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24 25 September 2014, BITEC Bangkok, Thailand 4 - Saeed.pdf · PDF file In 2010-2012, the...

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  • Asia Pacific Trade Facilitation Forum 2014

    24 – 25 September 2014, BITEC

    Bangkok, Thailand

  • Innovative trade financing initiatives for SMEs Asia Pacific Trade Facilitation Forum

    September 2014, Bangkok, Thailand

    Dr Mohammad Saeed Senior Trade Facilitation Adviser

  • Access to Finance vs Trade Finance

    2

    It refers to a wide range of tools that determine how cash, credit, investments and other assets can be used for trade1

    It is defined as an absence of price and non- price barriers in the use of financial services2

    Trade Finance

    Access to Finance

    1. How to Access Trade Finance, ITC 2010 2. THE IBRD – World Bank 2008

  • Importance of SMEs and Access to Finance as a Major Constraint

    3

    SME impact on GDP &

    employment

    Low access to finance

    rate

    High unmet credit needs

    Formal SMEs contribute up to 45% of employment and up to 33% of GDP in developing economies

    63% of the SMEs do not have access to finance

    The unmet credit needs of the SMEs in the formal sector in emerging markets are estimated between $900 billion and $1.1 trillion

    Sources: IFC 2010 Report, IFC-McKinsey Research 2010

  • SMEs Access to Finance Barriers

    4

    Most SMEs are start-up businesses with inadequate collateral;

    Lack of key financial management competencies;

    Poor quality of business plans;

    No clear understanding of banking lending requirements;

    Lack of time and the required resources from Financial Services Providers (FSPs) to effectively address SMEs financial needs.

  • Some SME Financing Solutions

    5

    Besides equity/debt based financing, grants and government aid, the key financing solutions for SMEs are:

    Trade Financing Instruments

    •Pre-shipment finance

    •Post shipment finance

    •Factoring

    •Leasing

    •Inventory financing

    Value Chain Financing

    Crowdfunding

    Key presentation

    focus

  • Inventory Financing: Purchase Order Finance

    6

    • Purchase Order Finance (POF) is a transaction-specific form of working capital/trade financing.

    • It is an advance against the value of a purchase order or contract to enable the borrower/supplier to pay for inputs, raw materials, packaging, goods for resale, shipping, insurance, etc.

    • In the framework of the ITC’s EnACT Programme, a Moroccan hand bag firm was helped to sell to Lancel Paris

    • Lancel-Paris issued a Euro 125,000 purchase order

    • This purchase order was taken by the Moroccan firm to Attijari Bank and got a Euro 50,000 credit line to start making the handbags

    What is purchase order finance (POF) about ?

    POF Case study: Moroccan hand bag firm

  • Inventory Financing: Warehouse receipt

    7

    Document certifying the quality and quantity of a specified commodity placed into a secure storage environment

    •It is issued by a licensed warehouse operator

    •It should specify: location of warehouse, name of depositor, commodity type, quality and quantity, date of delivery, storage charges

    Most warehouse receipts are issued in negotiable form

    Warehouse receipts can be used as secure collateral for inventory financing

    •When backed by a suitable legal framework, warehouse

    Farmers, traders and millers can raise finance against them

    •Thus increasing liquidity in agricultural markets

    Finally, it allows transfer of ownership without physical delivery

    What is a warehouse receipt? What is its key use ?

    Source: ITC, UNCTAD

  • Value Chain Finance (VCF)

    8

    What is purchase VCF Case study: Santo Cristo de

    Bagazán Credit Union (SCBCU)

    VCF consists of financial services and products flowing through value chain participants to address and alleviate constraints to growth1

    VCF can be grouped into three main types of vehicles:

    •The provision of credit, savings, guarantees or insurance to or among value chain actors;

    •The creation of strategic alliances through financing extended by a combination of value chain actors and financial institutions;

    •The offering of tools/services to manage price, production or marketing risks.

    SCBCU provides VCF to coffee growers and growers’ associations2

    •Production loans provide growers with finance to cover costs of production, resulting in increased quality and yield

    •Short-term commercialization loans provide growers’ associations with capital to buy more coffee from producers, which in turn, increases association’s bargaining power with the buyer on behalf of the growers

    Under this arrangement coffee grower earnings have increased on average by 53%

    1. Fires,2007 2.WOCCU Value Chain Finance 2009, USAID)

  • Crowdfunding

    9

    What is purchase crowdfunding Crowdfunding case studies

    1. Forbes 2012 2. Deloitte 2012 3. Review of crowdfunding for development initiatives, Evidence on Demand, July 2013

    The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet1

    Crowdfunding is just getting started but hit $3 billion globally in 2013, doubling over the previous year2

    The industry will grow at a compound annual growth rate of 100% over the near term2

    Angaza Solar Energy in Tanzania •Angaza raised USD $15,000 to facilitate the manufacturing and sales of 1000 Solar Home Systems in the Mwanza region of Tanzania

    Pollinate Energy India •Non-profit social enterprise that aims to provide access to affordable clean energy to poor people living in slums •Raised USD $10,500 via crowdfunding

  • ITC bridging the gap between SMEs and FSPs

    10

    National, regional &

    international DFIs

    FSPs

    Credit Lines & Guarantee Funds

    ITC A2F

    Programme

    SME Financing

    Training and tools (LOANCOM ,

    Online platform )

    Priva te

    Secto r

    Deve lopm

    ent

    Tr ad

    e- Re

    la te

    d Te

    ch ni

    ca l A

    ss is

    ta nc

    e

    Se rv

    ic es

    & F

    in an

    ce FMCs and TSIs Equipped with

    tools

    SMEs

  • ITC’s A2F TA as a complementary solution (ct’d)

    11

    Capacity building for

    SMEs

    Training for FSPs

    Credit Mobilization

    Building SMEs capacities in accessing finance •Trained FMCs provide coaching to SMEs before, during and after the loans

    Training FSPs to better address the financial needs of SMEs •And providing credit scoring tool when applicable

    Mobilizing credit lines/ guarantee funds schemes •With DFIs to partially make up for SME collateral requirements

    ITC also provides various tools to SMEs, TSIs and FMCs, as well as Credit scoring tools to FSPs

  • Fiji

    Zambia

    Case Studies

    12

    Country

    In 2010-2012, the African Development Bank (AfDB) put a

    line of credit at two commercial banks (Investrust Bank and Zanaco) to finance small

    agribusinesses in Zambia

    Project description Achieved results to date

    • 70 SMEs coached during and after the loan through 20 local FMCs

    • 50% of SMEs to secure loans • Default rate of the two banks

    reduced to 0

    Since 2012, ITC has been implementing an EC funded

    programme designed to alleviate poverty in Fiji's sugar cane belt by supporting income generating opportunities within non-sugar

    agriculture

    • 12 SMEs mentored before, during and after funding

    • 9 SMEs secured funding (loans/grants) for a total value of $600,000

    • FSPs now willing to finance SMEs with ITC A2F Technical Assistance.

  • Findings

    13

    Innovative SME financing solutions like Value Chain Finance can be very effective if value chains are well organized;

    Funding is effective when there is a good mentorship throughout the loan process;

    Commercial banks are more and more ready to finance SME mentoring;

    Tiding loans to mentoring prevents credit default and makes SMEs sustainable;

    Guarantee funds /credit lines should cover no more than 80% of loans: SMEs should have their stake in the projects.

  • Recommendations

    14

    Governments to create/promote a One-stop Shop for SMEs with all SME related services;

    Set up Credit Bureaus to help check SME credit history;

    Develop business clusters and cooperatives model which is the preferred financing channel;

    FSPs and DFIs to bound loans /grants to compulsory coaching of certified and registered Business Development Services Providers (FMCs);

    Train FSPs staff (Credit Risk Officers) to better address agribusiness risks.

  • Thank you for your attention

    15

    For Further information, questions or comments please contact

    Mr. Rajesh Aggarwal: [email protected] •Acting Director, Division of Business & Institutional Support •Chief, Trade Facilitation and Policy for Business

    Mr. Torek FARHADI: [email protected] •Senior Adviser, Tr

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