1. International Experience in Developing and Supporting SMEs
Trends and New Policy Initiatives in SME finance
Andrew McCartney
Global SME Banking Specialist,
IFC Advisory Services
Riyadh, KSA
8th February 2012

2. Key Messages
SME’s can play a major role in economic development, particularly in emerging markets
Access to finance remains a key constraint however, particularly in MENA
IFC as part of G20 SME Finance sub-group recently completed a review of global SME finance practices and reviewed 164 different models submitted
A number of key trends and recommendations emerged out of the findings from the G20 work:
Legal & Regulatory framework reform needs to drive changes in structure of financial services to support SME growth
Financial infrastructure needs to be strengthened for greater SME transparency
Public sector interventions need to remain focused and avoid market distortions
Emergence of specific sub-segments of focus in SME
Capacity needs to be developed in financial institutions
IFC as a knowledge leader in SME finance has a range of knowledge collateral available to support SME development

3. Access to finance remains a key constraint, particularly for SMEs across the GCC
Access to finance represents one of the major drivers for SME growth
GCC shows particularly low levels of SME lending penetration
SME loans/ total loans (%)
Source: Doing business report 2010, World Bank, Enterprise survey
Source: Bank lending to SMEs in MENA Survey Report, World bank and Union of Arab banks, 2010

4. IFC has recently completed a review of leading SME finance practices and models as part of our work with the G20
G20 SME finance Sub Group identified successful models & policy measures for SMEs in 2011
Work involved review of 164 different interventions globally and subsequent policy requirements
Resulted in nine major recommendations to support SME growth
Key Recommendations from the G20 Sub-Group
Developing specific country strategies
Developing supporting legal & Regulatory framework
Strengthening the financial infrastructure
Effective government support mechanisms
Building reliable data sources for SME finance
Building the capacity of financial institutions
Address specific market failures e.g. women and agriculture
Establish a Global SME finance Forum as a knowledge sharing platform
SME Finance Policy Guide – issued October 2011 by IFC

5. Legal and regulatory environment reform needs to drive competition and access to finance for SMEs in MENA
Licensing requirements need to be relaxed without sacrificing quality but enable significantly increased competition levels
Support non-FI alternatives to bank lending in the market e.g. leasing and factoring
Strengthen credit reporting to even the playing field between small and big banks
Ensure effective monitoring of data for effectiveness of measures
Case Study: NAFIN,
Mexico
Provides on-line factoring services to SME suppliers
“Productive chains” program allows SMEs to use big buyer receivables for working capital finance
Credit risk of the SME effectively gets transferred to higher quality corporate customers
By 2009, nearly 500 Corporates involved, and $60 Billion in finance extended to more than 80,000 SMEs through 21 banks and non-banks

6. Financial infrastructure needs to be strengthened for improved transparency of SMEs
Accounting and audit requirements need a balance between transparency & regulatory simplicity
Credit bureau & registries need complimentary systems for personal and business information from all players (ie FI and Non-FI)
SME rating agencies offer a potential alternative, but need a certain critical market size (e.g. India)
Case Study:
SME Rating Agency of India
India’s 1st rating agency for MSME’s
Diversified equity ownership by 11 banks allowed lenders to accept rating and extend financial and non-financial benefits
SMEs are bucketed by size for peer comparisons
Rating fee of over $1100, subsidized by the government by 75%
SMERA forecast to reach out to over 80,000 SMEs over the next 5 years
Source: SMERA Website, 2001

7. Financial infrastructure needs to be strengthened for venture capital and private equity access to the SME market
Secured transaction regimes should allow for a wide range of enforceable collateral & out of court enforcement options
Improve corporate governance practices should allow venture Capital/ private Equity access to SMEs
SME stock Exchanges have only proven marginally useful due to low volumes and a lack of investor interest
Case Study: INOVAR Program, Brazil
Objective: to strengthen investment in new technology SMEs and to establish Venture capital
Created a research and information dissemination platform and developed mgt capacity to accelerate VC investment
Established a VC portal where investors and entrepreneurs register
Allows for the provision of business plans and joint due diligence for VC funds
20 venture forums established and over $1 billion in VC/ PE investment made in SMEs

8. Effective public sector intervention needs to build SME capacity and avoid market distortion
Credit guarantees can be highly effective, but subsidies should be minimized to clear market failure areas
Government procurement can link SMEs into supply chain finance, providing they are paid on time (!)
MSME capacity measures e.g. training should ideally be on a commercial/near-commercial basis and become scalable
Key features of well designed credit guarantee schemes
Eligibility criteria – should target a broad part of the market and for small and medium SME
Approval – needs to be streamlined to a max of 1-2 weeks
Collateral – should be allowed, but subject to reasonable limits
Coverage ratio – need to incentivize risk-taking over time
Fees- need to be risk-based and contribute to financial sustainability of the scheme
Capacity building – CGs should play a key role

9. Specific recommendations and trends observed relating to specific sub-segments of the SME market
Crisis response - initiatives structured to support SMEs during time of crisis (e.g. Turkey)
Women-in-business - realization that they have specific needs that the market is not addressing today
Sustainable energy- SMEs can play a major role in ensuring sustainable energy
Women Entrepreneur Package – Garanti Bank, Turkey
Objective to meet businesswomen’s network, training and financial needs
Provision of customized suite of services and a support loan and financial training
Reached out to 8400 women and $156 m USD lending disbursed
Russia Energy Efficiency Program
Legal and policy reform coupled with advisory and credit line to on-lend to SME investment in energy efficient projects
8 Banks have funded 130 energy efficient projects with over $100M USD disbursed with expected lifetime CO2 save of 5.7M tons

10. Efforts should also be made to build internal capacity of the financial institutions to capture the SME Banking opportunity
….Banks need to build capacity across 6 main areas to succeed in SME banking
Pricing needs to incorporate data driven risk scoring
Development of statistical application & behavioral scoring
Strong portfolio management &EWI’s
Specific value propositions to target specific sub-segments of SME e.g. traders
Firmographic or behavioral segmentation techniques
Common models in MENA today
SME treated as corporate for medium SME and/or retail clients for small SME
100% secured lending driven with undifferentiated products of service levels
Limited product program approaches and a lack of cost-effective methods to address segment
Emphasis upon lending, not SME Banking
Customer
segmentation
Risk
management
Organization &
Human resource
Information
technology
Delivery
channels
Fin./ non-fin.
Prod/
services
Heavy customization of products from across bank
Islamic and non-Islamic banking provision
Non-financial advisory provision e.g. training, information
Dedicated organization structure for SME focus
Strong relationships across bank
KPIs set for multi-product
Tiered sales and service – focusing on higher valued customers
Branch-based models for small SME volumes
Investment in alternative channels e.g internet, call centre
Upgrading in IT platform for volume growth
Investment in credit modules for initiation & scoring to create credit factory
IFC Internal Analysis, MENA 2010

11. IFC as a knowledge leader in SME finance has a range of knowledge collateral readily accessible
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