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A general consensus has emerged around the key role that small and medium enterprises (SMEs) can have in reducing poverty and achieving the MDGs in African countries. In order to make use of their potential, SMEs need increased access to bank credit. African SMEs historically lack access to finance, and this is likely to be exacerbated by the effects of the financial and economic crisis on the continent.
There is a strong economic case for scaling up support for African SMEs. Development assistance for SMEs in Africa remains highly fragmented, with several donors and development finance institutions (DFIs) running a number of SME programs in an uncoordinated way. A regionalization of support and a pooling of resources are required to avoid duplications and inefficiencies, in the spirit of the Paris Declaration and the Accra Agenda for Action.
In particular, the provision of guarantees complemented by development of bank's capacity to engage in SME lending seems to be one of the most effective policy instruments for easing the access to credit for SMEs. The Africa Commission in 2009 called for the establishment of an African Guarantee Fund (AGF) for SMEs. The AfDB, the Danish Government (Danida) and the Spanish Government (AECID) are currently implementing this initiative. The AGF will be a permanent regional conduit for channeling guarantees and technical assistance to financial institutions in Africa with the objective of generating enhanced growth in the SME sector, thereby creating increased employment opportunities in the economy, particularly for the youth.
The AGF is set up as a company limited by shares under the business law of Mauritius. From the out set, a branch will be established in Nairobi, Kenya, from where the staff of the company will conduct the business. A second branch is likely to be set up in a West African francophone country within a few years. AGF will operate as a non bank financial institution with a Board of Directors responsible for the overall management and a Chief Executive Officer heading the operations.
Areas of Focus / Sub-Sectors
The AGF will gradually be able to provide guarantees to financial institutions in all African countries. The guarantees and the associated capacity development activities are meant to specifically stimulate lending to SMEs, whereby the definition of SMEs will largely be left to the client financial institutions.
All formal African SMEs regardless of sector, industry, location, etc. may benefit from loans backed by AGF guarantees. The intermediate target group will be financial institutions that wish to engage in, or expand their lending to African SMEs.
Indicative Timeframe and Proposed Activities and Outcomes
AGF will begin its operations in the second half of 2011, based on a guarantee capital of USD 50 million already approved by the three founding shareholders (Denmark, Spain and the African Development Bank). The AGF will be a permanent regional conduit for channeling guarantees and technical assistance to financial institutions in Africa with the objective of generating enhanced growth in the SME sector, thereby creating increased employment opportunities in the economy, particularly for the youth.
The AGF will provide (i) loan portfolio guarantees to PLIs, (ii) financial guarantees to PLIs, (iii) capacity development support for PLIs, and (iv) capacity development support for SMEs. Through the supply of these products and services, the AGF will help improve access to credit for SMEs as they start and grow their businesses. It will also contribute to address the issue of limited technical capacity of both PLIs and SMEs.
The AGF will mobilize substantial financial resources for African SMEs thus contributing to private sector development, job creation and ultimately poverty reduction. It will provide countercyclical support to financial institutions through easing access to liquidity and strengthening their capacity to create credit.
It will also provide capacity development support for both PLIs and SMEs thus increasing productivity and competitiveness. The AGF will finally contribute to increasing aid effectiveness in the context of shrinking development support for SMEs through channeling financial assistance into a regional conduit.
Proposed Administration and Governance Structure
As mentioned above, the AGF is a company limited by shares. The company is governed by a Board of Directors overseeing the operations of the company. These will be headed by a CEO to whom the staff of the AGF will report. The AGF will operate its guarantee business in house while the capacity development support will be outsourced to recognized external providers.
The present share capital of the AGF is USD 50 million. Over the coming 3 to 5 years, the capital is scheduled to increase to USD 300 million. Additional capital is sought from bilateral donors as well as from DFIs. Grant resources for the capacity development trust being established in association with the AGF are also sought, to boost the USD 2.5 million already committed by Danida for this purpose.
Denmark and Spain are founding shareholders together with the Bank. Two European DFIs have expressed a concrete interest in joining the AGF as shareholders, while some donors and DFIs have shown preliminary interest.
Source: African Development Bank Group
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