African Guarantee Fund: Bridging Africa’s SME funding gap

All over the world, Small and Medium Enterprises (SMEs) are widely recognized as big drivers of economic growth, innovation, regional development and job creation. A strong and vibrant SME sector provides a strong  foundation to improve standards of living and reduce poverty. 

Despite the internationally recognized importance of SMEs, African small businesses often have difficulties accessing financing for growth and innovation from the formal financial sector.

SME financing is often considered by many financial sector players in Africa to be a risky  activity as promoters quite more often than not, fail to come up with the collateral levels required to secure bank facilities.

Various studies by the World Bank and other organizations have revealed very low levels of bank financing for SMEs in Africa compared to other developing countries. In, fact, it is estimated that the SME funding gap in Nigeria and other African countries is more than $140 billion, according to Mr. Ifie Sekibo, Managing Director/CEO of Heritage Bank Limited.

Sekibo said this at a US-Africa Trade and Investment Forum held in New York, USA, last year, adding that more than 70 per cent of SMEs in the continent lack access to medium-longer-term finance. According to him, in Africa, SMEs are more credit-constrained which typically affects growth possibilities as significantly low number of start-ups, who apply for financing actually succeed.

“Using Nigeria as a case study, between 2003 and 2009, SME loans as a percentage of total credit, decreased from 7.45 percent to 0.18 percent. Yet by 2012, Nigeria had about 17.6 million MSMEs employing about 32.4 million people,” he stated.

AGF

It is in response to these challenges facing SME funding in Africa that the African Guarantee Fund (AGF) was created. According to Felix Bikpo, AGF’s CEO, the Fund is “the missing link  that will enable partner financial institutions execute their SME financing strategies effectively, while bringing their businesses to the required scale and thus enabling SMEs to play their expected role in fostering African economic development.”

Through its guarantee facility, AGF assists financial institutions to partially cover the risks associated with SME financing and thus enable them increase their portfolio in that asset class. Through its capacity development facility, the Fund assists financial institutions enhance their SME financing capabilities and thus be able to execute their growth strategies in that sector with ease.

A combination of AGF’s guarantee and capacity development facilities, thus enable partner financial institutions bring their SME financing business to the required scale that would not only enable them bring down transaction costs significantly, but also increase returns on investment.

Mandate

AGF’s key mandate is to assist financial institutions increase their financing to African Small and Medium Sized Enterprises (SMEs) through the provision of partial financial guarantees and capacity development assistance.

Products

AGF’s products and services provide financial institutions with the means with which they can leverage in bringing their African SME financing interventions to the required scale. AGF currently offers two product lines: Financial guarantees in support of: Loans made by Partner Lending Institutions (PLIs) to SMEs through a hybrid approach (on portfolio  and individual  loan basis);

Equity Capital financing  for SMEs; and Resource Mobilization  (.i.e. issuance of bonds/notes and lines of credit) by PLIs in support of their SME financing activities. Capacity Development Support to PLIs to enhance their SME financing capabilities as well as Capacity Development support to SME Business Development Support companies and SMEs themselves.

Eligibility

The eligible operations for AGF include: start-ups, scale-ups, modernization, productivity improvement, production capacity improvement, transfer of ownership and restructurings.  These operations must however be carried out by SMEs as defined by the financial service industry in a given country, and operating in the following sectors among others:

agriculture, agro industry, small and medium scale mining, oil and related services, manufacturing, building and construction, energy, telecommunications, transport, tourism, and trade.

Transaction procedure

The request for a guarantee should be submitted by the financial institution which is providing the financing. The request should provide the following initial information: Type of guarantee requested and amount; Profile of the institution including legal status, key activities, shareholding, directors, management;

Three year audited accounts; and Description project/product program requiring guarantee support and type of guarantee sought. Upon receipt of the application together with the accompanying information, AGF will carry out a quick dip-stick review to be followed by the issuance of an indicative term sheet.

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