Building a high performance SME business in the MENA Region Arab Monetary Fund & International Finance Corporation Dubai, 7-8 May 2013 Importance of financial infrastructure to increase Access to Finance By Hafid Oubrik Financial Sector Specialist, Arab Monetary Fund 1
Importance of Financial Infrastructure Financial Infrastructure as broadly defined comprises the underlying foundation for a country s financial system including all institutions, information, technologies and rules and standards which enable financial intermediation. Objectives: Assist countries in developing safe and efficient payment and remittance systems, securities settlement systems, credit bureaus, collateral registries Support operations of a sound financial sector Support enhanced access to finance Support efficiency of trade and of the overall economy 2
US $ Billions Billions Potential Reach of Financial Infrastructure Potential to enable A2F for half the emerging market population in 10 years $155,000 2007 Emerging Market GDP = $14.29 trillion $154,195 $89,350 3.50 3.00 2007 Emerging Market Population = 5.5 billion 2.97 2.50 2.00 1.87 $4,000 $3,000 $2,000 $1,000 $- $64,845 $2,068 $ 99 $1,256 $384 $285 $812 Credit Bureaus Remittances Domestic Payments 1.50 1.00 0.50 0.00 1.01 0.77 0.61 0.06 1.10 0.71 0.40 Credit Bureaus Remittances Domestic Payments Total Current Financing Volume Total Potential Financing Volume No. of people currently affected Potential no. of people affected 3
Cost per $100 lent or sent Potential of Financial Infrastructure Financial Infrastructure has Long-Term Systemic Potential to Reduce Cost per Dollar Lent or Sent $60 $50 $40 $30 $20 $10 $0 90% Unsecured micro, retail and small business loans 80% Loans securitized with movable collateral 90% Remittances 90% Domestic Payments Financial Infrastructure helps reduce transaction costs Least efficient system Most efficient system Total potential reduction in costs Notes: The chart serves to illustrate the range of possible reductions in transactions costs with the use of more efficient financial infrastructure. These ranges are meant to be indicative only. Actual cost reductions are contingent ultimately on the efficiency of the system and the level of competition in the market. All costs are per $100 lent or sent, except for remittance costs, which are per $200 sent. Credit Bureaus: Illustrates the range of costs associated with unsecured lending by micro and small business lenders and the potential for reduction from using credit reporting technologies. The upper limit indicates average lending costs for microfinance institutions based on 2006 MIX Market data for 798 MFIs in 96 countries. Lower limit is based on average small business lending costs in developed markets. Graph does not suggest that the entire reduction in costs is attributable to the use of credit bureaus alone. Collateral: Lending costs on secured credit and leases. Based on World Bank expert estimates. Remittances: Cost of sending remittances to remitter s home country. Estimates reflect the costs for sending $200 in the most expensive corridor (South Africa to Zambia) and least expensive corridor (Saudi Arabia to Pakistan). Based on the World Bank Remittance Price Database. Domestic payments: Cost of sending payments in country. Based on World Bank expert estimates. 4
Financial Infrastructure Reform: various pillars Efficient Payment & Securities Settlement Systems Global Credit Information Sharing Systems Appropriate Secured Lending Framework Strong Local Debt Markets Management 5
Payment and Securities Systems in MENA The Arab payments landscape shows significant differences across countries with regard to their level of payment system development. Nevertheless, the following features related to A2F can be regarded as characteristic across the Region : Cash continues to be the most important payment instruments for retail transactions followed by cheques. Very low number of cashless payment transactions per capita in the region, although with a clear difference between GCC and non-gcc countries Much less than one payment card per inhabitant in circulation The number of ATM and POS is growing at a relatively fast pace. Interoperability for ATM is generally good. However, in some countries POS payment card circuits are characterized by low interoperability. Automatic cheque processing is quite common in the region. However, in most systems cheque truncation has not been implemented and physical exchange of cheques is still required. Few countries have an ACH that processes direct debit and credit. 6
What IFC and AMF did Arab Payment Initiative (API) - 2006 Main Partner: WB Objectives Assess and strengthen payments and securities systems in the MENA countries with a view to improving their safety, efficiency and integrity. Building institutional capacity within the region in order to sustain the continued development of payment and securities settlement systems. Actions Achieved 12 countries visited: Bahrain, Egypt, Jordan, Lebanon, Morocco, Palestine, Qatar, Sudan, Syria, UAE, Yemen, Djibouti. On 2013 New MOU to be signed Missions expected to: Algeria, Libya Projects in progress: Financing and Implementing the RTGS system in Palestine Assisting Lebanon in the implementation of the RTGS and ACH systems 7
What IFC and AMF did Arab Payment Initiative (API) Since: 2006 Main Partner: WB Objectives Assess and strengthen payments and securities systems in the MENA countries with a view to improving their safety, efficiency and integrity. Building institutional capacity within the region in order to sustain the continued development of payment and securities settlement systems. Other partners: IMF, ECB Actions Achieved 12 countries visited: Bahrain, Egypt, Jordan, Lebanon, Morocco, Palestine, Qatar, Sudan, Syria, UAE, Yemen, Djibouti. On 2013 New MOU to be signed Missions expected to: Algeria, Libya, Mauritania Arab Payments Week 8
Credit Reporting Systems in MENA Doing Business Depth of Credit Information Sub-Index: 2010-2013 9
Credit Reporting Systems in MENA Status improved but lots of work still required: CREDIT REPORTING Big leap of MENA in quality and diffusion of credit reporting, however PCBs still young, only in 6 countries, generally limited to regulated entities Continued utilization of PCRs for credit reporting may unintentionally hamper PCBs development Public information: difficult to obtain, often not available/not electronic format Non-traditional data ( e.g. mobile tel. - utilities) extremely powerful, however not utilized Tailored credit reporting legal framework (and borrower s rights) still lacking in many countries RISK MANAGEMENT TECHNIQUES / TOOLS 10
What IFC and AMF did Arab Credit Reporting Initiative (ACRI) - 2008 Main Partner: WB Objectives Assess the credit information infrastructures in MENA countries. Promoting business and regulatory reforms that support best practices in credit information reporting. Raising financial community and public awareness about credit reporting. Actions Achieved 11 countries visited: Lebanon, Syria, Tunisia, Yemen, Oman, Palestine, Libya, Jordan, UAE, Qatar, Morocco Annual training program for central banks staff in Malaysia On 2013 Missions expected to: Mauritania and Egypt Projects in progress Full Assistance to Morocco in the implementation of the first credit bureau (the 2 nd license is coming soon ) Assistance to Algeria during the selection of the technical provider Full Assistance to Jordan in the implementation of the 1 st credit bureau. 11
Secured Transactions in MENA Doing Business Strength of Legal Rights Sub-Index: 2009-2012 12
Secured Transactions in MENA World Bank Enterprise Surveys 34% of Firms Consider Access to Credit a Major Constraint 60 50 40 30 20 10 0 Access to a Line of Credit or Loans from Financial Institutions (% of Firms) 56.92 54.97 45.02 37.54 Eastern Europe & Central Asia Latin America & Caribbean South Asia Sub-Saharan Africa 25.07 Middle East & North Africa 60 50 40 30 20 10 0 49.85 Eastern Europe & Central Asia Use of Bank Loans to Finance Investments (% of Firms) 34.18 OECD 28.77 27.20 26.21 Latin America & Caribbean South Asia Sub-Saharan Africa 16.45 Middle East & North Africa Country Loans to Firms requiring collateral (%) Algeria 79 Egypt 84.4 Jordan 97.6 Lebanon 67.5 Morocco 90 Oman 73.8 West Bank/Gaza 84.5 None of the MENA Countries have yet a modern secured transactions law. Very fragmented legal frameworks with provisions in many laws None of the MENA countries have modernized their collateral registries Secured Transactions and Islamic Finance can co-exist 13
Secured Transactions in MENA East Asia & Pacific Europe & Central Asia High income: OECD Latin America & Caribbean Middle East & North Africa South Asia Sub- Saharan Africa Legal Right Index (0-10) 5.7 6.6 6.8 5.5 3.3 5.3 4.6 Non-possessory security interests 100.0 100.0 100.0 90.5 83.3 85.7 97.4 Security interests in revolving assets with 66.7 57.1 63.6 28.6 0.0 71.4 41.0 general description Security interests in all assets with general 75.0 57.1 63.6 42.9 38.9 85.7 92.3 description Future assets, products and proceeds 50.0 39.3 72.7 61.9 11.1 71.4 41.0 General description of debts and obligations 83.3 75.0 100.0 81.0 55.6 57.1 87.2 Collateral registry 50.0 67.9 40.9 23.8 22.2 14.3 23.1 Absolute priority outside bankruptcy 58.3 75.0 59.1 38.1 16.7 14.3 25.6 Absolute priority in bankruptcy 33.3 71.4 59.1 4.8 11.1 14.3 15.4 Stay on enforcement during restructuring 41.7 35.7 36.4 47.6 38.9 42.9 30.8 Out of Court Enforcement 58.3 75.0 77.3 33.3 16.7 85.7 41.0 14
Secured Transactions in MENA Reform Secured Transactions by enacting stand alone ST Laws. Standard approach to reforms given the similarity in legal frameworks Broaden the scope of secured transactions: Allow all types of assets, including future assets, proceeds, all types of contractual agreements Modernize collateral registries: Notice system, web based, centralized, cost effective Improve enforcement mechanisms: Introduce out of court enforcement, fast track judicial processes in court and more flexibility in the disposition of the assets (private sale) Need for training financial institutions on asset based financing 15
What IFC and AMF did Arab Secured Transactions Initiative (ASTI) - 2011 Main Partners: WB Objectives Assess secured lending regimes in MENA countries Develop secured lending legal and institutional frameworks in MENA Raising awareness and promoting best practices in the area of secured lending to ensure the harmonization of secured transactions systems throughout the MENA region. Actions In progress 2 countries visited: Egypt, Morocco 3 countries assisted: Jordan, Palestine, Lebanon On 2013 Missions expected to: Mauritania, Tunisia Projects in progress Full Assistance to Jordan, Palestine and Lebanon in the legal framework reform Project to undertake a comprehensive reform of the collateral registry in Morocco 16
What IFC in cooperation with AMF did UAE Project: reform secured transaction systems in the country Objective Increase access to credit to the private sector in UAE by improving secured lending frameworks and strengthening lenders' rights in movable assets. Components legislative reform resulting in enactment of laws/regulations which will enhance the right of creditors in movable assets creation of a functioning movable asset registry to enable lenders to effectively file a notice related to their proprietary rights awareness raising and capacity building activities to increase knowledge among stakeholders (both government and private sector) about the benefits of well-functioning secured financing systems. Implementation in 2 phases: Diagnostic and Legal Framework Development (Feb 2012) Creation of Secured Transactions Registry and Training 17
What IFC in cooperation with AMF did UAE Project: reform secured transaction systems in the country Progress Setting -up of the Steering Committee Conducting a diagnostic mission to identify legal and institutional areas that need to be improved in order to create a secured transactions system based on international best practices, but tailored to the specificities of the UAE Developing the draft law on secured transactions that will be needed to create a stateof the-art secured financing system Holding an awareness raising workshop to present and discuss secured transactions frameworks Endorsement of the draft Law by the M. of Finances Presented to the Council of Ministers in December 2012 to be reviewed by the different legislative committees Expected Impacts Financial institutions will be able to expand their lending operations against movable collateral and businesses will be able to use their movable assets, inventory and accounts receivable as collateral. Government institutions will obtain the necessary infrastructure and skills to support effective secured lending practices in UAE. Increase the UAE's ranking on the getting credit indicator of the Doing Business Report. 18
To conclude. The AMF and IFC contribute to the development of international standards in Financial Infrastructure. Under this context, they will pursue their efforts to: Provide technical assistance to the authorities through the various initiatives created in partnership with the World Bank: API, ACRI, ASTI Strengthen capacity building among the financial sector stakeholders Raise awareness about the importance of theses aspects 19
Thanks for your attention 20