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2.1 Program Description
The Program aims to establish a USD 5.4 mln Technical Assistance (TA) Program Component, with FAPA being requested to provide a TA grant of USD 3.98 mln, to support the implementation of a (conjunctly proposed) USD 125 mln SME lending Program Component aimed at strengthening the SME related financing sector in Africa. The TA Component of the Program will enhance lending capacity of up to 25 small sized FIs and MFIs, primarily in LIC / ADF countries, spread over all 5 regions in Africa.
2.2 Project Development Outcomes
Outcome 1: Improved Financial Sector SME (Credit) Risk Management and Product Development in Targeted FIs: The Program will help African FIs
(i) improve their internal systems, people skills and ultimately loan book quality;
(ii) create new products for this market segment and scale up their lending activities;
(iii) develop a more inclusive approach to customer relationship management;
(iv) develop appropriate long term products targeted at SMEs.
The training programs to be offered under the TA component will assist the benefiting FIs to improve staff skills. The program envisages that training be offered in SME Customer Relationship Management, SME Credit Appraisal, SME Project (Term) Financing, Loan Monitoring, ESMS Implementation, etc. which will improve the overall banking skills capacity with the RMCs in which the FIs operate.
Overall, the TA component will improve the performance of the eligible FIs including banks, MFIs and NBFIs and will strengthen the financial sector in RMCs.
Outcome 2: Improved Access to Finance for Africa's SMEs: The TA support will assist FIs to expand SME outreach and include currently underserved SMEs, thanks to the internal capacity development as well as to SME capacity building (financial literacy, business plan preparation) under the Program, thus improving business and entrepreneurial activities and creating employment opportunities which in turn impact on local communities and households. It will promote "inclusive growth" on the continent. The TA Component of the Program will also lengthen the tenor of loans to SMEs and enable SMEs to invest in capital acquisition and business expansion.
2.3 Project Goals and Objectives The objective of the TA support component is to address specific weaknesses in the operational structures of usually smaller SME focused FIs (including MFIs up-scaling to service SMEs) which are hampering them from effectively supporting SMEs.
2.4 Target Beneficiaries The beneficiaries are 20 to 25 SME focused FIs who will receive support under the Africa SME Program. The exact number will largely depend on the LOC component of the program. An initial approximate 5 FIs (including some Tier 2/3 banks, MFIs and a Leasing company), have been processed for possible inclusion under the first phase of the Africa SME funding program. Of these FIs, the majority will require substantial TA with only one or two requiring limited support. The FIs are selected based on a range of qualifying criteria as detailed in the Program's LoC Component and include regional and country limits, priority to LICs and Fragile State FIs, as FI specific criteria including SME focus and commercial viability/strength. The table below lists some of the indicative TA needs of the expected first set of FIs under the first phase of the Program.
Rationale for Bank's Involvement Alignment with Bank Private Sector Strategy This TA Program Component is well-aligned with the Private Sector Development Strategy which focus on Productive Enterprises through entrepreneurship development and the deepening and expansion of financial and capital markets to serve different types and sizes of enterprises and in particular SMEs. The new PSD Strategy puts a particular strong emphasis on supporting SMEs as entrepreneurial drivers for economic development, social inclusion and inclusive growth.
Alignment with FAPA Objectives The combined funding and TA is an effective approach in promoting the development of SMEs which is also one of FAPA's pillars of intervention. Another FAPA pillar of intervention calls for the strengthening of the financial system through technical assistance, i.e., developing sound systems to broaden and deepen financial markets.
Prior Bank Involvement The Private Sector Department of AfDB has extensive experience in assisting medium sized and larger FIs in Africa extending medium to long term funding, sometimes supported by TA packages. The Bank's more relevant experience includes microfinance and SME specialist banks such as for example Banque Rwandaise de Développement, and Banque de Kigali (both of Rwanda), Advans Banque Congo, Access Bank of Liberia, Access Bank Tanzania, ZANACO (Zambia), Investrust (Zambia), Pulse Financial Services Limited (Zambia), AB Microfinance Bank (Nigeria) and K-REP Bank (Kenya). The TA element of each of these projects sought to build capacity of the recipient FI with the ultimate aim of maximizing the development impact of these projects on the targeted end-beneficiaries: which include SMEs.
Lessons Learned The Program incorporates the lessons learned regarding extending both financing and TA assistance to smaller sized FIs and MFIs in Africa. Firstly, previous experiences have pointed to the importance of linking the granting of funding to the extension of appropriately structured TA packages in order to achieve the desired impacts. Coupling funding with TA have shown to improve both loan quality and loan volume.
The Bank has also learned that it is usually more effective to procure the TA services on behalf of smaller clients/beneficiaries as most of them are not familiar with Bank's procurement rules. A well-packaged procurement of TA services significantly reduces the implementation challenges for both FIs and AfDB.
In the past, the Bank couldn't process a larger number of small FI transactions because the processing lead time is lengthy even if complete and adequate information from FIs is readily available. In addition to credit risk considerations, other Bank's requirements such as ESMS, legal and development related compliance aspects make the processing of small FI Lines of Credit (LoC) a low chance of success or too costly transaction from an originator's point of view. It is thus easier' to process LoCs for larger and well organized FIs who more often than not may not be targeting SMEs.
As a response to the lessons learned, the Africa SME Program introduces an efficient and effective programmatic approach in the processing of Line of Credit requests from such small FIs to overcome the processing constraints and maximize the potential development impact through TA component. The approach hinges on 2 aspects: Firstly, it introduces a fast-track' project approval process; driven by the pre-identification of SME centric FIs in RMCs with high SME financing needs, using a number of regional, country and FI selection criteria and prudential limits as outlined in the Program's LoC investment proposal. Secondly, the provision of TA will generate economies of scale and include;
(i) upfront procurement of specialist TA providers for the entire Program;
(ii) developing a standardized ESMS framework for smaller sized FIs and implementing this for all Program FIs through AfDB (ONEC) and additional consultancy support;
(iii) developing and implementing standardized reporting modalities including development outcomes measurement;
(iv) establishment of a dedicated SME Program team in OPSM and dedicated Bank-wide PAT members to facilitate origination of the Funding component of the Program.
Target Beneficiaries The beneficiaries are 20 to 25 SME focused FIs who will receive support under the Africa SME Program. The exact number will largely depend on the LOC component of the program. An initial approximate 5 FIs (including some Tier 2/3 banks, MFIs and a Leasing company), have been processed for possible inclusion under the first phase of the Africa SME funding program. Of these FIs, the majority will require substantial TA with only one or two requiring limited support. The FIs are selected based on a range of qualifying criteria as detailed in the Program's LoC Component and include regional and country limits, priority to LICs and Fragile State FIs, as FI specific criteria including SME focus and commercial viability/strength. The table below lists some of the indicative TA needs of the expected first set of FIs under the first phase of the Program.
COULIBALY M'Para Issouf - PIFD1