Asia Pacific Trade Facilitation Forum 2014
24 – 25 September 2014, BITEC
Bangkok, Thailand
Innovative trade financing initiatives for SMEsAsia Pacific Trade Facilitation Forum
September 2014, Bangkok, Thailand
Dr Mohammad SaeedSenior Trade Facilitation Adviser
Access to Finance vs Trade Finance
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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 20102. THE IBRD – World Bank 2008
Importance of SMEs and Access to Finance as a Major Constraint
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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
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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
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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
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• 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
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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)
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What is purchase VCFCase 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 loansprovide 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
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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
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National, regional &
international DFIs
FSPs
Credit Lines & Guarantee Funds
ITCA2F
Programme
SME Financing
Training and tools (LOANCOM,
Online platform)
Private
Sector
Development
Trade-R
elate
d Technic
al Assis
tance
Servic
es & F
inance FMCs and TSIs
Equipped with tools
SMEs
ITC’s A2F TA as a complementary solution (ct’d)
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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
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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
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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
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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
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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, Trade Finance for SMEs
Mr. Yaya Ouattara: [email protected] •Adviser, Access to Finance for SMEs
Or consult our web page: http://www.intracen.org/itc/exporters/obtaining-export-credits/
