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The African Guarantee Fund is a new non-bank financial institution in Africa. It specialises in providing loan guarantees and other guarantee products to African financial institutions (commercial banks, leasing companies, micro-finance institutions, and others). Linked to the guarantees provided, AGF also sponsors capacity-development efforts in its client financial institutions.
Improved access to finance for small and medium-sized enterprises (SMEs) plays an essential role in the promotion of inclusive economic growth in Africa and in employment creation for the growing African population. AGF will expand the access of African SMEs to finance from the financial sector. All AGF guarantees and capacity-development grants will be provided with this aim.
AGF guarantees can back loans to all formal SMEs, regardless of sector and location. The definition of SMEs will largely be left to AGF’s client financial institutions, and these will also assess the bankability of each single loan application according to their own procedures and criteria.
AGF will start operations in the first quarter of 2011 in order to issue a first batch of guarantees before mid-2011.
AGF will gradually operate in all of Africa. Initially, the business will be focused on a limited number of countries: Ghana, Mali, Senegal, Cameroun, Kenya, Tanzania, Uganda, Mozambique, and Zambia.
The founding shareholders of AGF are the African Development Bank (AfDB), the Danish Government and the Spanish Government. Regular capital increases will allow other donors and Development Finance Institutions (DFIs) to join as new investors. In the longer run, the intention is to also attract private investors.
For a start, the three founding shareholders contribute US Dollars 50 million as AGF guarantee capital and additional funds for capacity development. The capital is expected to rise to USD 300 million in the medium term through investment by the same and new partners. This will enable AGF to generate approx. USD 2 billion of new lending to SMEs.
AGF is a company limited by shares under Mauritius law. It is expected to be a permanent player in the African guarantee market, operating so as to be profitable. AGF will have its first continental office in Nairobi where the CEO and the staff will be based. A second office is likely to be set up in a francophone West African country within the first few years.
AGF will primarily provide partial loan portfolio guarantees. These are guarantees covering part (usually 50%) of the credit risk of a financial institution lending to a number of SMEs. AGF will also provide guarantees to financial institutions that wish to raise capital in the local capital market for SME lending. These are called institutional guarantees. AGF is one of the first SME guarantee providers in Africa to operate on market conditions.
Limited access to finance is known to be a major impediment to growth and employment creation in African SMEs. This is particularly true for access to longer-term loans for investments. The reticence of the banking sector to provide loans to SMEs is due among other things to the frequent difficulty of SMEs to provide sufficient collateral. This contributes to a perception in the banks that SME lending is particularly risky. Loan guarantees are known to encourage increased bank lending in such circumstances.