TBN 14 May 2010 Developing SMEs: a case study in transformational investment Peter Hinton SDG 1

Typical SME: Modern Radiators 2

Personal History 3 Africa Trading

Missing middle opportunity 4 Micro finance Over served Emerging propositions Neglected opportunity Donor focus Micro finance MNCs Corporates Micro finance SMEs, Unbanked, Home buyers Affluent Mid–lower income Poor Affluent Middle income Mid–lower income Poor Missing Middle Missing Middle Potential clientsDemographic Impact Banking opportunity Less than $2bn in actively managed investment funds specifically target the SME sector, compared with over $6bn invested in microfinance sector

The majority of SMEs identify access to finance a major constraint Source: World Bank Enterprise Surveys. 2008

While SMEs tend to be banked, less than 30% have access to credit Source: World Bank Enterprise Surveys. 2008

Women SMEs Access to credit in Kenya & Uganda 7

Microfinance vs. SME finance 8 Microfinance customerSME customer

SME finance vs. Microfinance: Job creation Microfinance a SME banks b Investment size(US$ mn)11 Leverage (Deposits mobilized)2x8x Total assets available (US$ mn)28 Portion of assets for lending, 75% (US$ mn)1.56 Average loan (US$)31720,000 Number of loans4, Jobs created per business over 5 years c 150 Total jobs created4,73215,000 Cost per job created (US$)21167 Source: a Averages for Sub-Saharan Africa based on 159 institutions surveyed in MixMarket 2008 Microbanking Bulletin b SDG estimates based on 2008 financial reports for 4 institutions in E. Africa: Development Finance Corporation Uganda and Finabank Group in Kenya, Rwanda, Uganda C SEAF estimate 26% annual employment growth; These calculations assume SME average employment of 20 with annual growth rate of 20% 9 $1 of SME finance creates 3 times more jobs than microfinance

SME finance vs. Microfinance: Financial statistics Microfinance a SME banks b ROA-3.2%2.1% ROE-1.1%16.5% Total invested in sector (US$ bn)41 Average loan (US$)31720,000 Loan portfolio (US$ mn) Average outreach per institution32,6163,043 Source: a Averages for Sub-Saharan Africa based on 159 institutions surveyed MixMarket 2008 Microbanking Bulletin; Deutsche Bank 2007 report b SDG estimates based on 2008 financial reports for 4 institutions in E. Africa: Development Finance Corporation Uganda and Finabank Group in Kenya, Rwanda, Uganda; IFC

‘Missing Middle’ Finance drives sustainable economic growth Expansion of formal financial inclusion for : ―SMEs and SME employees ―Unbanked ―Low- /middle-income homebuyers Deepening of financial market and enhancing country financial structure Strengthen capacity of management and employees of FIs and SMEs Job creation and contribution to tax base 11 Source: SEAF 2007, From Poverty to Prosperity: Understanding the Impact of Investing in Small and Medium Enterprises

Channels of SME investment Direct – eg Cocoa farms in Ghana Through SME funds eg I&P, Fusion Through MFIs upscaling Through financial intermediaries eg banks with an SME focus 12 Source: SEAF 2007, From Poverty to Prosperity: Understanding the Impact of Investing in Small and Medium Enterprises

SME Banking: Case study 13

SDG Business Model: FI Transformation Transformation Aspects Under- performing Under- managed Sub scale Poor Credit Quality Weak IT Small Capital base Unfocused Branding Marketing Product range Balance sheet building Distribution channels Risk management Governance Controls Credit management Processes & procedures Management Culture/ Leadership Missing Middle Market Focus Transform FI’s into leading local/SME banks

SME multiplier effect - latrines 15

SME Multiplier effect - schools 16

Impact Investing (10 Years) 17 INVEST $1, Job $6,200 return (IRR 20%)

Conclusion SMEs are key to development On the ground contact is key Banks can be a key channel Multiplier effect is significant Commercial returns, development impact 18

Peter Hinton