Credit Guarantee Schemes Risk Mitigation Tool SME Finance Credit Guarantee Schemes Risk Mitigation Tool SMEs Beyond Borders 26 September2016, Ritz Carlton Hotel, Egypt Nagla Bahr Credit Guarantee Company nagla.bahr@cgcegypt.com

Presentation Highlights SMEs finance - Banks. Basel II & effect on SMEs finance. Basel II & CGSs as a risk mitigation tool. Overview of CGSs. CGS in Egypt at a glance.

SMEs Finance - Banks BANKS the prime source of finance to SMEs. SMEs business opportunity to banks. IF CAPTURED effectively and responsibly, the benefit to banks, SMEs and national economy and society will be immense.

Demand gap of more than 80% SMEs Finance - Banks Demand gap of more than 80% Supply available Yet untapped Why is this syndrome?

SMEs Finance - Banks SMEs don’t have the security required for conventional collateral based on banking lending, missed information & track records. BANKs Limited suitable systems to determine the SMEs probability of default. Result Risky expensive tools to measure risk.

How to resolve this Dilemma? SMEs Finance - Banks How to resolve this Dilemma?

SME Finance - Basel II Banks Challenges On one hand - Pressure on meeting SMEs finance requirement. Probability of default is higher. On the other hand Basel II focus on establishing capital requirements that are more sensitive to risk. Greater risk management requirements. high cost products. Increasing SMEs finance gap!

High collateralized products. SMEs Finance - Basel II Basel II and SMEs SMEs Cost of Credit:- More administrative and operational cost. Cost of capital requirement. Cost of risk impact on provision based on probability of default. High collateralized products. High Finance cost.

SMEs Finance - Basel II - Risk Mitigation Tools Basel II and Guarantee HOWEVER, Basel II – First Pillar – Minimum Capital requirement clearly recognized the value of security and GUARANTEEs as a form of SMEs finance and credit risk mitigation. Enabling banks to reduce capital requirements against the guaranteed part. Better target the SMEs sector.

CGS is the other side of the coin for SMEs finance. SMEs Finance - CGSs CGS is the other side of the coin for SMEs finance.

What is a credit guarantee scheme? SMEs Finance – CGSs (1) CGSs Definition What is a credit guarantee scheme? CGSs act as guarantors of SMEs in dealing with banks by covering part of the expected risk of viable MSMEs lacking adequate collateral or financial track record to obtain the needed finance, reducing the risk of banks. Facilitating better finance conditions for SMEs.

Guarantee Scheme Involvement SMEs Finance – CGSs (2) Effect of Guarantee on Banking SMEs Finance Effect of Guarantees on Income ∆ revenue + from released capital + from retained earnings (provisioning) + from more and larger loans (growth) ∆ expenses - from better quality portfolio and cash- like guarantee security ∆ net income + overall effect Potential for lower cost for borrowers Guarantee Scheme Involvement Higher profit: due to less provisioning for Partner Institutions Portfolio growth: due to strategic impact of available guarantees Released capital

SMEs Finance – CGSs (3) CGSs/Basel II requirements CGSs, to qualify as a Risk mitigation tool as per Basel II: Direct claim on the protection providers. Explicit specific exposure or peal of exposure. Clear definition and incontrovertible. Irrevocable no possibility to cancel the credit cover (contract condition). Unconditional no possibility for non payment (contract conditions).

SMEs Finance – CGSs (4) CGSs Rationale Integral part of the system of SMEs financial intermediation. Governments’ arm for delivering public support to SMEs. Risk transfer instrument to overcome SMEs lending constraints. Financially sustainable schemes. Strong partnership with central banks. Central banks supervision. Guarantee weight acknowledgement by CBs as per Basel II.

SMEs Finance – CGSs (5) CGSs Operational Principles: Direct guarantee to banks/FIs. The lending institutions are the direct partner of CGSs. Strong risk system based on stated risk appetite. Resources leverage w/ average 6-7 ratio. Another eye on appraising the SMEs finance (enterprises & projects). Guarantees for all types of finance. Individual & portfolio base guarantees. Guarantee coverage range from 50-80% of the principle amount. Guarantee fee is paid by SMEs against the service and reviewed annually.

SMEs Finance – CGSs (6) Individual Guarantee Model FIs Borrower Requested Facility FIs Borrower Installments Guarantee Fees Guarantee – fees Guarantee System appraisal focus on individual & qualitative. Share historical data with bank. W/ bank monitor the client W/ bank agree on action upon default (possible reschedule) Coverage default of

SMEs Finance – CGSs (7) Blanket Guarantees (Portfolio Guarantee Model) CGS – Process Involvement Information of disbursement by bank to CGS Agreed upon criteria of portfolio Delinquency management - hand in hand coaching / mentoring Bank Process Loan request Loan appraisal Credit committee Disbursement (loan + guarantee) Closing Agreed upon portfolio criteria. Differentiated portfolio by loan size, branch, …etc. Direct disbursement of guarantees by bank. Covering portfolio default as agreed. Intense post-disbursement reporting to CGS. Monitor & follow up by CGS of the guaranteed portfolio. CGS – Monitoring & Audits Post-disbursement portfolio monitor Delinquency file audit. Monitoring through reports against committees & projection

CGS in Egypt at a Glance Operation Characteristics (1) Mature business for over 25 years. Stable structure developed to meet the international criteria & the market requirement (2015 onward). Stable business with strong risk system. Diversified portfolio. Diversified Products (individual guarantee + micro portfolio) & heading for portfolio guarantee. Linear fee in light of international standards. Expansion strategy to involve all banks and other FIs.

CGS in Egypt at a Glance Onward Strategy (2) More SMEs Finance Recent Dynamics GOE serious focus on SMEs Finance CBE initiative for SMEs Finance CBE recognition of CGC & full coordination w/ CGC CGC Business Maturity allowing for: - More risk appetite intertwined with clear growth strategy. - Launching New products with new partners. - Variable fees & coverage ratios based on risk weight. - Recognition by the CBE of the guarantee as a risk mitigation tool as per Basel II. A supervisory body CBE (in process) More SMEs Finance

CGS in Egypt at a Glance Financial Results - June 2016 (3) Initial resources (Capital + funds) LE 514.96 m Outstanding Gtee Portfolio LE 3.5 billion Outstanding Credit Portfolio LE 8.6 billion Leverage 6.8 Outstanding no. of Beneficiaries 93.260 Net Loss Ratio 4%

Thank You Nagla Bahr Managing Director CGC Egypt Nagla.bahr@cgcegypt.com