by IFI funds. The majority of the
funding has been mobilized by domestic banks on their markets
(exception: Kyrgyzstan and Armenia)
Downscaling: The China Example
China Development Bank Microfinance Project (CMFP) Framework:
• Technical assistance and credit funds provided to the China Development Bank by
the World Bank and Kreditanstalt fuer Wiederaufbau (KfW)
• China Development Bank provides credit lines and finances technical assistance to
selected partner banks (PB)
• IPC provides technical assistance to partner banks: capacity building, institution
building, and training
• Partner banks develop sustainable MSE credit operations
Objectives
•
Provide ongoing access to finance for micro and small enterprises (MSE)
•
Implement sustainable micro credit activities at participating partner banks
•
Strengthen the financial sector
•
Achieve wide regional coverage
Financing MSE
The Target Group:
– Micro and small enterprises cannot supply
formal financial data, or only unreliable data
– Need for alternative forms of collateral
– Need for quick and simple loan processing
– Demand for permanent access to credit
– Need to establish relationships between an
informal sector and formal commercial banks
Technology to provide financial services
to MSE:
– Providing accessible products, attractive to
the target group
– Low transaction costs, efficient procedures,
cost covering interest rates
– Analysis of whole economic unit
– Strict monitoring ensures low arrears rates
– Sanctions, moral hazard, prospect of ongoing
access to finance
Phases of Institution Building at a Partner Bank
Monitoring
Graduation
Expansion
Implemention
Preparation
Project month
1-3
3-6
- Select and begin training of initial
MSE credit staff
- Establish MSE credit department at
selected pilot branches
- Conduct market survey: clients,
competition
- Product design
- Draft MSE credit policy and
procedures
- Draft organisational structures for
MSE lending – Head office and
branch level
- Establish credit committee
- Begin lending operations
6-9
- Build up in-house training
capacities
- Streamline efficient
procedures and operations
- Develop MSE credit
management staff for head
office
- Delegate credit approval
authority to branch level
- Expand marketing
activities
- Establish additional MSE
credit departments
- increase lending activities
9-12
…
- Ensure appropriate internal control
- Ensure quality training and HR
development
- Ensure continuous development of
high quality MSE credit portfolio
- Establish internal capacity for MSE
internal audit
- Ensure effective MSE credit
management
- Fully handover management and
further development of MSE credit
operations to PB
- Monitor sound development of MSE
credit operations
Institution Building at Partner Banks
Support PB to establish MSE finance as new business line within existing structures:
– Train and develop MSE credit staff (on-the-job, classroom)
– Implement MSE credit technology and procedures
– Establish pilot micro credit departments
– Delegate credit approval authority to lower management level
– Develop and ensure adequate internal control on the branch level
– Ensure strong, effective coordination, support and monitoring by Head Office
– Ensure effective cooperation and integration with ancillary departments (e.g.
HR, Marketing, Audit)
– Change the “mindset” of the PFI (HR/Credit policy, internal control,
marketing…)
Standardised MSE Loan Products
Loan Product Express Loan
Micro Loan
Small Loan
Type of Business
Sole proprietors
Sole proprietors
Legal entities, sole
proprietors
Business sector
Trade and services
Trade, services,
production
Production, services,
trade
Loan amount
(equiv.)
Up to EUR 5,000
EUR 5,000 – 10,000
EUR 10,000 – 50,000
Term
Max. 18 months
Max. 24 months
Max. 36 months
Security
Only personal
guarantor
Limited: equipment,
goods, personal
property
Some: any commercial
/private assets
Loan purpose
Working capital
Working capital, small
investments
Fixed assets, working
capital for production
Pricing
Market rate
Market rate
Market rate
Loan Processing
time
Within 24 hours
1-3 days
3-5 days
Building HR capacities for MSE credit operations
Development of MSE Credit Staff
CMFP Regional Outreach
CMFP Monthly Loan Disbursements
Vol. (EUR ‘000)
No.
CMFP Monthly Portfolio Development
Vol. (EUR ‘000)
No.
CMFP Portfolio Development
Outstanding Number of Loans: By Loan Size (EUR)
No.
Outstanding Volume of Loans: By Loan Size (EUR)
Vol. (EUR ‘000)
Achievements of CMFP Pilot Phase (May 2007)
 Credit technology adapted to Chinese environment and standardised
 PB willingness to accept the target group and the proposed credit technology
 High quality MSE credit portfolio development
 Pilot PB have achieved profitability
 PB implement required institution building measures
 PB recognize and gradually develop MSE lending as a key strategic priority
 MSE credit staff trained; key focus on training and building up managers and
“trainers”
 Base of consultants trained: initial implementation at PB at faster pace
Outlook for CMFP in 2007
 Graduation of pilot PB:
–
–
–
–
–
Full handover of responsibilities to HO MSE credit management department
Handover of basic training activities for MSE credit staff
Ensure continued development of quality credit decisions/portfolio/credit staff
Improve audit system for MSE credit activities
Establish effective monitoring mechanism
 Continuous standardisation of procedures and documentation
 increase efficiency of CMFP implementation at PB by use institution building
measures at existing PB as basis for new PB:
–
–
–
–
Organisational structures
Procedures, guidelines and manuals
Training capacities for LO, HO MSE credit staff, senior management
Marketing methods
 Increase number of PB and regions covered to 12
 Ongoing training of all CMFP PB staff
 Monitoring PB graduated from TA
 Launching activities at additional 6 new PB
 Prepare for roll-out phase: reach out to 130,000 MSE in China by implementing
project cooperation at 69 partner financial institutions