African Guarantee Fund for Small and Medium-sized Enterprises
Background and Objectives
A general consensus has emerged around the key role that small and medium enterprises (SMEs) can have in reducing poverty and achieving the MDGs in African countries. In order to make use of their potential, SMEs need increased access to bank credit. African SMEs historically lack access to finance, and this is likely to be exacerbated by the effects of the financial and economic crisis on the continent.
There is a strong economic case for scaling up support for African SMEs. Development assistance for SMEs in Africa remains highly fragmented, with several donors and development finance institutions (DFIs) running a number of SME programs in an uncoordinated way. A regionalization of support and a pooling of resources are required to avoid duplications and inefficiencies, in the spirit of the Paris Declaration and the Accra Agenda for Action.
On 1st June 2012, during the AfDB’s Annual Meetings, held in Arusha, Tanzania, the AfDB’s President Donald Kaberuka, announced the official launch of the African Guarantee Fund (AGF), a market-friendly guarantee scheme aims at easing access to finance for African small SMEs.
The AGF, designed and funded by the AfDB in partnership with the governments of Denmark and Spain, will provide financial guarantees to financial institutions to stimulate financing to SMEs and unlock their potential to deliver inclusive growth in the region.
The AGF is a truly public-private partnership, with other donors, development finance institutions and private investors expected to join to provide additional capital and scale up its operations.SMEs are the best candidates to achieve inclusive growth in Africa as they contribute significantly to income generation and job creation. However, financial access is consistently reported as one of the major obstacles to SME’s growth and development. Only 20 percent of African SMEs have a line of credit from a financial institution. The AGF will help fill this gap.
Areas of Focus / Sub-Sectors
AGF was established to address this mismatch in the supply and demand of SME financing. A joint venture between the African Development Bank, the Danish and Spanish Governments, AGF was initiated in 2010 to partner with financial institutions to help them increase their exposure to SMEs in Africa.
To accomplish this, AGF has two lines of activities:
- Partial Credit Guarantees: Provision of partial guarantees for financial institutions in African countries to incentivize them to increase debt and equity investments into SMEs. Based on an assessment of the needs of financial institutions and SMEs in the region, AGF will offer three types of guarantees with different fee structures: a) portfolio and individual loan guarantees, b) Bank fund raising guarantees; and c) equity guarantees.
- Capacity Development: A separate entity will help financial institutions develop their capacity to appraise and manage SME portfolios. AGF will allocate a portion of its budget to capacity building, with financial institution partners covering most of the costs. Additional grants are being sought to supplement AGF’s capacity development trust of USD 2.5 million committed by Danida for this purpose. Capacity development of SMEs will be managed and implemented through existing local service providers.
AGF’s products are expected to have a scalable positive impact in the following three ways:
- Improve SME financial product offerings: by helping banks to better address working capital and long-term financing needs of SMEs.
- Expand bankable SME segments: by changing Bank’s perception of bankable SMEs and permanently increasing their exposure to SMEs.
- Increase Banks’ capacity to appraise SMEs: by providing technical assistance and strategies to further develop SME engagement.
As the definition of SMEs varies across countries and financial institutions, AGF will not prescribe qualifying characteris
tics for SMEs other than the one defined by the banking sector of the countries where AGF will operate. Within these limits, AGF will target all African SMEs with a valid operating license regardless of sector, industry, location, and ownership. AGF will have a rigorous partner selection process, with partner financial institutions demonstrating a clear commitment to growing their SME portfolio and improving financial product offerings to this segment.
AGF products will be rolled out in nine to fourteen countries in Africa within the first two years with the objective to cover the entire continent by year 2016.
AGF will roll-out its operations in these regions in three phases. Phase I countries have been identified through the AGF preparation phase and are characterized as ‘transition economies’ in terms of economic diversification and export orientation, including: Ghana, Mali and Senegal in West Africa, Cameroun in Central Africa, Kenya, Tanzania and Uganda in Eastern Africa, and Mozambique and Zambia in Southern Africa.
Activities and Outcomes
AGF began its operations in the second half of 2011, based on a guarantee capital of USD 50 million already approved by the three founding shareholders (Denmark, Spain and the African Development Bank). The AGF will be a permanent regional conduit for channeling guarantees and technical assistance to financial institutions in Africa with the objective of generating enhanced growth in the SME sector, thereby creating increased employment opportunities in the economy, particularly for the youth.
The AGF provides:
- Loan portfolio guarantees to Partner Lending Institutions (PLIs),
- Financial guarantees to PLIs,
- Capacity development support for PLIs, and
- Capacity development support for SMEs.
Through the supply of these products and services, the AGF will help improve access to credit for SMEs as they start and grow their businesses. It will also contribute to address the issue of limited technical capacity of both PLIs and SMEs.
The AGF will mobilize substantial financial resources for African SMEs thus contributing to private sector development, job creation and ultimately poverty reduction. It will provide countercyclical support to financial institutions through easing access to liquidity and strengthening their capacity to create credit.
It will also provide capacity development support for both PLIs and SMEs thus increasing productivity and competitiveness. The AGF will finally contribute to increasing aid effectiveness in the context of shrinking development support for SMEs through channeling financial assistance into a regional conduit.
Administration and Governance Structure
The AGF is set up as a company limited by shares under the business law of Mauritius. From the outset, a branch will be established in Nairobi, Kenya, from where the staff of the company will conduct the business. A second branch is likely to be set up in a West African francophone country within a few years. AGF will operate as a non-bank financial institution with a Board of Directors responsible for the overall management and a Chief Executive Officer heading the operations.
Ownership and Management
The African Development Bank (AfDB): The AfDB has invested USD 10 million in AGF and represents the AGF Board of Directors. The AfDB began work on the preparation phase for AGF together with Danida in 2009. The AGF is one out of several concrete projects initiated by the AfDB to support financial sector development and SME growth across Africa.
The Danish International Development Agency (DANIDA): Danida has invested USD 20 million in AGF and represents the AGF Board of Directors. The creation of AGF is one of five concrete initiatives to promote private-sector growth and employment creation in Africa.
The Spanish Agency for International Development Cooperation (AECID): AECID has invested USD 20 million in AGF and represents the AGF Board of Directors. The Spanish government joined the AGF initiative in 2010 as part of its 2009-2012 Strategy on Economic Growth and Promotion of Businesses in Africa.
Felix A. Bikpo, AGF CEO: Mr. Bikpo, a Cote d’Ivoire national, joined the AGF as CEO in August 2011. Prior to joining AGF, Mr. Bikpo was CEO and Founder of Success Finance, a private equity and asset management firm. He has worked with several banks and financial institutions including Citibank, Ecobank group, Atlantic bank group, Access Bank group and Gari Fund. He was CEO of Access panafrica (the holding company of Access bank group in charge of the investments outside Nigeria) and executive Director at the Access Bank Group.
He led the management of Atlantic bank group (a West African Banking group) as CEO. He was Managing Director at Ecobank group, Managing Director of the Gari Fund (a West African Guarantee Fund) and spent seven years at Citibank NA, as Vice President and Regional Director of financial control. He has led various projects to help strengthen financial markets across Africa. Mr. Bikpo holds a Master in Economics from Universite Nationale de Cote d’Ivoire. He is graduated from School of Economics and Commerce (ESSEC) in Paris, one of the leading French business schools.
Advisory Panel: The AGF Advisory Panel was composed of African and non-African bankers, central bank representatives, SME representatives, and other specialists in fields central to AGF, and it will be maintained even as AGF launched its products. Other stakeholder representatives have been consulted during missions, in individual meetings, and through consultancies.
The present share capital of AGF is USD 50 million. Over the next 3 to 5 years, this is scheduled to increase to USD 500 million, with additional capital coming from bilateral donors, private investors as well as from DFIs. AGF anticipates that through leveraging its guarantee capital of three times, it will generate approx. USD 2 billion of new lending to SMEs in the medium term and reach some 10,000 African SMEs. This will help secure and create millions of productive and better jobs across the region.
The African Guarantee Fund
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