EAC-AfCFTA News Updates , Loans , SME Financing

Access to Loans & finance for SMEs through FIs

Background and Objectives

The Africa SME Programme supports African local Financial Institutions (FIs) with long-term liquidity (Lines of Credit) and with technical assistance to be able to successfully provide relevant financing to local small and medium-sized enterprises (SMEs) and to build larger and good quality SME loan portfolios. The Programme can also support the FIs’ SME clients to ensure better loan application preparations (for example, development of business plans, financial literacy training, etc.). The program is accessible to banks and to regulated specialized financing houses such as leasing companies and other Non-Bank Financing Institutions, including Micro-Financing Institutions with an SME portfolio. The ultimate beneficiaries of this Programme are local SMEs, seeking adequately priced offerings to finance their business investments and overall business activities. The AfDB does not finance SMEs directly. AfDB supports local financial institutions in such a way that they will increasingly see SMEs as a real and successful market opportunity.

Through the Africa SME Program, the AfDB seeks to address shortcomings in the local market supply and demand for financing between financial institutions and SMEs, so that funding becomes more easily available to the benefit of both the financial institutions and the SMEs.

The scope of instruments of the program might be widened to other instruments in due course, however, for the moment the prevailing instrument includes Lines of Credits.

Program details

The Africa SME Programme is initially a 4-year Program but may be extended depending on its operational performance.  It will seek to identify and process requests to support up to 25 Financial Institutions with a total Programme envelope amount of USD 125 million. A portion will be dedicated to financial institutions focusing on women entrepreneurs.

Financial Institutions may be located in any given African country as long as a number of criteria are met (see below).  It is expected that a fair number of the financial institutions will be based in lower-income countries as well as in fragile states, where access to finance for SMEs is most pressing.

The size of the Lines of Credit is determined based on the size of the balance sheet (equity/tier 1 capital) as well as funding needs for the SME pipeline, but will not be less than USD 1 million or over USD 10 million, or the equivalent amount in local currencies. A key distinguishing factor for these loans is their medium to longer-term nature of between four and seven years. This should address asset/ liability mismatches of client FI’s balance sheet and allow beneficiary institutions to also provide more term loans to their client SMEs. Term loans are in a particular shortfall for SMEs and are mostly needed by SMEs that are investing and scaling up business activities. 

AfDB normally provides loans of up to a maximum of (under) 50% of the borrowers’ equity including retained earnings. The Lines of Credit are to be used for on-lending to SME clients only. Pricing is based on a risk assessment and also aligned to existing debt facilities of the client – or to the broader local industry pricing. Pricing is thus competitive but is not concessionary.

The depth (and amount) of technical assistance will be considered on a case-by-case basis. The TA will be provided to the borrowing FIs to enhance their capabilities to provide relevant SME finance products and tenors, and where preferred also to SME clients to enhance bankable loan requests. Institutions are expected to co-finance a smaller portion of the technical assistance to demonstrate the importance attached to capacity building.

Other benefits of the program include a ‘standardized’ due diligence process, as well as a ‘ready to be deployed’ Technical Assistance support.

Eligibility Criteria

In principle, any Financial Institution located in Africa is eligible to partake in the Program. The AfDB reserves the right, however, to exclude requests if country risk ratings preclude the processing of an investment proposal. Furthermore, since the Programme seeks to reach as many as possible countries on the continent, if and once a financial institution has received support under the Program, priority may be given to financial institutions in other countries that have not yet been covered.

Key eligibility criteria are the FI’s financial and commercial viability. The AfDB will also evaluate the borrower’s risk profile and ensure this falls within acceptable levels. Compliance with the local regulator is also essential, as are high standards of corporate governance and management, as well as adherence to best practices as regards social and environmental (E&S) protection. (Technical support can be provided to strengthen E&S as well). Specific eligibility criteria apply.

Further information

Financial Institutions interested in the Programme can find further information and register on the website http://sme.finance.afdb.org/  to establish contact with AfDB staff.