PACIFIC ISLANDS FORUM SECRETARIAT PIFS(13)FEMT.18 FORUM ECONOMIC MINISTERS MEETING AND FORUM ECONOMIC OFFICIALS MEETING Nuku alofa, Tonga 3 5 July, 2013 SESSION 5: REGIONAL ECONOMIC POLICY CHALLENGES AND REGIONAL SOLUTIONS SME RISK SHARING FACILITY: ACCESS TO FINANCE FOR SMALL AND MEDIUM ENTERPRISE SECTOR IN THE PACIFIC This briefing paper, prepared by the World Bank Group, assesses the feasibility of developing a regional Small and Medium Enterprise finance facility for the Forum Island Countries. 1
Session 5 Access to Finance for Small and Medium Enterprise Sector in the Pacific [PIFS(13)FEMT.18] Purpose The purpose of this paper is to provide an update to the Forum Economic Ministers and Officials on the work undertaken by the World Bank Group (WBG) to assess the feasibility of developing a regional Small and Medium Enterprise (SME) finance facility for the Forum Island Countries (FICs). Background 2. Since 2010 the Forum Economic Ministers have encouraged and supported the urgent need for improving access to finance in FICs to develop the private sector and assist in efforts to promote economic growth. Last year, the Economic Ministers noted the work in progress to explore the possibility of an appropriate Risk Sharing Facility (RSF), including a regional facility, to assist with SME financing, and requested the WBG to submit a firm proposal for financing to members and key development partners before the end of 2012. However, this process was delayed as firm commitments from the potential participating banks and other stakeholders were not received until after first quarter of 2013. Issues The PNG Risk Sharing Facility (RSF) 3. The WBG with Bank of South Pacific (BSP) launched an SME finance facility in Papua New Guinea (PNG) in October 2011 1. The programme includes an SME Risk Sharing facility which provides credit enhancement to partner banks interested in expanding their lending to the SME segment along with a technical assistance package for these banks to build internal capacity in this area. The programme also has a capacity building component to help SMEs to prepare business and marketing plans and enhance management capacity to improve their ability to access credit from banks. 4. The project has taken longer than planned to start due to delays in organising the technical assistance components. At the end of March 2013, the RSF portfolio of the partner bank had reached 80 projects/loans with a total outstanding balance of PGK 15 million, an increase of about 70% in number of loans and 75% outstanding balance from the last quarter of 2012. Approximately 17% of the projects are owned or jointly owned by women. SME Access to Finance Score Card 5. As flagged at the 2012 FEMM 2, the donors and development partners (AusAID, New Zealand Ministry of Foreign Affairs and Trade, Asian Development Bank, European Investment Bank, International Finance Corporation) developed and presented a report card at the Forum Private Sector Dialogue meeting in August 2012, on the respective initiatives undertaken by each institution that contribute towards facilitating and supporting SME finance in the Pacific region. This included both key developments initiated to improve the enabling environment for access to finance for SMEs as well as direct investments in SMEs. A summarised version of this presentation is attached as Annex I for further reference. 1 The programme targets to support up to 150 million PNG Kina (PGK), equivalent to around US$61 million, in new financing to small and mid-size businesses within three years. 2 See 2012 FEMM paper on the Regional Facility to assist Small and Medium Enterprise Financing (FEMK.11). 2
Assessing Feasibility of a Regional SME Finance Facility 6. With a view to assessing the viability of establishing a regional SME finance facility, the WBG undertook SME market assessment studies in Vanuatu, Samoa, Tonga and Fiji (see Table 1). The studies focused on estimating the potential demand for finance among SMEs and assessing the appetite of banks in these countries to participate in a regional SME finance programme 3. It was clear that the market context, demand and capacity of SMEs and banks differ significantly in different countries. Table 1: SME Financing Demand in Selected FICs Country Estimated Number of Formal SMEs SME Financing Demand (next two years) Samoa 3,774 US$9 14 million Vanuatu 1,573 US$12 20 million Tonga 2,885 US$3 6 million Fiji 11,000 US$30 40 million 7. While the market assessments identified certain opportunities in markets outside PNG, due to the limited size, weak capacity of SMEs and poor financial infrastructure, the existing banks that have a regional presence have not shown strong interest in developing a regional facility. The banks do not yet see a business case at a regional level to invest funds, time and effort to such an initiative given the low market potential and high risk of down scaling their operations to the lower end of the SME segment. However, several banks have shown interest in working at a country level potentially in PNG, Fiji, Vanuatu and Tonga through specific SME banking programmes, focusing on certain sectors and target market segments such as agriculture or tourism rather than a broad regional SME facility. These opportunities will be pursued by the WBG and other development partners. 8. In the meantime, BSP has indicated its desire to expand the SME finance programme developed in PNG to the other countries where they have a presence (Fiji and Solomon ), subject to market opportunities and availability of resources. BSP has already started SME banking operations through its subsidiary in Fiji. With the institutional capacity developed through the WBG/Government of PNG funded SME Finance Programme in PNG, BSP now has the internal capability to extend the programme to the other countries. The WBG has offered to provide assistance to BSP where necessary and is also exploring similar opportunities through its partnership with the National Bank of Vanuatu. Improving the Enabling Environment for Access to Finance for SMEs 9. While facilitating direct finance to SMEs continues to be an area of focus with banks, the development partners will continue to work on the key financial infrastructure components aimed at improving the enabling environment for access to finance. For example, the ADB is supporting secured transactions reforms, allowing movable property to be used as collateral for loans to the SME sector. Various donor funded programmes provide business development services for SMEs, and support institutional capacity building to financial institutions to increase services to the SME market segment. The WBG is currently providing support to a number of FICs on payment systems reforms and the establishment of credit bureaus to improve credit information on SMEs for banks. 10. Furthermore, the key development finance institutions in the Pacific are currently discussing the feasibility of establishing a new equity investment fund based on experience and lessons learnt from the 3 SMEs covered in the study included businesses registered with government authorities with a turnover of AUD$50,000 to AUD$1.0 million and/or with 5 to 50 employees. 3
Kula Fund I and II 4 operations. The donor group is currently exploring the potential to expand the Fund into phase III with a new mobilisation of funding which could enable extending equity capital to more SMEs in the region. Investment in a private equity fund in the region will be beneficial to SMEs providing them with an alternative source of risk capital. The Fund will also provide access to technical assistance by the investee companies through a capacity building programme. Pacific Forum Secretariat Suva June 2013 4 The Kula Fund I and II are private equity funds focussing on investing in risk capital in SMEs in the Pacific. The two funds have invested up to US$25million in 17 SMEs in the Pacific region between 1997-2003 and 2006-2011 periods respectively. The core investors in Kula II (IFC, ADB, EIB) are currently exploring the feasibility of developing a new fund to mobilise further equity investments in the region. 4
ANNEX I Improving Access to Finance in the Pacific Summary Scorecard of Current Donor Implemented Activities Improving access to finance for Pacific island businesses has been identified as a priority in a number of fora, including annual Forum Economic Ministers Meetings and at the Private Sector Dialogue (first held in the margins of the Pacific Forum Leaders Meeting in 2010). Governments, financial institutions and donors are addressing access to finance in a number of different ways. However, information on these activities and their effectiveness is published in many different formats and a concise overview has not been available so far. Development partners have committed to provide a report on activities to the Private Sector Dialogue in 2012 and to the Forum Economic Ministers Meeting in 2013. Barriers to accessing finance This note uses the G20 SME Finance Policy Guide 5 as a framework for describing donor programs to improve access to finance. Non-financial barriers A wide range of non-financial barriers also affect small and informal firms (e.g. lack of infrastructure, lack of information). These non-financial barriers can have significant impacts on a firm s ability to access finance by impacting on the risks and return of business venture. In addition, such barriers also affect the costs faced by financial institutions, often resulting in limited services for remote and rural communities. Programs aimed at overcoming non-financial barriers are excluded from this note. For a useful summary see the ADB s Private Sector Assessments of Pacific countries. 6 Financial barriers SMEs obtain finance from two sources - internal (e.g. savings) or external (e.g. friends, family, supplier finance, debt or equity). Policy and programs are predominantly aimed at improving access to external finance, and broadly fall into three categories: Regulatory and Supervisory Frameworks o To promote market development and competition, while subjecting financial institutions and agents to sound and appropriate prudential regulation and rules of conduct in order to protect consumers and depositors and ensure market stability. Financial Infrastructure o To reduce the information and legal uncertainties that increase risk to lenders; includes accounting and auditing standards, credit reporting systems and collateral and insolvency regimes. Other Interventions o designed to address market failures (e.g. enforcement difficulties, imperfect information and lack of resources and capacity); includes capacity building to improve SME creditworthiness, capacity building to banks/other financial institutions to improve product offering, systems, processes and skills, credit guarantee schemes and risk share 5 International Finance Corporation (2010) Scaling-up SME Access to Financial Services in the Developing World, available at: http://www.gpfi.org/sites/default/files/documents/g20_stocktaking_report_0.pdf International Finance Corporation (2011) G20 SME Finance Policy Guide available at: http://www.gpfi.org/knowledgebank/publications/sme-finance-policy-guide 6 http://www.adb.org/documents/series/country-private-sector-assessments 5
facilities to improve lending to SMEs, state owned banks, investment funds and supply chain finance (in public procurement). Donor Programs in the Pacific Tables 1 to 4 provide a summary of current and recent programs aimed at improving access to finance which are funded and/or delivered by: Australia, New Zealand, Asian Development Bank, European Investment Bank and the International Finance Corporation. We present the information for 1) small islands states that do not have central banks and 2) larger countries. Given the regional focus of many banks and other credit providers, regional programs and those in other countries will have spillover effects for non-target countries. Since 2006, donors and Pacific island governments have increased their focus on improving access to finance. These programs are beginning to significantly change the financial landscape in the Pacific. For example, secured transactions reform in Solomon has led to faster loan approval from 28 days to just 1 day. In the Marshall, reforms have made lending less risky leading to a 2 percentage point reduction in interests on collateral based loans. TABLE 1: SMALL ISLAND STATES: FINANCIAL INFRASTRUCTURE AND OTHER INTERVENTIONS Cook FSM Kiribati Nauru Niue Palau RMI Tuvalu Financial Sector Assessment Company Registries Secured Transaction Reform Support to State-owned development banks Direct Investments Services promoting creditworthiness TABLE 2: LARGER ECONOMIES: REGULATORY AND SUPERVISORY FRAMEWORKS Fiji Papua New Guinea Samoa Solomon Tonga Vanuatu Multi country Payments System Reform Microfinance Regulation Branchless Banking Regulation Central Bank Assistance Central Bank Networks 6
TABLE 3: LARGER ECONOMIES: FINANCIAL INFRASTRUCTURE Fiji Papua New Guinea Samoa Solomon Tonga Vanuatu Multi country Financial Sector Assessment Demand for Finance Credit bureaus Company Registries Secured Transaction Reform Alternative Dispute Resolution Research and Information sharing TABLE 4: LARGER ECONOMIES: PUBLIC SECTOR & OTHER INTERVENTIONS Fiji Papua New Guinea Samoa Solomon Tonga Vanuatu Multi country Risk share facility - banks Risk share facility for microfinance Support to State-owned development banks Trade Finance Program Agricultural Finance Concessional Finance Business Grants Direct Investments Donor Investment Funds Strengthening Financial Service Providers Services promoting creditworthiness 7