Expert Opinion

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Development of Africa's private sector

Director Private Sector Operations AfDB, Timothy Turner

The below interview was provided by Brussels based EMRC International. The AfDB is a member of the EMRC network and Timothy Turner, Director of AfDB’s Private Sector Operations, was a speaker at EMRC-AfDB SME Forum held in June of 2011.

1. What are the main priorities and objectives for the AfDB concerning the development of Africa’s private sector?

The Bank’s vision for private sector development is founded on a conceptual framework for development impact that links entrepreneurship, investment, and economic growth with the Bank’s ultimate goal of poverty alleviation. Given the importance of Private Sector Department (PSD) as the engine for poverty-reducing economic growth, the Bank’s strategy articulates five focal development priorities for its interventions:

(i) improving the investment climate,

(ii) supporting private enterprises,

(iii) strengthening financial systems,

(iv) building competitive infrastructure, and

(v) promoting trade.

Our strategy builds on the comparative advantage of having the whole spectrum of financial instruments, sovereign, concessional and non-sovereign under one “roof”.

The Bank’s Private Sector Department leads investments in catalytic private sector transactions through a variety of instruments without a sovereign guarantee, including loans, lines of credit, guarantees, equity and quasi-equity investments, and technical assistance. These interventions are undertaken with private corporations, financial institutions, or state-owned enterprises and in partnership with other development-oriented organizations in order to attract other investors by creating a strong demonstration effect. The Bank seeks to take maximum advantage of its unique positioning at the interface between the public and private sectors – the Bank’s so-called “sweet spot” – to maximize the development impact of its PSO.

2. What are the main targeted sectors for the private sector to play a significant role in Africa’s development and why these sectors?

Infrastructure is critical to the growth of the private sector in the continent as one of the key strategic priorities. Estimates by the Investment Consortium for Africa and the World Bank indicate that the infrastructure investment need on the continent is about US$90 -100 billion per annum for the coming ten years. Inadequate and poor infrastructure is the culprit for an estimated 2% reduction in GDP per capita on the continent. In line with the priorities of the MTS, the AfDB has invested about US$13.5 billion in infrastructure through sovereign, concessional and non-sovereign lending over the past three years, helping to alleviate Africa’s infrastructure shortage in the power, transport, ICT and water sectors.

Particular emphasis has been placed on cutting the continent’s harmful energy deficit, which attracted about 50% of Bank Group infrastructure financing. An abundance of needs and project opportunities have been identified. However, as already mentioned, capacity enhancement in governments to plan, design and launch project proposals is a critical requirement towards making these investment opportunities bankable.

The Bank strives to support private enterprises across the full business spectrum from micro-enterprises to mega-enterprises and across the broadest range of countries from middle income to low income. Given the diversity and huge numbers of micro, small, and medium-scale enterprises (MSMEs), the Bank generally channels its support to these businesses through financial intermediaries, using lines of credit in local currencies or guarantee facilities combined with grant resources for technical assistance and capacity building. The Bank also supports MSMEs by assisting business associations and other business development services. For the larger-scale enterprises, the AfDB is usually able to provide direct financial support in partnership with other financial institutions.

Given Africa’s abundance of natural resources, and its dependence on agriculture as a key contribution to GDP and poverty reduction, AfDB attaches significant importance to supporting the primary sector, in particular by adding value to the production processes (mining products, agribusiness).

Lastly, AfDB also advocates inter- and intra-regional trade, assists local banks to establish relationships with foreign banks, and strengthens the financial capacity of local trade financing institutions. Trade promotion is one of the primary ways the Bank can support the development of indigenous private sector companies and the African agricultural sector.

3. How do you cooperate with commercial banks in meeting SME’s financial needs?

The AfDB’s cooperation with commercial banks consists of assistance to increase their ability to provide financial services to SMEs in various ways, depending on the specific needs of the banks: firstly, the Bank applies various instruments to commercial banks, including debt, sub-ordinated debt or sometimes equity to improve commercial banks’ capital or liquidity, to enhance their ability to provide finance to SMEs. Improving capital will allow banks to attract and avail liquidity to SME clients; providing liquidity through Lines of Credit assists banks directly to increase their SME lending. Often banks are liquid, but because their sources of liquidity tend to be short to medium term they tend to provide short term finance to their SME clients only. AfDB can assist by providing long term lines of credit, thereby also increasing the tenor of loans to SMEs, and as a result allowing SMEs to invest and grow. Commercial banks often require improved capacity to lend to the SME sector; the perception is that this is risky and inefficient because of the small loan size and informality of the client. Good SME banking models exist to engage successfully with SMEs, and AfDB can assist its client banks to acquire the expertise to set-up SME desks, credit scoring methods, portfolio management platforms and SME relationship management approaches that will allow banks to become more efficient and effective in the SME market. The AfDB has also set-up a guarantee fund for Africa along with the Spanish and Danish Governments, and this facility will be able to assist banks by sharing the risk of their SME client base thus making it more interesting to engage in this market. Sometimes AfDB also assists in designing additional support mechanisms for the SME target entrepreneurs so that they will be able to submit better prepared projects to the banks. Lastly, AfDB can assist, through partnerships, to address specific constraints that may exist in countries, related to collateral registration, credit information, business licensing issues, and legal and regulatory issues (bankruptcy law, contract enforcement) etc.

4. What are the most interesting trends in SME finance in Africa according to the AfDB?

There is a clear and noticeable trend for financial institutions to get involved in SME financing. International banks active in African countries are adopting new alternatives to collateral through innovative credit scoring methods. Local banks are strengthening their SME desks and are applying client relationship models to maintain loan portfolio quality and upscale their financing in SMEs. Alternative financing modalities such as through mezzanine / (equity) fund financing is increasingly being developed in Africa, and leasing finance is developing quite rapidly. Trade financing is increasingly becoming available to SMEs, and factoring is being looked at outside the existing South Africa and Egypt markets and is expected to be introduced in other countries. In general there is a trend for banks to actively downscale to SME finance and to adopt adequate systems to do so, having realized that corporate financing models cannot be successfully and profitably applied in the SME market without making requisite changes to the delivery mechanisms. At the same time, established microfinance institutions have many clients that migrate to become small sized businesses, and these institutions are developing mechanisms to upscale their financing instruments by making adaptations to their operational models. These efforts are complemented by governments trying to improve the business environment for SMEs and enhancing the ‘ease of doing business’, thus making it easier for financial institutions to become more active in the SME space.