Catalyzing US$3 billion of SME lending by transforming African banks
SDG invests in African banks and transforms them to become leading SME banks. The transformation process is supported by a revolving Technical Assistance (TA) Facility that provides capacity building to banks to serve SMEs and business development support to SMEs to expand their businesses and create jobs.
About You
About You
First Name
Peter
Last Name
Hinton
Website
Your Organization
Summit Development Group
Country
Botswana
About Your Organization
Organization Name
Summit Development Group
Organization Website
Organization Phone
+44 207 636 9571
Organization Address
5, Kgale Mews, Kgale Hill, Gaborone, Botswana
Organization Country
Organization Type
Private Institution
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Your solution
Name Your solution
Catalyzing US$3 billion of SME lending by transforming African banks
Describe Your Solution
SDG invests in African banks and transforms them to become leading SME banks. The transformation process is supported by a revolving Technical Assistance (TA) Facility that provides capacity building to banks to serve SMEs and business development support to SMEs to expand their businesses and create jobs.
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
Sub-Saharan Africa
Region(s) your solution focuses on:
Africa.
Range of turnover in your target firms, in USD
Less than $1 Million.
Average turnover in USD of your target firm
Average turnover:… $150,000
Number of employees in your target firms
5-24.
Average number of employees of your target firm
Average number of employees:…10
Specify the size, average and range of expected loans or investments in each target firm
SDG investee banks will provide loans to SMEs in the range of $5,000 - $75,000, with an average loan size of $20,000.
What stage is your solution in?
Operating for 1‐5 years
Innovation
What makes your innovative solution unique?
SDG’s innovation lays in its ability to scale supply of finance to SMEs through transformation of banks, while expanding the number of successful SMEs through business development support.
Beyond access to finance, SMEs in Africa face multiple barriers for growth including lack of business knowledge and access to markets. SME finance interventions have traditionally targeted a single element such as direct finance provision or business development services. Some interventions may combine elements, but have difficulty achieving scale because of the time intensity and resources required to develop individual SMEs directly.
SDG is unique because its core activity is transforming financial intermediaries, the banks, to provide finance to SMEs. By targeting banks instead of providing finance directly, SDG can leverage local resources and networks to reach more SMEs and strengthen the financial structure in the country to provide a sustainable source of SME finance.
At the same time, SDG recognizes that successful SMEs require business development support and linkages to markets. SDG utilizes an approach that proactively links SMEs to a broad range of partners including technical experts, business development service providers and mentors. Partnerships are created at multiple levels (regional, national and local) and across industry sectors focusing on four key areas for SME development called ‘FROG’:
• Financial literacy
• Retention and reward of staff
• Operational efficiency
• Governance
SDG thus serves as an intermediary to catalyze partnerships to ensure that more SMEs can expand and create jobs.
How does your proposed innovation leverage public intervention in catalyzing private SME finance?
Banks in Africa have been reluctant to provide financial services to SMEs because of a costly operating environment that favors larger transaction sizes, difficulty assessing creditworthiness of potential customers and a lack of skills to serve SMEs. In addition, most banks have weak incentives to move downmarket given the profitability of their current businesses serving high net worth individuals and large corporations.
SDG addresses these issues through transformation of banks to focus on SMEs, which will demonstrate the commercial viability of the SME sector. SDG requires public funding sources to take the initial risk and overcome the first-mover dilemma in the private sector.
Public funding , including DFI investing in SDG, catalyzes private SME finance in several ways. In the early capital raising stage, participation of public funding encourages private investors to consider investing in new initiatives such as SDG. Public funding also adds credibility to SDG and encourages the private sector to deploy capital.
Most importantly, public funding allows SDG banks to develop strategies to mobilize private funding sources including local deposits and debt financing to build their balance sheet. Through banks, SDG leverages public funding to increase the pool of available lending to SMEs by eight times. This leveraged finance is continually recycled as SMEs repay their loans and the pool of assets available for lending gradually becomes larger. Thus, using banks as intermediaries allows SDG to serve more SMEs and to achieve scale.
Public finance also provides the seed funding for SDG’s TA Facility that provides SME business development support. Because SMEs that receive benefit from the TA Facility will pay back a portion of the cost, the pool is revolved and public finance leverages the SME private capital to allow more SMEs to receive benefits.
What barriers does your proposed solution address?
Asymmetry of information, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Lack of financing to women entrepreneurs.
If you checked any of these barriers, describe how your solution addresses them
a. Asymmetry of information: SDG banks hire loan officers that have strong ties to local communities and trains them to understand SMEs in the local market so that they can gather information from other people in the community to verify credit worthiness
b. Lack of collateral: SDG banks use alternative character and cashflow-based mechanisms for assessing credit worthiness and not collateral as primary determinant
c. Lack of financial capacity: SDG TA Facility provides financial literacy training to SMEs to improve their ability to manage their finances
d. Lack of SME access to skills / knowledge / markets: SDG TA Facility provides SME business development support in four key areas: ‘FROG’: financial literacy, operational efficiency, retention and reward of staff and governance. SDG also links SMEs to partners that provide access to markets.
e. Unavailability of financial products tailored to SME needs: SDG works with banks to understand their local SME market and to develop products that meet their needs such as leasing, factoring and working capital finance.
f. Lack of institutional capacity of financial intermediaries: SDG transforms banks to focus on SMEs by strengthening management, enhancing governance, creating a performance-based culture, building balance sheets, improving risk management, introducing SME credit management techniques and training loan officers to lend to SMEs.
g. High transaction costs for financial intermediaries to serve SMEs: SDG builds volume of SME lending by working with banks to expand and cross selling its SME product range to increase revenue per client, create efficient distribution networks incorporating alternative distribution channels and expand Banks’ tools to determine the creditworthiness of clients and minimize risk (e.g. techniques focused on cash flow and character lending, predictive technologies and non traditional collateralization and credit scoring techniques). As part of a pan-African network of SME banks, SDG banks also benefit from economies of scale through shared resources, methodologies and back office technology platforms.
h. Lack of competition / incentives for financial intermediaries to serve SMEs: As SDG banks grow and become profitable, they will demonstrate the commercial viability of the SME market segment and lead to more players entering into the market.
i. Underdeveloped local capital markets (term local currency funding, exit options for SME equity): SDG will draw on investors and partners to secure long term local currency loans and link SMEs to local venture capital and private equity funds.
j. General barriers to SME development related to investment climate:
k. Lack of financing to women entrepreneurs: SDG banks target and serve women-owned SMEs with a goal of 40% of SMEs financed to be women-owned.
Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact
SDG’s business model is based on the experience gained by SDG management in four different types of banks in Uganda, Ghana, Kenya and Rwanda. This has been applied recently to two financial institutions in Kenya and Gambia, which has led to successful turnarounds in 2009 and 2010.
In Uganda, the Bank was founded in the mid-1960’s by a DFI and the Ugandan government. In 1997 the Bank was under-performing with no banking license, poor quality portfolio and no clear direction. Over the next five years the Bank adopted an SME approach, installed commercial professional management and became the fifth largest financial services group in that market. From 1999-2004, US$ profits after tax grew by a compound annual rate of 28%. Significant training took place within the Bank to equip staff with the right skills to assess SME credit risk and successfully make SME loans. In 2009, the Bank has become a leading SME bank in Uganda.
Similarly, the Kenyan Bank developed a new SME portfolio of US$6m over a two-year period, resulting in 20-30% increase in employment at the SMEs financed by the Bank. In 2007, the Bank won the SME Bank of the Year award in 2007 in Kenya.
There is evidence presented by the Economist (July 2009) to suggest that growth is faster in countries where SME focused banks have larger market shares, in part because of improved financing for SMEs. Facilitating SME growth can, thus, contribute to sustainable economic growth. Studies by Small Enterprise Assistance Funds (2007) show that when SMEs receive finance for growth, they can have a tremendous development impact on local economies:
• SMEs create jobs at a rate of 26% per annum and increase wages at a rate of 25%.
• 72% of new jobs generated at SMEs go to unskilled or semi-skilled employees, who will receive training.
• SMEs make important contributions to the formalization of the economy, by creating enterprises that pay taxes.
• SMEs are in an advantageous position to understand market opportunities that address unmet needs in their communities, such as access to clean water, health services and housing.
• SMEs are key to long-term sustainability of the private sector in AAfrica; every dollar invested in a SME generates, on average, an additional 12 dollars in the local economy.
• Each SME, through its purchase of inputs, supports an average of 331 other local businesses
The SDG solution to transform banks and support SMEs thus provides an impact across several dimensions:
• Strengthening capacity of banks to provide SME finance
• Increasing supply of SME finance
• Creating jobs at SMEs
• Contributing to social and environmental sustainability of local communities.
How many firms do you expect to reach?
SDG banks expect to reach 190,000 SMEs in 12 countries across Africa in 10 years. The financed SMEs will create over 1.4 million jobs.
What is the volume of private SME finance you aim to catalyze?
SDG will leverage $125 million of public and private capital plus $10 million grant funding to catalyze $3.8 billion in bank lending to SMEs in Africa over 10 years. In addition, through partnerships with venture capital funds and public guarantees, SDG will catalyze $50 million of equity finance to SMEs.
What time frame will be required to reach these targets?
The core transformation of banks into SME-focused institutions will typically take between 18-24 months. SDG serves as a long term investor to provide local African banks with investment capital and technical assistance to deliver SME finance, and the above targets in terms of number of SMEs financed, jobs created, amount of SME finance etc are expected to be achieved within a 10-year period.
Does your solution seek to have an impact on public policy?
Yes
What would prevent your solution from being a success?
Based on SDG experience, SMEs in Africa need both finance and business support in order to succeed. Thus, important to the success of SDG’s solution is the combination of both investment capital and grant funding which addresses access to finance and business development support for SMEs. Without grant funding the SME clients of SDG banks will not receive support that enables them to expand and to create more jobs. On the other hand, without investment capital, SDG will not be able to invest and transform African banks to provide SME lending.
In order to generate more successful SMEs that create additional jobs in local African economies, SDG looks for both investment capital and grant funding. However, if SDG does not receive grant funding, SDG would seek out partnerships to deliver business development services to SMEs and targets would take longer to achieve.
This Entry is about (Issues)
Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact
SDG delivers social impact through several dimensions:
• Financial inclusion of SMEs and their employees –SDG banks utilise a relationship-based model to reach out to SMEs and increase availability of financial services, particularly to women-owned businesses. Through increased access to finance SMEs and unbanked customers can build assets, including savings, and manage cash flows better. Households can pay for education, better food and other consumables, which in turn fuels the economy through spending, taxes paid and wealth creation. SDG banks will reach over 190,000 SMEs and 5 million unbanked in 12 countries across Africa in 10 years.
• Strengthening SMEs – Focusing on ‘FROG’ SDG proactively links SMEs to local organizations that foster skills development, market linkages and other support which improve the profitability and sustainability of SMEs.
• Job creation through SME growth – Studies show that providing both finance and business development support to SMEs facilitates their growth and allows them to hire additional employees. Over 10 years, SDG anticipates creating over 1.4 million jobs at SMEs.
• Increase number of sustainable SMEs – SDG also encourages SMEs to participate in environmentally and socially responsible activities which support local economic development and resources conservation.
For example, in Botswana a kitchen cabinet maker, BOB, was linked to an industrial designer. The industrial designer evaluated BOB’s production process and discovered that BOB could use its existing equipment to make office furniture, which had margins 8 times higher. So the industrial designer worked with BOB to design a line of office furniture. As a result BOB increased his profits and was able to hire additional employees.
Sustainability
List all the funding sources that are required for the sustainability of this solution
Small local banks are the best entities for providing financial services to SMEs because of their close relationships with local communities and businesses. However, smaller African banks have difficulty raising capital and limited internal resources to implement a comprehensive SME banking strategy. They need funding from public and private sources in the form of:
• Investment capital to grow
• Debt capital and local deposits to build their balance sheet
• Grant funding to provide support to SMEs
SDG requires $125 million in investment capital and $10 million in grant funding to implement its solution. With investment capital, SDG will transform banks to focus on SMEs and work with them to develop a sustainable source of low-cost funding through mobilization of local deposits. With grant funding, SDG will establish a revolving TA Facility to provide business development support to SMEs to help them expand and create jobs.
Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?
SDG’s solution will graduate from dependence on public finance because it seeks to build the balance sheet of banks through mobilization of local deposits and demonstrate the profitability of SME banking to attract private players.
A key strategy for transforming banks into successful SME banks is to secure lower cost funding, which can be achieved by attracting local deposits. Public finance will allow banks to develop strategies for attracting deposit customers through new products and services and distribution channels. Over time, the banks deposit base will increase so that it will rely less on public finance.
Furthermore, most banks in Africa hold the perception that SME banking is unprofitable and have little incentive to provide services to the SME market segment. As SDG banks demonstrate profitability in the sector, creating a precedent, more banks in Africa will provide services to the SME market segment. Furthermore, as the commercial viability of SME banks are demonstrated, the smaller African banks that SDG invests in will be able to attract more private funding to expand. Over time, public finance will no longer be needed as competition increases in the private sector and the cost of transactions are lowered.
When considering the TA Facility, SDG expects SMEs that receive benefits from the TA grants to contribute towards the cost of such service provision thereby replenishing the TA Facility; consequently the pool of TA funds is sustainable. SMEs will not have the expectation to repay immediately so that they have time to allow the training and benefits they receive to generate additional income. SMEs will typically have a grace period of up to two years to pay 80% of the costs of the service provision.
Considering this, SDG expects the solution to graduate from dependence on public finance in 7-10 years. By that time SDG will have demonstrated that SME banks are profitable and sustainable so public finance is no longer needed.
Demonstrate how your proposed solution will survive a potential loss of its largest private funding source
SDG has identified a range of public and private funding sources to diversify risk, with 14% coming from the largest private source. Loss of the largest private funding source would decrease the amount of capital available for investment, but would not impact the viability of the overall SDG solution.
If this occurs, SDG anticipates investing in fewer banks in Africa and scaling back the targets for SME lending disbursements, number of SMEs financed and job created.
Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation
Integral to SDG philosophy and operations is collaboration with a wide range of partners in order to achieve economic growth and development impact in Africa. SDG looks to build strategic relationships to add value to SME banks and to realize sustainable impact at the SME level.
Key partnerships are in the following areas:
• SME banking expertise – SDG draws on technical experts to build bank capacity to focus on SMEs
• SME business development support – SDG partners with SME support agencies in the areas of financial literacy, operational efficiency, mentoring and skills development.
• SME market linkages – SDG works with NGOs, multinational corporations and funds to connect SMEs to supply and distribution chains.
• Sustainable SME activities – SDG connects SMEs to organizations that encourage them to participate in environmentally and socially responsible activities and to contribute to their local communities
Are there non-financial issues that could threaten the sustainability of your proposed solution?
The key non financial risk stems from SDG’s network of partners that support various elements of the SME. In certain markets partnerships may be hard to foster to create valuable linkages; this may be due to the fact that they are either nonexistent or are weak. The result could potentially be lower performing SMEs, inadequate scale of target market, or SMEs in specific sectors that lack the technical support for ongoing development and scaling of market led solutions.
SDG has developed multiple partnerships on the grounds with organizations that have a demonstrated successful presence in many of its target country markets and significant expertise and resources of their own. SDG management has successfully worked with many of these partners in the application of SDG’s business model in several African banks.
Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically
The majority of SMEs supported by SDG banks will involve high growth markets. While not all SMEs will directly serve end users they may provide an important service or product that ultimately serves large consumer markets. The primary consumers served by SMEs will be drawn from ‘Base of the Pyramid’ markets. In order of size key markets representing massive demand and unmet supply are the following:
• Food
• Energy
• Housing
• Transport
• Health
• Information and communication technologies
• Water
SDG intends to scale up geographically by investing in 12 banks across 12 countries in East, West and Southern Africa over 4 years. After 10 years, these 12 banks will have consolidated total assets of US$8.6 billion, profit after tax of US$287 million and US$3.8 billion SME loans disbursed.
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 | 141 weeks ago Peter Hinton submitted this idea. |
