Access to Finance in West Africa by CARANA Corporation

ACCESS TO FINANCE IN WEST AFRICA Lessons Learned from the USAID West Africa Trade Hub April 2013

April 2013 This document was produced for review by the United States Agency for International Development and was prepared by Amanda Fernández, Senior Manager of CARANA Corporation, and Peter White, Consultant to the USAID West Africa Trade Hub. Disclaimer The authors’ views expressed in this document do not necessarily reflect the view of the United States Agency for International Development. Acknowledgements The authors wish to express their gratitude to the numerous individuals at the companies and financial institutions who kindly participated in the background interviews for the study. This report could not have been produced without the able assistance of members of the USAID West Africa Trade Hub staff and of the Financial Facilitators for the Access to Finance pilot program, including: Jean-Guy Biley, Roger Brou, Stephanie Diakité, Greg Dobbels, Craig Duncan and Judson Welsh.

2 | Access to Finance in West Africa

Table of Contents Main Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Section 1 | Evolution of the West African Banking Sector. . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2 | The West Africa Trade Hub’s Approach to Access to Finance. . . . . . . . . . 13 Section 3 | The USAID Trade Hub’s Revised A2F Approach (2009 – Present). . . . . . . 16 Section 4 | Performance-Based Contract Methodology. . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 5 | Guarantee Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 6 | Lessons Learned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Lessons Learned Summary Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

West Africa Trade Hub| 3

Main Acronyms and Abbreviations A2F �� Access to Finance

GSA �� Global Shea Alliance

ACA �� African Cashew Alliance

IESC �� International Executive Services

ADB �� African Development Bank

IFC �� International Finance Corporation

AFD �� Agence Française de Développement

MCP �� Macedonia Competitiveness Project

AGOA �� African Growth and Opportunity Act

MFW4A �� Making Finance Work For Africa

AIMS �� African Investors Management Services

MOU �� Memorandum of Understanding

ARC �� AGOA Research Center

MT �� Metric Tons

BDS �� Business Development Services

NCCFS �� Nigerian Cashew Cluster Finance Scheme

BEAM �� Business Environment for Agile Markets (USAID) BIA �� Banque Internationale pour l’Afrique au Togo BMCE �� Banque Marocaine du Commerce Extérieur BOA �� Bank of Africa BOAD �� Banque Ouest Africaine de Développement

NEXIM �� Nigeria Export Import Bank NGO �� Non-Government Organization OECD �� Organization for Economic Cooperation and Development PBC �� Performance-based Contracts PN �� Productive Network PPP �� Public Private Partnership

CFS �� Conseils, Finances & Services

SME �� Small and Medium-sized Enterprise

DANIDA �� Denmark Development Corporation

SSA �� Sub-Saharan Africa

DCA �� Development Credit Authority (USAID)

Trade Hub �� USAID West Africa Trade Hub

DFI �� Development Financial Institution

UEMOA �� Union Economique et Monétaire Ouest Africain

EBID �� ECOWAS Bank for Investment and Development

US �� United States of America

ECOWAS �� Economic Community of West African States

USAID �� United States Agency for International Development

ERC �� Export Ready Company

$ �� United States Dollar

FF �� Financial Facilitator FI �� Financial Institution

4 | Access to Finance in West Africa

Executive Summary

Access to finance (A2F) is a major challenge for West Africa’s small and medium-sized enterprises (SME). As part of its export development mandate, the USAID West Africa Trade Hub1 (Trade Hub) was tasked with helping “export-ready companies” (ERCs, most of which are SMEs) to increase their capacity to export and take advantage of international market demand and preferential trade agreements, such as the African Growth and Opportunity Act, or AGOA2. Since its inception in 2003, the Trade Hub’s approach to export development has been to provide ERCs with a “wraparound” package of services; transactions which, over time, lead to transformational change of sectors, institutions and economies. These services include connecting ERCs with foreign markets and buyers, assisting ERCs to better understand international trade rules and agreements, and providing other forms of technical assistance, such as product quality, design, production, distribution and financing. As the Trade Hub’s export development work evolved and expanded, financing for its SME clients remained an elusive target. Over time it became clear that the financing of ERCs would need to be elevated to a frontline activity. This realization culminated in the Trade Hub’s launching in 2009 a new Access to Finance strategy, introducing a model of financial facilitation that had achieved significant results in other parts of the world, also with USAID resources. The

Trade Hub’s new Access to Finance strategy set out to prove a set of hypotheses, namely that:

• Banks and financial institutions would expand

lending to SMEs, in particular agricultural SMEs, if provided the right mix of support and technical assistance

• High quality financial business development servic-

es (BDS) were a key, missing piece in loosening the grip of the financial sector on financing resources for SMEs

• BDS providers could be enticed to expand their

services to SMEs, and could do so profitably and in a sustainable manner (no longer requiring USAID subsidy)

The new A2F strategy was predicated on expanding and deepening relationships with multiple financial sector players, and instituting Performance Based Contracts (PBC) with financial facilitators (FF), thereby introducing innovative approaches to motivate the financial system to provide financing to Trade Hub clients and targeted sectors. Today, three years later and coinciding with the launch of a new USAID Trade Hub project for West Africa, USAID’s West Africa Mission asked CARANA Corporation (implementer of the USAID Trade Hub) to

1 | From its base in Accra, the West Africa Trade Hub helps 21 countries in the region become more competitive by improving business environments, supporting SME firms to export and reducing intra-regional barriers to trade. 2 | The African Growth and Opportunity Act, or AGOA was approved by the U.S. Congress in May 2000. It provides preferential treatment to countries in Sub-Saharan Africa (SSA) to access the U.S. market.

West Africa Trade Hub| 5

reflect on the above hypotheses and whether these were proven correct, to discuss what the Trade Hub had learned over the years in its Access to Finance work, and to reflect on how the Trade Hub can leverage or support guarantee funds in the region (namely, USAID’s Development Credit Authority, or DCA). This report is the product of this reflection process. In November and December of 2012, the CARANA study team researched the Trade Hub’s files, spoke with Trade Hub management and staff, held extensive discussions with the financial facilitators (FF), met with dozens of West African and international financial institutions and, most importantly, held in-depth interviews with fifteen Trade Hub, ERC clients. The study’s main findings are summarized below:

• The Trade Hub’s original design underestimated the importance of financing as a precursor for expanding ERC exports. Eventual recognition led to the development of a revised A2F strategy, launched in 2009.

• The Trade Hub’s revised A2F strategy has mobi-

lized a network of financial institutions throughout West Africa to profitably lend to SMEs, in particular to agricultural SMEs. In many cases, the Trade Hub-facilitated loans were the first agricultural, SME loans that these financial institutions had lent to the targeted sectors over the past decade.

• Through its revised strategy, the Trade Hub suc-

ceeded in unlocking significant amounts of financing from financial institutions to the Trade Hub’s SME clients. Since its inception, the Trade Hub has facilitated a total of $49.8 million in financing to thirty-eight (38) ERCs, $47.6 million of which took place between 2009 - 2012. West Africa’s cashew and shea sectors benefitted significantly from this financing.

• As part of assisting ERCs’ access to new financing, the USAID Trade Hub helped several ERC clients and their lenders to restructure $7.1 million in debt, a prerequisite for SMEs with troubled credit histories in order to obtain new loans.

• Interest rates charged on the loans to Trade Hub

clients ranged between 9-12% APR in Francophone West Africa (average APR is 10.3%), and 11.5 – 32% in Cameroon, Ghana and Nigeria (with an average APR of 20%). Loans remain short-term, with the average loan term of 20 months. Real interest rates vary among the countries served with PBC

3 | The real interest rate = nominal interest – inflation.

6 | Access to Finance in West Africa

loans, ranging from 10% per annum among Francophone countries, 15% in Nigeria, and a 21.31% real interest rate in Ghana.3

• Initial findings reveal that over time and upon suc-

cessful repayment of loans, loan sizes to SMEs increase, as loans are consolidated into fewer FIs, and loans are made for purposes other than working capital. Also over time, interest rates tend to decrease, as SMEs improve their ability to negotiate with FIs.

• An expansion of finance to multiple actors in key

sectors (i.e. cashews, shea, apparel) can stimulate the development of new processing clusters, which will have an important development impact on the broader economy.

• Women in particular have benefitted from USAID’s

A2F work; SME clients benefitting from the Trade Hub’s most recent A2F work currently employ 5,455 full and part-time workers, 83% of whom are women. Employment figures in key Trade Hub sectors are on the rise as SME firms access more capital to increase production capacity.

• The Trade Hub was successful in creating a market

of highly qualified financial facilitators that continue to serve the SME markets in the Trade Hub’s target sectors (shea, cashews, specialty foods, textiles and apparel, handcrafts/home décor). These FFs were motivated to shift their focus from their traditional client base of medium and large enterprises, and deployed their technical skills, industry connections and market savvy (some with support from industry alliances in the cashew and shea sectors) to make finance available to SME ERCs from premier commercial banks, bilateral donors, multilateral Development Financial Institutions (DFIs) and social investment funds.

• As USAID subsidy support to the FF has been

phased out, fees for continued technical assistance to ERCs are in some cases being borne by the ERCs themselves. USAID’s challenge moving forward is to broaden and deepen financial facilitation to reach many more ERCs of different sizes and sectors.

• Bank training was an important activity for the Trade Hub’s A2F work. Initially, bank training content was generalized, addressing global issues of financing non-traditional sectors, trade finance and new loan products. ERCs and banks attended, at times

jointly, these training sessions. Although this type of training helped prepare the groundwork for lending, it has limited impact on the actual extension of loans.

• Bank and FI training evolved to be more demand-

driven and sector-specific. Bank training sessions were immediately followed by the presentation of loan applications, which the Financial Facilitators helped prepare. Interest among bankers in these sectors increased, and loans ensued.

• Performance indicators for the Trade Hub’s A2F

work were not initially well designed or implemented. Data collected in early years did not capture the full breadth of the Trade Hub’s A2F work. Inadequate metrics did not fairly reveal the highly skilled deal structuring, critical investment referrals or bad-debt restructuring. The lack of good data undermined the perception of the Trade Hub’s A2F successes. Data collection and tracking were significantly improved in 2012.

• New financial players and instruments are increas-

ing the availability of financing to West African ERCs. Social investment funds have played an important role in stimulating bank lending to agriculture, as these seek investment opportunities which offer both commercial and social returns. Some well-established commercial banks are dedicating additional resources to supporting SMEs.

• Several guarantee funds operate in West Africa,

providing selected banks with risk mitigating tools for new client segments, particularly micro-enterprises and SMEs. USAID operates DCAs in multiple West African countries, targeting agriculture, education, health, housing, energy and women-led enterprises.

• DCAs encourage bank lending mainly to micro-en-

terprises, a distinctly different market segment than the SME ERC segment which is the Trade Hub’s core client base. The future Trade Hub project must differentiate between these two clientele segments and find new ways to help USAID’s DCA partner banks increase guarantee fund utilization rates.

West Africa Trade Hub| 7

Section 1 | Evolution of the West African Banking Sector Emergence of Pan-African Banking Since the early 2000’s, a fundamental and positive change has swept across West Africa’s4 banking landscape. Nowhere is the evolution of this sector more apparent than in the ownership of its banks. Prior to bank liberalizations in the 1990’s, West African banks were typically state-controlled or Europeanowned. In Francophone Africa, names like Société Générale, Belgolaise, Crédit Lyonnais and Citibank were ubiquitous. National governments controlled or had influencing interests especially in “development” and “agriculture” banks. Banking and accounting systems held over from pre-independence, particularly in the Francophone countries, translated into one of the most opaque and conservative financing environments in the world. Today, West Africa’s financing space looks much different. Bank failures in the 1980s and 1990s in the region and ensuing stricter regulatory requirements encouraged banks to reinforce their lending criteria. The dominance of western banks has dipped as African-owned bank holding companies have spread from organic expansion (e.g., Ecobank), consolidation (e.g., Nigerian bank consolidation of 2004-2005) and acquisition of non-African owned banks by African banks (e.g., Morocco’s Attijariwafa Banking taking over IUBank Holdings in Côte d’Ivoire and Senegal). Preoccupied by recent financial crises and Euro zone issues, European banks have refocused their attention on more familiar and less risky home markets. Francophone Africa exemplifies this transition. In 2000, an average of 42.6%5 of local shareholdings in banks was held by national governments. By 2010 this stake had fallen to 31.6%. Meanwhile, private shareholdings in local banks rose over the same

Emergence of Pan-African Banking Numbered among the largest “indigenous” banking groups in West Africa today are: Ecobank (with subsidiaries in 17 West African countries); Bank of Africa (controlled by Morocco’s Banque Marocaine du Commerce Extérieur, with subsidiaries in 8 West African countries); Morocco-based Attijariwafa (with subsidiaries in 4 West African countries) and Nigeria’s United Bank for Africa (with subsidiaries in 11 West African countries). Standard Bank of South Africa has moved forcefully into Nigeria and Ghana. A plethora of Nigerian banks, including Access, Diamond, Fidelity, Guaranty and Zenith, have opened subsidiaries or branches in West Africa.

period from 57.4% to 68.4%. Market shares held by African banks rose over the same period. The days of “Pan-African banking” dawned as a cadre of “indigenous” African banks took the African banking market by storm (see above box). The combination of emerging Pan-African banks and well-established traditional banks has given rise to concerns over a “new concentration” of Africa’s banking community6. On the other hand - and perhaps more relevant from a development perspective - the larger banks have now attained the scale, capital base

4 | The Trade Hub covers the following countries in West Africa: Benin, Burkina Faso, Cameroon, Cape Verde, Chad, Côte d’Ivoire, Equatorial Guinea, Gabon, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Sao Tome & Principe, Senegal, Sierra Leone, The Gambia and Togo. 5 | Léon, Florian. 2012. Financial Sector Competition in West African Economic and Monetary Union. CERDI, Clermont Ferrand, France. 6 | In Union Economique et Monitaire Ouest Africain (UEMOA), five bank holding groups account for about 60% of total bank assets but constitute only one-quarter of the number of banks (see Léon).

8 | Access to Finance in West Africa

and staff resources to penetrate local and distant markets, innovate new services and instruments, reduce transaction costs and deepen their client base. This new client base includes SMEs which have joined banks’ traditional clientele of government borrowers7, larger corporations and large trading companies. Small and Medium-sized Enterprise Prospects Never before have micro-enterprises and SMEs in West Africa had so many FIs, financial services and products to choose from. That said, SMEs still remain “under-banked” (see definition of SMEs in box on next page). As mentioned, the Trade Hub and this report focus on SMEs. The Trade Hub’s target sectors are at

this time agribusiness (with a focus on cashew, shea and specialty foods), handcrafts/home décor and textiles/apparel. Banks and FIs offer a wide range of financing to their customers. Broadly speaking, these can be classified8 as “Finance for Markets” (encompassing trade finance, transaction and payment services, deposittaking and short term credit services) and “Finance for Growth” (for medium or long-term investments, and centering on equity, mezzanine capital and debt instruments). Transitioning from Finance for Markets to Finance for Growth presents a major hurdle for companies in low-income regions, including West Africa.

Table 1: Comparison: Percentage of Commercial Bank Lending to Agriculture 50

Agriculture Sector's Contribution to GDP

a rk in

ria ge

Fa so

a ni Ta n

a bi m Za

bi am M

Ke ny a

e qu

ia op hi Et

Commercial Bank Lending to Agriculture

7 | In some cases, government treasury bills and borrowings for large projects can represent 50% to 70% of a commercial bank’s loan portfolio. 8 | Beck, T., Maimbo, M. M., Faye, I., and Triki, T. 2010. Financing Africa – Through the Crisis and Beyond. Making Finance Work for Africa. Washington, DC.

West Africa Trade Hub| 9

Definition of SMEs The SME market segment consists of a wide array of enterprises of various shapes, sizes and levels of sophistication. At the lower end of the range, SMEs can be slightly larger than micro-enterprises, while at the upper end they are often seen locally as “big business”. This report adopts, with some flexibility, the common definition of SMEs as registered businesses with between 10 and 300 employees and with total annual sales of between $100,000 and $15 million. Micro-enterprises are considered to be those with annual sales below $100,000 and fewer than 10 employees. “Mesofinance” is a broader term which is increasingly in use to describe financial services being provided to users which are larger than micro-enterprises but smaller than corporate entities. In the context of West Africa, mesofinance would embody a loan of anywhere from $10,000 to $1,000,000.

In West Africa, only about 20% of SMEs have ever obtained financing from any FI9. Moreover, in most cases, this financing is in the form of seasonal or short-term loans. While such loans are critical to an SME’s operations, they do not address a company’s fundamental need for capital expenditure and capacity building financing. This situation pertains particularly to agribusiness, which is inherently risky, given weather, commodity pricing and pest and disease challenges. Generally speaking, less than 5% of commercial banks’ loans in West Africa, or SSA-wide, support agriculture (see Table 1 before for country comparison). When they do, these loans are predominately short-term or fund less risky processing and downstream activities. Interestingly, of the 80% of SMEs which report not having received any loans from FIs, only 23%10 advise that they have actually applied for loans. Several factors contribute to this poor record, all confirmed through research for this report. SMEs are often simply unaware of the range of financing available. They

view the banks’ application procedures and culture to be forbidding. Collateral11 requirements are often deemed onerous, time consuming and expensive to perfect. In many cases (Ghana and Nigeria, particularly) interest rates are seen as excessive (see Table 2, next page). Notwithstanding the number of adults who hold bank accounts in SSA has steadily risen over the past ten years from 6 per 1,000 adults (2000) to 65 (2005) to 242 (2010)12. While encouraging, there is much room to grow both in terms of the number of account holders and the percentage of SMEs that benefit from formal credit. However, many potential SME borrowers in West Africa are often unprepared to apply for or meet the borrowing criteria of bank loans (i.e., not considered “bankable”). The company’s financial statements may not accurately reflect its true financial position – or even be available. Corporate governance, transparency and environmental compliance may need improvement, or the owners are not interested in sharing control of their company with an outside lender or shareholder. Interest Rate Environment Among SMEs, in particular agricultural SMEs in low income countries, access to finance is generally low and borrowing rates are typically high. West Africa is no exception. The Lessons Learned study reconfirmed this empirical observation, albeit based on a very small sample consisting of the Trade Hub’s Performance Based Contract clients. Overall, it was observed that clients representing the six countries (Burkina Faso, Cameroon, Ghana, Mali, Nigeria, and Togo) incurred an average real interest rate of 11% per annum (2010). As shown in the graphic on the next page, Ghana topped the real interest rate scale at 21.3% per annum. Clients in the four Francophone countries incurred an average real interest rate of 10% per annum. In Table 2, on the next page, the negative interest rate observed for Ethiopia suggests that farmers there benefitted from some form of subsidized financing. These findings substantiate claims of agribusiness SMEs, who complain of being straddled with high costs of financing.

9 | “Microfinance in Africa: State-of-the-Sector Report, “Closing the Gap”. CARE, April 2011 10 | World Bank Enterprise Surveys. Washington, DC. 11 | The term “collateral” generally refers to readily-marketable assets like real estate, commodity inventory, cash deposits or financial securities. The term “security” is often used to denote collateral which supports longer-term project finance lending. 12 | The Little Data Book of Financial Development, World Bank 2013.

10 | Access to Finance in West Africa

Table 2: Real Interest Rates on Lending for Agriculture through Commercial Banks

30%

20%

10%

op ia hi

a kin Bu r

Fa so

ia za n Ta n

ya Ke n

m bi a

ria ge Ni

oz am bi q

-10%

ha n

-20%

-30% New Financial Services and Service Providers Fortunately for SMEs, the Trade Hub’s client base, West African banks have over the past several years begun to recognize the importance and growth prospects of SMEs13 and to offer a new generation of financing services and instruments. A few examples include:

• Mobile and e-Banking. About five in ten West

Africans have access to a mobile phone and are increasingly using new communication technologies to access commodity prices, transfer money and draw down loan balances.

• Money transfer services. International and local

asset-based financing tools14 are making headway into the SME financing mix and helping to address lenders’ requirements that borrowers provide collateral.

• Lease Financing. While well suited for SMEs’

acquisition of equipment and increasingly available, lease financing remains under-exploited in West Africa. Leasing offers good business opportunities for FIs and companies, alike.

• Insurance. Property insurance availability is ex-

panding as formal lenders increasingly require fire and theft insurance. Weather-indexed crop insurance is making inroads into West Africa’s more mature markets15.

money transfer services are now widely available in most urban and even rural areas. Commercial banks in major cities offer Automated Teller Machines, which did not exist a decade ago.Warehouse Receipt Funding (WRF). WRF and other

13 | In interviews, Ecobank Ghana mentioned that 60% of its SME clients graduate over time to its corporate bank. 14 | Warrantage, a simplified and localized form of WRF applicable to SMEs, requires small warehouses to be secured by two padlocks – one held by the borrower and the second by the lender. 15 | Ghana’s broad-based micro and SME lender, Opportunity International Savings and Loan (OISL), offers micro-insurance, including weather-indexed crop insurance, to its clients. Santam Insurance of South Africa supported Stanbic-Ghana’s Masara corn project in Tamale with weather-indexed crop insurance.

West Africa Trade Hub| 11

The banking sector has been emboldened by West Africa’s soaring economic growth rates (averaging 6-7 %16 p.a. in recent years) and improved policy and regulatory environment17. Commercial banks have expanded and still account for 80 to 90% of all formal, local lending to West Africa’s private sector. New fi-

nancial development service providers have emerged and include public, private, local and international entities. A sampling of financial entities operating in West Africa and serving the SME sector, aside from commercial banks, is illustrated in the table below.

Table 3: West African Financial Services Providers Government Institutions State banks, agencies and programs designed to provide short- and especially longer-term equity and loans to qualifying SMEs. Examples

Ghana Venture Capital Fund, SME Revitalization and Governance Project (Côte d’Ivoire), Nigeria National Economic Fund for SMEs (NERFUND)

Development Finance Institutions Donor-backed financial institutions providing development-oriented loans, equity and risk guarantees to private sector companies, including SMEs. Multilateral

AfDB, EIB, Gari, IFC

Bilateral

USAID OPIC, DEG, Proparco, FMO

Large Equity Funds Investment schemes managed by investment specialists and used to make equity and quasi-equity investments, typically in larger individual companies with potential for high financial returns. Sovereign

Kuwait Investment Authority, Temasek (Singapore)

Private

Helios, Emerging Markets Partnership, Africa Agriculture Funds, Zephyr

Savings & Loans Associations (S&Ls) Associations specializing in deposit taking and offering mortgages and other loans. Often community based and mutually held, depositors and borrowers are members with the ability, theoretically, to influence policy. Includes a wide array of donor and private, locally and internationally-led associations, including CARE Village Savings and Loan, Opportunity Savings and Loan, Ghana Association of Savings and Loans Companies. Social Investment Funds Also known as impact or philanthropic funds, provide venture-capital type funding in form of equity, quasi-equity and debt often to SMEs for investments which combine financial, developmental and social returns. Multi/bilateral

USAID-DCA, IFC SME Ventures, AfDB African Guarantee Fund

Private

Root, Acumen, responsAbility, Grassroots Business Fund, EB-Accion

Savings Societies Lending and savings groups (e.g., village banks, solidarity groups, susus in Ghana) manage small loan funds and mitigate risk by joining together and collecting contributions from members to on-lend on a rotating basis to members. 16 | ECOWAS/Price Waterhouse Cooper (April 2011); CIA – the World Factbook (December 2012). 17 | For example, in the two years following the 2004/2005 consolidation, Nigeria’s total bank assets nearly doubled from $28.3 billion to $50 billion.

12 | Access to Finance in West Africa

Section 2 – The West Africa Trade Hub’s Approach to Access to Finance USAID Trade Hub’s Market Niche

The Trade Hub’s target market consists mainly of West African SMEs which are already export ready companies or are aspiring ERCs.18 Many Trade Hubsupported ERCs are recent start-ups and some are women-owned. They are characteristically undercapitalized, new to financial markets and in need of good technical and financing advice. The ERCs, depending on their size and sophistication need a combination of Finance for Markets (short-term) and Finance for Growth (equity, longer-term loans). Trade Hub-supported SMEs also report needing “time to grow”, including lengthy grace periods and backended repayment schedules (often embodied in “patient capital” financing). As part of its revised A2F

strategy launched in 2009, the Trade Hub targeted loans ranging from $100,000 to $1 million (i.e., above the micro-enterprise threshold). Although it has conducted multiple analyses of the sectors it supports and has provided individual and group technical assistance and training to hundreds of ERCs, the Trade Hub has not undertaken a comprehensive segmentation of ERC financial services demand. It has also not formally conducted an in depth analysis of the most resourceful and appropriate lenders for its ERC client base. It has, rather, depended on the astute market knowledge of its staff and FFs to identify the most suitable FIs as partners.

18 | In this context, “export ready” means those companies which are competitive for export sales as well as for domestic and intraregional sales.

West Africa Trade Hub| 13

SME entrepreneurs find it difficult to navigate through the myriad and often confusing financial offers proposed by traditional FIs and, increasingly, social investment funds. At the same time, willing lenders often complain that it is hard to identify potential SME borrowers. In the past, this “missing middle” of SMEs has been left to its own devices to find financing. It is into this arena that the Trade Hub’s Access to Finance team has stepped to help both the lender and borrower mobilize financing. The need for financial facilitation between the two actors has never been greater. The Trade Hub has emphasized supporting innovative “first-movers” and market leader SMEs, actors which play a catalytic role in their market segments. These companies’ initial successes encourage other investors and lenders to enter the market, leading to a cluster of investments, eventually spawning a new industry with employment, income generation and export benefits. In other words, the Trade Hub supports transactions with individual ERCs that lead to transformational impact. Early Assistance to ERCs In 2003 and 2004, the broader focus of the Trade Hub was to promote AGOA export development through expanded market linkages, and enabling regional economic integration policy. At the same time and part of its export development mandate, the Trade Hub staff spent time understanding the region’s prime value chains, export barriers (including access to finance) and potential buyers. As the Trade Hub’s export development work ramped up and market linkages were forged between ERCs and international buyers, the Trade Hub found that its ERC clients often could not meet the orders it had helped facilitate due to inadequate financing. To respond to this export development challenge, the Trade Hub allocated in late 2004 resources to provide targeted, demand-driven, one-on-one financial services support to a few select ERCs. This was spearheaded by an Accra-based banking and investment expert, who focused exclusively on helping ERCs obtain financing and equity. In 2005, 2006 and 2007, the Trade Hub gained expertise in the targeted export sectors. As demand for financial services TA to ERCs grew, the Trade Hub’s financial services consultant began to give sectorspecific, pre-trade show trainings to dozens of Trade Hub ERCs. Subjects covered included financial management, business planning, pricing/costing and relationship building with financial institutions. ERCs specifically requested the trainings, as they were confronting requirements by international buyers for improved quality standards, larger order sizes and financial reporting. These requirements motivated

14 | Access to Finance in West Africa

some ERCs to get their financial houses in order with a view to attracting bank loans, supplier credits and longer-term asset-based financing. The Trade Hub also conducted training and TA for West African banks and financial institutions to introduce these to the Trade Hub’s priority sectors and clients, in an effort to stimulate finance to SMEs. In spite of the ERC and FI trainings, unlocking finance from FIs to SMEs remained elusive, even among SMEs with purchase orders from international buyers in hand. The few financing deals that moved forward took many months and, in some cases, even years to close. Faced with bank inaction and eager for solutions, international buyers began to resort to providing their own financing to ERCs for working capital and equipment purchases. During this same time, the USAID Trade Hub-supported public-private partnership (PPP) of the African Cashew Alliance (ACA) was growing. ERC members of this Alliance were demanding even more support, both technical and financial. In late 2006, recognizing that limited financing for SMEs was holding ERC customers back in terms of expansion, the Trade Hub and USAID staff developed a concept paper arguing for an expansion of the Trade Hub’s financing work to facilitate pre-export and investment finance for ERCs. USAID’s response was to create a separate A2F pilot project with its own Chief of Party, managed by Enterprise Works and the International Executive Services Corps, but co-located within the West African Trade Hub. This project targeted improving upon commercial banks’ lack of strategy, tailoring financial instruments for SMEs, as well as raising the ability of SMEs to present loan requests. A pilot alliance was formed between USAID and Ecobank, and a new USAID DCA guarantee was designed for Ecobank to support handcraft and home décor ERCs. A new round of training activities for bank staff and ERCs ensued during the 2007 to 2008 period. However, once again, trainings and technical assistance provided to Ecobank staff and Trade Hub-referred ERCs did not result in significant lending to SMEs. During this pilot project, the Trade Hub continued with its own set of demand-driven, financial services training to ERCs in preparation for trade shows and as part of AGOA trainings. The USAID Trade Hub also began to collaborate with FIs on developing specific financial products for the SME marketplace. This effort included developing a multi-million dollar revolving fund with Greylock Capital Management of the US. This facility was to serve as a model to local commercial banks to participate in non-traditional pre-export and revolving financing.

Fund Flows in West Africa and the Role of Mobile Banking Simultaneous to the provision of demand-driven technical assistance and financing to ERC, the Trade Hub and USAID also addressed the Access to Finance issue through a regional policy lens by studying the value of informal trade flows within West Africa. They undertook this effort in an attempt to capture the scale of money moving across borders outside of the formal financial system. Once armed with compelling evidence of the scale of informal, cross-border money flows, the USAID Trade Hub anticipated that it would be in a position to attract the banking sector into this market segment. The Inter-American Dialogue, a Non-Government Organization (NGO), and CARANA conducted on behalf of USAID a review of the fund flows phenomenon. Their study was published in March 2006, titled “West African Financial Flows and Opportunities for People and Small Businesses”19. Among other findings, the study brought to light that an estimated $2 billion dollars in remittances and perhaps as much as $8 billion in settlements for trade and personal purposes flow annually and outside of the formal financial sector across Ghana, Mali, Nigeria and Senegal. In the tense, post-September 11th environment, these flows represented not only a lost market opportunity for West Africa’s FIs and telecommunications companies but also a security risk for governments, given the potential for these funds to be misdirected for illicit purposes (such as narcotics-trafficking and terrorism). It also exposed traders operating along the trade routes to the threat of theft and bodily harm. This was particularly true in the case of women traders.

The Trade Hub quickly recognized the promise of mobile banking in West Africa to transact cross-border trade settlements and money transfers. In 2007 and 2008, it began to push for both domestic and regional policy action to help mobile banking become a reality. The Trade Hub helped lay the foundation for crossborder, multi-currency transactions over the mobile phone network by engaging a wide range of private and public sector stakeholders in Ghana, Nigeria and Senegal, working with UEMOA, providing consultations, discussing legal, regulatory and technological barriers, preparing a cross-border pilot and giving presentations at conferences such as Making Finance Work For Africa and the CGAP Technology Fair. In 2008, the Trade Hub negotiated a Memorandum of Understanding (MOU) with MTN Mobile Money International Development to design a trader-friendly mobile payments product capable of allowing businesses to send and receive funds across borders in West Africa. ECOWAS strongly endorsed the Trade Hub’s activities to accelerate the free flow of capital across the region, thereby accelerating and strengthening regional economic integration. However, national governments, regional bodies and private firms had a host of different ideas on how to operationalize and regulate mobile money products. These different views complicated coordination efforts. Furthermore, legally-mandated thresholds for mobile transactions (even those conducted within a domestic context) were too low to be meaningful in a trade context. These barriers to success were deemed insurmountable. The Trade Hub suspended its groundbreaking work on mobile banking, having successfully stimulated market interest in mobile banking which was taken up by telecommunication companies and FIs.

19 | Orozco, Manuel and Casanova, Ann. 2006. Prepared for USAID.

West Africa Trade Hub| 15

Section 3 – The USAID Trade Hub’s Revised A2F Approach (2009 – present) A New Strategy

The end of one Trade Hub contract and initiation of a second phase of the Trade Hub presented an opportunity for the Trade Hub to again reflect on its A2F work, this time incorporating lessons learned from its prior work in A2F, as well as the findings from an internal evaluation of the A2F pilot managed by Enterprise Works, IESC and involving Ecobank. The Trade Hub concluded that barriers to ERC financing could not be quickly alleviated by engaging a single bank and one guarantee product (e.g., a DCA targeting handcraft ERCs) and with brief, joint trainings involving both ERCs and bankers. In 2009, the Trade Hub documented its analysis of the A2F pilot and the market for SME finance in West Africa in a paper titled “Institutional Analysis - Access to Finance by West African

16 | Access to Finance in West Africa

Export Ready Companies and Regional Traders”. Following the report’s findings, the Trade Hub designed a new strategy to address A2F for ERCs that integrated financial services supply, demand and policy aspects. The new strategy focused on developing strategic partnerships with multiple FIs, designing new bank products and services, and expanding the market of financial business development services (BDS) in the region, a strategy that CARANA had piloted in two other developing country contexts, with some success. The Trade Hub ramped up its A2F staffing, recruiting a West African banker to its permanent staff, thereby expanding its “wrap-around” services strategy” (see box on next page).

Wrap-around Services Since its inception, the West Africa Trade Hub has provided “wrap-around” services to ERCs, where assistance on product development, production, market linkages, AGOA support services and access to finance is provided simultaneously. The strategy is grounded in providing demand-driven technical assistance and key referrals to ERCs introduced by AGOA as well as to walk-ins and other referrals. ERCs frequently visit the Trade Hub, walking between AGOA, Access to Finance and Export Development Team offices to meet with Trade Hub staff and get updates on recent market developments and events. The USAID Trade Hub’s welcoming culture, wide range of services and flat organizational structure encouraged ERCs to “one-stop shop” within the Trade Hub.

In the second phase of its A2F, the Trade Hub also modified its A2F client identification strategy. In prior years the Trade Hub would give A2F support to any ERC client which approached the Trade Hub for financing support. The Trade Hub began to implement a more proactive approach, identifying and approaching “finance-ready” ERCs in close collaboration with industry alliances (e.g., the African Cashew Alliance, or the Global Shea Alliance). The alliances effectively vetted clients via their membership requirements, so that the Trade Hub began to target clients that were more likely to qualify for traditional financing. The

Trade Hub also recognized the need to offer a wider range of financial products, given the different financial and managerial situations of the potential ERC customers. The Trade Hub also revisited how to leverage USAID DCAs in the region, given the pervasive barrier of collateral required to obtain financing, as well as a renewed promotion of DCA use in the wake of a recent US Presidential visit to West Africa20. Financial Services Policy Advocacy As part of its new strategy, the Trade Hub opened up lines of communications with multiple banks and FIs. It developed strategic bank relationships with regional banks, the World Bank’s International Finance Corporation (IFC) and equity funds. The Trade Hub tried to attract private equity firms but was quickly confronted with their lack of interest in the small size of the SME transactions, low potential fee income and “cultural” resistance by SME owners to accept outside shareholders. The Trade Hub began to collaborate more closely with the emerging social investment funds that saw promise in West African SMEs and were looking to expand coverage (e.g., Acumen Fund, Grassroots Business Fund, Root Capital). To address policy barriers to increased access to finance among SMEs, the Trade Hub advocated for an improved and harmonized regulatory environment through the regional private bankers’ initiative, the Private ECOWAS Financial Improvement Board (PEFIB). It also brought together FIs and ERCs via Businessto-Business events as part of regional conferences such as its “Trade Finance 2009 – Untapped Markets Conference” in Dakar. The Trade Hub continued to sponsor workshops and developed guides to support export finance. A sampling of the guides includes:

2009

Invest in West Africa: Sector Guide

Guide targeting potential investors and banks that are new to West Africa.

2009

Access to Finance

A practical guide for aspiring ERCs to understand the requirements for financing exports.

2009

Facilitating Regional Mobile Payment Transactions in West Africa

Comprehensive study on status and prospects for mobile money transfers (MMT) in West Africa.

2010

Transforming Trade Finance

Assistance to especially SMEs, wising to exploit AGOA opportunities.

20 | In July 2009, President Obama made his first visit as President to Sub-Saharan Africa, including Ghana.

West Africa Trade Hub| 17

Trade Hub Referrals During the second phase of its A2F work, the Trade Hub continued its practice of referring ERCs to FIs. While not reported in a systematic fashion, Trade Hub management, A2F and AGOA staff and sector leads have, over the life of the project, provided literally hundreds of referrals of ERCs to banks, grant facilities, social investment funds, donors and NGOs. The Trade Hub staff also regularly provided FIs with company leads. Although originally not considered important enough to track, financial referrals are an important business development service, which many firms charge for.21 As an indication of the scale of this service provision, Trade Hub staff and consultants made, just over the course of the subject ten day study, dozens of referrals, not only to ERCs, but also to banks, funds and micro-finance facilities. These covered potential ERC customers and several sectors, such as cashews, shea and staple foods.

Capital and a variety of regional banks, unlocking millions of dollars in finance for the cashew sector.

• Fritete (handicrafts and home décor22). An ERC

that obtained a referral from the Trade Hub to receive a $230,000 loan from the Grassroots Business Fund (GBF) of the US to process an order from Pier 1. In addition to finance, GBF’s support package included technical assistance (production, communications, financial documentation).

Since the A2F team did not deliberately document its informal referrals, the A2F study cannot reasonably estimate their effectiveness. However, a sampling from the study’s interviews gives a good taste of the scope and financing impact of simple referrals:

• Alpha Samuelson Enterprises (organic honey pro-

cessing). An AGOA client and walk-in to the Trade Hub, the company received AGOA export advice, attended the 2008 Fancy Food Trade Show in New York, received technical support to improve marketing, production capacity and product quality. This firm now supplies Shoprite-Ghana, and was able to raise a small credit line from Ecobank Ghana through a Trade Hub referral.

• Global Mamas (non-profit and fair trade apparel

and home furnishings NGO based in Accra with a network of 627 women entrepreneurs, input suppliers and retail distributors, www.globalmamas.com). The Trade Hub’s wrap-around services helped Global Mamas attend trade shows and attract a $100,000 revolving line of credit from Shared Interest, a UK social investment cooperative.

• Root Capital (US based social investment fund).

A close partnership has evolved over the years with extensive referrals. One example is Togo’s Cajou Espoir, which received long-term funding from Root

21 | Chambers of Commerce, Export Development Agencies and Investment Promotion Agencies in West Africa often charge for this service; USAID Trade Hub does not. 22 | Fritete’s Ghanaian owner, Robert Ellis, expressed during the study’s interviews the excitement of meeting with President and Mrs. Bush during their May 2008 official visit to Ghana during which he explained the opportunities and challenges of exporting to the US.

18 | Access to Finance in West Africa

Section 4 - PerformanceBased Contract Methodology The USAID Trade Hub’s revised A2F strategy includes use of Performance-Based Contracts (PBC) provided by experienced FFs, who are paid upon the completion of milestones relating to financing deals for ERCs. The design of the Trade Hub’s PBCs was in part based on CARANA’s experience implementing with USAID support similar models, referred to as “Financial Platforms”, in Macedonia and Ecuador. The experiences of these two financial platforms and how they have impacted the design of the Trade Hub’s PBC are briefly described below. Global Experiences – Macedonia Competitiveness Project USAID’s Macedonia Competitiveness Project (MCP) was designed by CARANA to assist ERCs in accessing finance through the local financial sector. A World Bank study found that only 9% of companies in Macedonia approached financial institutions to access financing for working capital and investments, compared to 26% of companies in the broader Balkan region. Macedonian firms feared unfavorable loan terms, difficult appraisal procedures and high collateral requirements from local banks. At the same time, Macedonian banks noted a scarcity of bankable financial proposals for their consideration. As a result, Macedonian SMEs were often obliged to fund their operations and expansion projects with limited, internally-generated cash or small loans from friends and family. The USAID MCP sought to improve upon this situation and give a boost to the Macedonian private business community.23 MCP’s response was to address the dysfunctional relationship between banks and ERCs and instill a new and sustainable “financial culture”, by:

• Expanding the community’s awareness of non-

traditional financial instruments, including financial leases, sale-and-leaseback financing, export credit insurance, factoring24 and other asset-based instruments.

• Improving SMEs’ financial management and reporting.

• Developing sound business strategies and bankable financial proposals.

To bridge the communications gap between companies and banks, MCP organized matchmaking and financial education events throughout the country, reaching out to over six hundred (600) SMEs. To improve ERCs’ ability to conduct financial management and planning, MCP created a pool of 15 local FFs who helped ERCs to develop business growth strategies and investment plans to seek an optimum mix of financial solutions. MCP provided training and a mechanism for these FFs to become Certified Management Consultants and specialized workshops on subjects like “mergers and acquisitions” to build FFs’ skill set to facilitate equity investments. MCP helped to organize a broader network and hold educational events for the certified management consultants and FI representatives to share the latest financing trends, products and financing requirements. The FFs were compensated on a success fee basis, calculated based on the nature and size of the investment facilitated upon proof of financing. Fees were capped according to client engagement and size of the transaction. MCP also supported and then spunoff a Business Angel Network NGO, whose role is to facilitate innovative start-ups and their financing. Over a period of three years, the MCP helped 159 ERCs obtain $78 million in financing, contributing to total investments of $118.3 million, creating 1,622 jobs and resulting in over $58 million in exports. Macedonian banks were convinced of the value of the

23 | Case Study, USAID Macedonia Competitiveness Project, May 2012. 24 | MCP worked closely with the Macedonia Bank for Development, a wholly-government owned institution serving to promote exports through providing credits and other support services primarily to SMEs. It is estimated that over 30 Macedonian companies have used forfeiting to access new markets and thereby generating at least $5 million in incremental sales.

West Africa Trade Hub| 19

project’s Financial Facilitators, and many began to hire these directly, substituting private resources for the initial USAID subsidy to these. The certified FFs and their network continue to play a crucial role in the development of Macedonia’s SMEs. Global Experiences - Ecuador’s Productive Network II Project CARANA piloted the Financial Platform concept in Ecuador as part of USAID’s Productive Network II Project (PNII). PNII is a three-year project whose goal was to build the capacity of regional actors to promote overall competitiveness and inclusive economic growth. Unlike in Macedonia, PNII’s A2F work was a relatively minor sub-set of the project’s overall sector support component, targeting tourism and agribusiness. Ecuadorean growth-oriented companies had similar perceptions as did Macedonian companies with regard to interacting with commercial banks. The private sector considered Ecuadorean banks to be overly risk-averse, especially with regard to extending loans of $50,000 and above, which were PNII’s targeted lending range. The banks were seen to offer unfavorable loan terms and conditions, including high collateral requirements. However, once again, from the banks’ perspective, there were not enough “good deals” for their serious consideration. PNII’s hired two FFs on PBCs. The FFs in Ecuador would fulfill a function similar to their counterparts in Macedonia; i.e., to provide management and financial support. This support would enable the ERCs to submit more convincing loan applications to banks and other FIs. The core of the Ecuador Financial Platform was, given its limited resources, less about creating a network of FIs but more about testing the hypothesis that FFs working under PBCs could effectively unlock financing from FIs. The two FFs began their work by reviewing the PNII’s existing agricultural and tourism partner companies and others referred to the project via PNII’s regional economic development agency partners. FFs found no “finance-ready” partners from PNII’s existing portfolio. Thus, they drew upon their own network of contacts and eventually identified a half-dozen leads. The Ecuadorian PBC model required supported SME firms to bear 50% of the FFs’ success fee once a FI had extended the loan. FFs reported that this requirement discouraged interest among many SMEs, given the potential size of the deals and, therefore, success fees. Although the Ecuador financial platform pilot coincided with a period of record-high, global commodity

prices, the country was rife with political and economic instability. Constantly changing tax, labor and investment laws, combined with an adversarial relationship between the government and private sector led many smaller companies to forgo their investments. Flat economic growth and historically low levels of investment ensued.25 Halfway through the pilot, budget cuts to the USAID/ Ecuador mission and a shift in scope to move PNII away from economic growth and towards environmental protection forced the pilot’s closure. Although other investments were in the pipeline, budget cuts prevented co-financing of the FFs’ success fees. FFs were asked to close the pending finance deals in the shortest period possible. Given resource and timing constraints, Ecuador’s FFs served principally as financial advisors and less as management consultants. Limited budget also reduced possibilities for certification or training of FFs and new product development, as was the case in Macedonia. Notwithstanding, PNII’s two FFs helped two Ecuadorean companies obtain over the course of one year $15 million in new financing for agricultural and tourism expansion. Significantly, as in the case of Macedonia, and speaking to the sustainability of this model following the phase out of the USAID subsidy, one of the lending banks adopted on its own the financial platform concept, hiring FFs after the pilot closed. Global Experiences - West Africa Trade Hub In the late 2000s, the West African business environment was among the most challenging for which CARANA had ever designed a financial facilitation project. On the other hand, the region’s rapid pace of economic growth and emerging appetite by some FIs for new clients and sectors opened a unique opportunity to test a Financial Platform concept. USAID supported the Trade Hub in rolling out a new A2F strategy, and challenged CARANA to prove a set of hypotheses, namely that:

• Banks and financial institutions would expand

lending to SMEs, in particular agricultural SMEs, if provided the right mix of support and technical assistance.

• High quality financial business development servic-

es (BDS) were a key, missing piece in loosening the grip of the financial sector on financing resources for SMEs.

25 | Ecuador’s investment levels in 2009 and 2010 were the second lowest in Latin America, behind Venezuela’s.

20 | Access to Finance in West Africa

• BDS providers could be enticed to expand their

services to SMEs, and could do so profitably and in a sustainable manner (no longer requiring USAID subsidy).

West African ERCs too had a generally negative perception of the banking sector. With a few notable exceptions, West African banks had largely ignored the non-traditional sectors championed by the Trade Hub. Given this contextual environment, the Trade Hub’s financial platform pilot focused on:

• Improving ERCs’ financial management and planning.

• Developing sound business strategies and bankable financing proposals.

• Training banks to understand the Trade Hub’s target sectors and their financing opportunities.

To begin, the Trade Hub conducted an extensive competitive bidding process to select three highly qualified financial facilitators. The project divided up the 21-country region into three zones26 and assigned one FF to each. To start the process of identifying clients, the Trade Hub asked the FFs to evaluate the credit readiness of the Trade Hub’s existing 300-plus ERC client-base. Among these, FFs identified only a dozen or so “finance ready” firms.

on relationship-building with FIs led to several matchmaking events between ERCs and banks. In some cases, the relationships with FIs were formally solidified by USAID signing MOUs with financial institutions (e.g., the ECOWAS Bank for Investment and Development (EBID). The team brought innovative approaches in securing much needed financing on a “wholesale” basis (e.g., the Nigeria Cashew Cluster Finance Scheme) and in so doing creating a financing structure which could be replicated among several end-users. USAID West Africa Trade Hub PBCs’ Successes Between June 2010 and December 2012, the Trade Hub staff and financial facilitators helped twelve, SME ERCs obtain $34.9 million in new financing (see Table 2, below) for the apparel, cashew, shea and specialty foods sectors. These ERCs are located in six countries: Burkina Faso, Cameroon, Ghana, Mali27, Nigeria and Togo.28 The Trade Hub FFs were also instrumental in negotiating debt restructurings for SMEs totaling $7.1 million.

Like their Macedonia and Ecuador counterparts, the Trade Hub’s FFs were compensated by success fees based on three deliverables. The milestones were: (1) development of business plan for the ERCs, (2) submission of loan applications to FIs and (3) first loan disbursements by FIs to ERCs. The fee structure was aligned to loan size and capped per client engagement. The Trade Hub also provided an up-front fee to its FFs to encourage them to refocus their attention away from larger corporate clients to the Trade Hub’s agricultural-focused, SME client base. The Trade Hub incorporated the three FFs into its A2F team structure and began to develop several formal relationships with premier regional FIs. This emphasis 26 | The three zones were: (1) Ghana, Nigeria, Liberia and Cameroon; (2) Burkina Faso, Gambia, Guinea Bissau, Mali, Mauritania and Senegal; and (3) Togo, Benin, Côte d’Ivoire, Gabon, Sao Tome e Principe and Togo. 27 | Two Mali transactions, ATRAFEL and Laham Industrie, have since suspended operations due to internal management issues and Mali’s ongoing armed conflict. Laham, a showcase meat and cereals processing operation, saw substantial follow-on investment. While meat and cereal processing are not WATH’s targeted value chains (and, therefore, were not included in prior reports to USAID) Laham is for the purposes of this report included as a specialty food company and recognized for its high catalytic and employment potential. ATRAFEL is a mango processing company. Both Laham and ATRAFEL received financing from EXIM Bank of India. 28 | As of March 2013, the FFs are assisting a pipeline of six ERCs to obtain financing, expected over the coming three months.

West Africa Trade Hub| 21

Table 4: Companies Supported by the Trade Hub’s Financial Facilitators Company

Country

Sector

ABOD Success

Nigeria

Cashew

643,412

ACET Traders

Nigeria

Cashew

390,789

ATRAFEL

Mali

Specialty Foods

3,250,000

6,290,000

9,540,000

Cajou Espoir

Togo

Cashew

1,928,016

400,000

2,328,016

Cajou Espoir II

Togo

Cashew

2,500,000*

Karikis International

Burkina Faso

Shea

KD Foods Processing

Nigeria

Cashew

Ken Atlantic

Cameroon

Apparel

Laham Industrie

Mali

Specialty Foods

NWCA Cooperative

Cameroon

Specialty Foods

SIKA

Mali

Shea

UCODAL

Mali

Specialty Foods

150,000

WAML

Ghana

Cashew

400,000

Totals

Financing Disbursed

Debt Restructured

Follow up Financing

Total Financing: Contract & Follow up 643,412

600,000

(disbursement pending)

346,750

956,800

1,303,550

600,000 250,000

250,000

2,662,032

15,785,620

18,447,652 (in process)

1,207,968

11,228,967

5,850,000

1,207,968 300,000

450,000 400,000

7,050,000

23,732,420

34,961,387

* Bank approved but not disbursed as of February 28, 2013; not included in total financing disbursed.

In great part due to this firm level support, the Trade Hub was able to prove its first hypothesis, that banks could be motivated to expand lending into new sectors, particularly to agricultural SMEs. A number of bank representatives interviewed for this study mentioned their initial reluctance to enter into lending to SMEs in the agricultural sector due to risk, but how the Trade Hub and its financial facilitators had shown them how these loans could be profitable, and they were now hoping that the Trade Hub would bring them more customers in these same sectors. Since providing loans to an initial SME Trade Hub client, the ECOWAS Bank for Investment and Development created a “cashew desk” to roll out new financing to actors in the cashew sector regionally. Hearing of this development, another regional financial institution covering the Francophone region, the West African

22 | Access to Finance in West Africa

Bank for Development (BOAD), requested a similar agreement. This agreement was signed in July 2012 by USAID/West Africa, and was followed by a Trade Hub and African Cashew Alliance training to BOAD analysts on the cashew value chain in October 2012. These two agreements (EBID and BOAD) have made available a combined total of $28 million in private capital from regional development banks to finance longer-term loans to cashew processing in West Africa. Not to be outdone by its Francophone neighbors, in Nigeria, the Trade Hub financial facilitator brought together a group of banks, cashew processors and the African Cashew Alliance in a shared collateral effort to expand financing to Nigeria’s growing cashew sector, dubbed “the Cashew Cluster Finance Scheme”.

Implementation of the revised A2F strategy also led the Trade Hub to prove its second and third hypotheses, that high-quality financial BDS services were a missing link to expanding finance to SMEs, and that BDS providers could continue to provide services to SME customers in Trade Hub priority sectors following the conclusion of their Performance Based Contracts. Two of the three original financial facilitators completed their services for the Trade Hub, and both continue to serve SME clients independently in the Trade Hub’s targeted sectors. Two financial facilitators charge SME clients for their services, further demonstrating that SMEs in West Africa are capable of absorbing the costs of BDS services when these are proven valuable.

Value of initial loans disbursed under performance based contracts

2.2%

54%

29.9% 13.8%

Cashew $3,362,217

Specialty Foods $6,062,032

Shea $1,554,718

Apparel/Textiles $250,000

Total: $11,228,967

The process of facilitating loans to SME customers also provides insight to lending more broadly to the agricultural SME sector in West Africa, when loans are appropriately structured. One example of a successful set of financing packages is the case of Cajou Espoir of Togo. An Ivorian based financial facilitator firm (Conseils, Finances & Services (CFS) was assigned to support this cashew processing company based in Tchamba, about 375 miles from Lome, quadruple its production, following a request for support from the African Cashew Alliance.29 Cajou Espoir had a production capacity of 300 metric tons (MT) per year of raw cashew nuts, which its 100 employees shelled, peeled and packaged for sale in Togo, Benin, Ghana and Nigeria. CFS worked with Cajou Espoir over a two-year period to raise a combined total of $2.3 million in working capital financing from multiple financial institution partners, and eventually a seven-year project financing loan of $2.5 million. Given reluctance among banks to enter into financing agreements with an “untested” company, CFS originally approached Root Capital as an initial financing partner. CFS was able to use the negotiated Root Capital loan as leverage to engage additional bank partner Ecobank to gather the working capital necessary for one cashew season. At the same time, CFS worked with Cajou Espoir management, original FI partners and the ECOWAS’ Bank for Investment and Development to negotiate the terms for a new loan to upgrade Cajou Espoir’s factory. Upon successful payment of the initial working capital loan, a larger loan was negotiated with the same bank partners, and also the International Bank for Africa of Togo (BIA). Cajou Espoir has already increased its initial processing capacity fivefold, now processing over 1,500 MT of raw cashews per year. It has more than doubled its workforce, now employing over 280 people, of whom 80% are women. Thanks to this experience, EBID has since created a commodity financing desk to expand cashew finance to other parts of West Africa. The Cajou Espoir experience demonstrates a number of findings that are true for all PBC loans facilitated; that that SMEs demand different types of loans for a wide range of purposes. PBC clients have required loans for short-term working capital, raw material procurement, pre-export financing, debt restructuring and longer-term “capacity to export” loans for plant and equipment. Trade Hub FFs assisted bank employees to assess the peculiarities of each non-traditional sector and tailor specific financial instruments to meet the

29 | The African Cashew Alliance is a member-based association spearheaded by the USAID-financed West African Trade Hub (WATH), GIZ and private sector actors, established in 2005 to promote a globally competitive African cashew industry. ACA provides business advisory, consulting services, capacity building training and crucial linkages to its member firms.

West Africa Trade Hub| 23

needs of the ERCs and sectors. These instruments included receivables financing, discount of letter of credit facilities, sector “desks” (e.g., “cashew desk” by EBID), security-sharing arrangements and property risk insurance. This type of complex financial service provision assumes a high level of expertise and ability to deliver technical assistance to both FIs and borrowers. Innovation and flexibility in designing new loan products should be an important aspect of the Trade Hub’s A2F work moving forward. In terms of sequencing, the Cajou Espoir case demonstrates another point made by Trade Hub FFs; that the primary financing hurdle for ERCs is to close their first bank loan. Once done and after the ERCs have demonstrated their repayment capacity, ERCs find it relatively easy to contract follow-on financing, often for higher amounts. In other words, under optimal circumstances and if growth plans are proceeding as planned, loan sizes for agricultural SMEs will increase over time, and some sorts of financing products (such as checking accounts, electronic payments, letters of credit) may be required in perpetuity. This has implications for the type and length of subsidy provided to ERCs by donors and outside groups. Financial business development services for ERCs should be “front-loaded” to assist in the provision of initial loans, and can be phased out over time. The way business development services become a sustainable service therefore, is to first prove that the BDS support is worthwhile, and then begin to shift performance payments to BDS providers away from donors to domestic actors over time (i.e. banks, ERCs themselves or others) a strategy that was successful under the Trade Hub’s A2F work. Regarding loan sizes, in the case of almost all PBC loans made, loans had to be packaged together for SME clients from multiple financial partners, as no one institution wanted to assume all the risk for an SME loan. Over time and following successful repayment of initial loans, lenders sought to increase their share of the loan to the SME client, in some cases requesting an exclusive relationship. With each loan cycle, ERCs improved their ability to negotiate with bank partners, in some cases agreeing to an exclusive relationship with one financial partner in turn for a reduced interest rate. West African banks fund their loan portfolios mainly with short-term deposits and short-term interbank loans30. These funding and risk considerations translate into banks’ extending lower-amount, shorter-term

loans. Loan terms negotiated by financial facilitators ranged widely, from 90 days to 7 years, with an average term of 20 months. As mentioned, Trade Hub FFs have helped three ERCs to restructure $7.1 million in debt (see Table 4). Unless cleaned up, such debt overhang cripples an ERC’s financing options. USAID West Africa initially suggested that refinanced debt not be considered an A2F indicator; however, upon further reflection, the assessment team cannot emphasize enough the importance of resolving ERCs’ “stuck debt” as a part of a path forward for future growth. The ERCs’ $35 million of finance was funded by a broad range of regional partner FIs, including the institutions shown on the map in the opposite page. Annual interest rates charged on the loans to Trade Hub clients ranged between 9-12% APR in Francophone West Africa (average APR is 10.3%), and 11.5 – 32% in Cameroon, Ghana and Nigeria (with an average APR of 20%). Real interest rates vary among the countries served with PBC loans, ranging from 10% per annum among Francophone countries, 15% in Nigeria, and a 21.31% in Ghana. Based on experience to date, the average all-in cost of FFs’ fees as a percentage of the total amount of loans disbursed and loans restructured is 2.9%. This is well within industry norms and appropriately compensates for the complexity of the financings and expertise and time which the FFs had to bring to bear. In terms of development impact, firm level support provided under this A2F work can lead to the creation of new industry clusters, as is currently happening in Benin. Extension resources from USAID made it possible to hire one of the original financial facilitators under a new Performance Based Contract in 2012 and 2013. Given successes in Togo, this FF is seeking to support Benin – a smaller cashew producer – to emerge from the sidelines (behind regional cashew movers Cote d’Ivoire, Nigeria and Ghana) and attract investor and buyer attention. CFS is in advanced discussions with three companies processing cashews under the Benin Gold brand name as well as with a fourth American-owned start-up processor. Within a couple of years, if financing is closed, these four companies are expected to process and export between 15,000 and 20,000 MT of processed cashew and directly employ 1,500 factory workers, most of whom will be women. The employment impact will extend

30 | In some cases central bank legal lending limits and minimum capitalization requirements limit the loan amount which a bank may extend to one client.

24 | Access to Finance in West Africa

USAID Trade hub partner banks

Burkina Faso Root Capital Cassie Populaire

Senegal Root Capital

Mali Bank of Africa BICIM BNDA EXIM Bank-India Root Capital IFC BMS Ecobank-Mali

Nigeria

Ghana UT Bank

Ecobank-Nigeria NEXIM Bank

Togo Root Capital EBID/BIDC Ecobank

further to approximately 10,000 seasonal harvesters of raw cashew nuts, also most of whom are women. The impact on local communities of this new industry, which virtually did not exist three years ago, is amplified by its concentration within a 200 km radius of the city of Parakou in the north of Benin. The employment impact of the Trade Hubâ&#x20AC;&#x2122;s A2F work is also rapid and significant. The PBC financing investments sealed since 2010 alone have contributed to the creation of 5,455 full and part-time jobs of which women occupy 4,57531, or 83% of these jobs. When financing allows enterprises to expand, new employees are immediately sought to increase production. The sectors targeted by the Trade Hub are highly

Cameroon BGFI Afriland First

inclusive of women, so women, and by extension their families, have benefitted greatly by the Trade Hubâ&#x20AC;&#x2122;s expanded financing in recent years. Demand for financial facilitation in West African by ERCs far exceeds supply, although supply of financial facilitation is also higher than was originally anticipated. A thorough analysis of the size of the West African BDS sector was not included in this study. However, interviewers found that every ERC and bank interviewed had hired some sort of business development service, or were aware of the existence of BDS providers. Those interviewed also questioned the capacity of most BDS providers operating in the region, although they were highly complementary about the

31 | Trade Hub conducted client surveys

West Africa Trade Hub| 25

services of the Trade Hub’s A2F team and Financial Facilitators. Motivated by both developmental and fee impact considerations, the Trade Hub FFs have focused on the more mature and larger ERCs and those transactions which could be closed in a relatively short period of time32. In other words, the FFs essentially “creamed” the top of the ERCs currently targeted for Trade Hub support. The resulting disbursed loans ranged from $150,000 to $3,250,000 and averaged $863,000. The current approach leaves room for the next Trade Hub to grow “down-market” to serve newer and smaller ERCs, and to continue to expand the network of financial services providers. In early 2013, a fourth, Togo-based financial facilitator was hired with additional USAID resources to the Trade Hub under the BEAM mechanism, and is facilitating loans in the apparel sector in Benin. A distinction between the USAID Trade Hub and the Macedonia and Ecuador Financial Platforms is the level of the Trade Hub’s partnership with industry alliances, namely the ACA and now GSA, in sealing these financing deals. FFs were able to successfully coalesce and leverage USAID and the Trade Hub’s brand names and experiences, in-house expertise, and ACA partnerships to reduce FIs’ perception of risks in the non-traditional sectors. Multiple FIs interviewed for this assessment, particularly those entering into agricultural loans for the first time in decades, mentioned the value of the quality technical assistance provided to ERCs and its contribution to increasing their comfort levels for lending. The value of these alliances and the Trade Hub’s reputation as a solid technical services provider with strong USAID backing provided indisputable value-addition to the FFs’ work and benefits to their clients.

32 | The full lending cycle can take anywhere from six to eighteen months according to WATH PBC experience and depending on the readiness of the ERCs and their investments for funding.

26 | Access to Finance in West Africa

Section 5 - Guarantee Funds Government and Donor Guarantee Fund Programs Several guarantee fund programs are operating in West Africa directly or in cooperation with commercial banks, development banks and microfinance institutions. Each has its own goals, target sectors, compliance requirements, fee structures and performance criteria. They serve to promote economic development and encourage FIs to expand their lending into new and often higher-risk sectors, often targeting SMEs. Guarantee funds address banks’ requirements for strong security33 from loan applicants by partially guaranteeing the banks’ loans. When a loan backed by a guarantee fund is not fully repaid, the guarantee fund will partially offset the bank’s loss. Guarantee

coverage usually comes at a set-up and maintenance cost to the participating bank. The scope of guarantee funds varies, with some emphasizing regional and others local impact. Some guarantee schemes deposit guarantee funds physically into West African banks, while others, such as the USAID DCA guarantees, are maintained offshore and drawn upon in the case of loan default. A representative sampling of organizations which support SMEs and micro-enterprise financing in West Africa, directly or indirectly, through guarantee funds follows:

African Development Bank (African Guarantee Fund for SMEs)

Multilateral

African Export-Import Bank (AFREXIMBANK)

Multilateral

Agence française de Développement (AFD)

Bi-lateral (France)

Agence Nationale de Promotion, de Garantie et de Financement (ANPGF)

National (Togo)

Agriculture Credit Guarantee Scheme Fund (ACGSF)

National (Nigeria)

DANIDA

Bi-lateral (Denmark)

European Union

Multilateral

Fond Africain de Garantie et de Coopération Economique (FAGACE)

West African States

Fond de Garantie des Investissement Privés en Afrique de l’Ouest (GARI)

PPP

Gates Foundation (support to ACA)

Private

Organization for Economic Cooperation and Development (OECD)

Multilateral

USAID DCA

Bi-lateral (USA)

World Bank and IFC

Multilateral

USAID’s Development Credit Authority USAID’s DCA program occupies an important space on the West African financial landscape. According to DCA’s office in Washington DC, USAID has twenty-two active guarantee programs in West Africa as of November 2012. These are entered into between USAID and commercial banks, savings and loans associations, micro-finance lenders and social

investment funds. Several social investment funds (e.g., Root Capital, Acumen) manage global DCA programs, including West Africa. DCA’s West Africaspecific programs total over $100 million in guarantees. They are located in eight West African countries, including recently-signed programs in Benin, Burkina Faso, Guinea and Niger. Senegal’s DCA program is the largest in terms of the value of DCA guarantees

33 | Banks routinely require up to 150% and above security coverage to account for unpaid interest and reflect the discounted market value of financed assets in liquidation. This is particularly true for project finance.

West Africa Trade Hub| 27

($25.8 million) and number of sub-programs (8). Ghana and Nigeria follow closely behind with ($25.1 million, 4) and ($23.7 million, 4), respectively. Ecobank is the most widely represented of the partner

institutions with 10 different DCA programs, totaling $50.2 million, or nearly half of DCA’s total West African specific programs.

Table 5: DCA Guarantee Lines in West Africa Financial Inst.

Target Sectors

DCA Gtee ($ ‘000)

# of Loans

Avg. Loan Size ($)

Benin

Ecobank

SME, Micro, Edu, Health

4,000

New

N/A

Burkina Faso

Ecobank

Agri, SME, Micro

3,360

New

N/A

Ghana

OISL

Edu

5,000

254

6,562

OISL

Agri

9,304

1,021

3,273

Sinapi

Agri, Micro, SME

3,775

New

N/A

Ecobank

Agri, SME

7,000

New

N/A

Guinea

Ecobank

Agri, SME, Micro

5,000

New

N/A

Liberia

Ecobank

Agri, SME, Energy

4,240

16,250

IBLL

SME, Agri, Energy

6,868

100,000

Niger

Ecobank

Agri, SME, Micro

4,000

New

N/A

Nigeria

Zenith

Housing

10,000

49,728

Accion

Health, Micro

400

407

1,346

Diamond

Health, Micro

8,300

26,339

Ecobank

Energy, Agri, SME

5,000

New

N/A

Ecobank

SME

4,000

62,700

CBAO

SME

3,000

45,617

ACEP

Agri, SME, Micro

8,000

2,926

2,734

U-IMCEC

Agri, Micro

2,000

1,016

1,645

Ecobank

Agri, Micro

400

MEC

Agri

6,000

Ecobank

Agri, SME, Micro

5,820

PAMECAS

Agri, Micro

2,000

284

1,688

U-IMCEC

Agri, Micro

2,000

1,016

1,645

102,067

6,097

Senegal

Total

28 | Access to Finance in West Africa

The USAID DCA’s modus operandi is straightforward and efficient, as summarized in the box below.

USAID DCA Modus Operandi USAID’s DCA was created in 1998 to mobilize local private capital through the establishment of risk-sharing relationships with private FIs in USAID countries. The tool is available to all USAID overseas missions and can be used as a vehicle for providing much-needed credit to an array of companies and under-served sectors. Private FIs in West Africa enter into risk-sharing agreements with USAID DCA pursuant to which USAID guarantees part of the loan which the FI has assessed and extends from its own funding. USAID typically provides guarantees covering 50% of the loan principal. This guarantee effectively enables collateral-strapped companies to meet the FIs’ collateral requirements and access otherwise unattainable funding. The DCA also enables FIs to leverage their risk exposure to a given sector. For example, Ecobank-Benin and DCA entered into a Guarantee Agreement in August 2012 designed to support productive activities by SMEs in education and health, microfinance institutions and SMEs run by women. The DCA can support up to $4 million of principal, of which the DCA guarantees $2 million. Each DCA designates a maximum cumulative amount and maximum single borrower amount (for example, this is $1 million in Benin).

Given the DCAs’ high potential developmental impact, USAID strives to maximize their utilization rate. As per USAID’s DCA office, the thirteen established programs34 have utilized $24.2 million out of $63.5 million in guarantees. Most FIs apply the DCAs on a caseby-case basis. However, a couple of banks use their DCAs as “blanket” coverage to mitigate portfolio risk. Individual DCAs serve specific sectors and/or a broader cross-section of SMEs and micro-enterprises. The targeted sectors are typically agriculture, education, health, housing and energy. The promotion of women-owned and -run businesses is of strategic importance to USAID DCA. It is important to note the varying levels of loans. DCA loans to individual micro-enterprises range from $1,500 to $3,000, with

$2,000 per loan being representative. The range of SME loans is much wider, running from around $3,000 to $60,000, with $30,000 being an indicative average. There are a couple of loans whose amounts are much higher at $100,000 (e.g., to the energy sector in Liberia). USAID missions interpret differently the significance of the loan thresholds. Some missions focus on the development impact of larger loans and the higher amounts of private capital which they can leverage. Other missions are more interested in reaching directly a larger number of, albeit, smaller borrowers. When USAID’s focus in a specific country is geared to maximizing the number of borrowers, implying smaller loans (primarily micro-loans), then the residual guarantee cover available to support larger SME loans will be reduced. This will, by elimination, reduce the impact of loans to higher-capacity, finance-ready ERCs. DCA-guaranteed loans, particularly those through micro-finance institutions, are typically used to finance micro-borrowers and smaller SMEs which are in the very early stages of exporting. Over the past two years, Trade Hub’s FFs have focused on larger investments within the mesofinance sphere which have high development impact, and also offered FFs the opportunity to earn larger fees. Moving forward, USAID must take into account the developmental tradeoffs of targeting smaller versus larger SMEs and how impacts are recorded by indicators. There is currently great interest among FFs and USAID to leverage DCA guarantee instruments to increase access to finance among ERCs. However, the average size of Trade Hub PBC-supported loans is $863,767. This amount far exceeds the upper limit loan size of DCA-supported SMEs – not to mention micro-enterprises. In any case, the Trade Hub or its successor is well positioned to support more aggressively the growing number of DCAs, perhaps through “wholesale” approaches (e.g., through cooperative or farmer based organizations). The mobilization of DCAs by the USAID Trade Hub must be aligned with the interest of both the respective USAID country offices and the financial service providers facilitating loans to ERCs.

34 | Nine of the 22 total programs are relatively new.Nine of the 22 total programs are relatively new.

West Africa Trade Hub| 29

Business Environment for Agile Markets (BEAM) project The Business Environment for Agile Markets (BEAM) task order financed under USAID’s Bureau of Economic Growth, Environment, and Education (also managed by CARANA) offers USAID missions and their local partners a broad range of services in economic growth programming, such as needs assessments, training, monitoring and evaluation, identifying public-private partnerships, and rapid-response support. In West Africa, in response to USAID/West Africa priorities, the BEAM project seeks to support trade facilitation and improved trade policy, improved use of the DCA, and further increases in the extension of loans to ERCs from Benin, Burkina Faso, Côte d’Ivoire, Guinea and Niger. BEAM has set aside technical assistance support funds for bank training and FFs on a performance-based reward system. BEAMsupported financial facilitators and Trade Hub staff will provide technical assistance and training to the DCA banks, ERCs and partner FIs to stimulate rapid loan disbursement primarily in the cashews, shea, apparel and home décor value chains.

30 | Access to Finance in West Africa

BEAM funds will allow the Trade Hub to expand its PBC methodology to new FFs and new ERCs, and to provide training and technical assistance to Ecobank, so this financial player can expand its DCA use in target countries. As seen in Ecuador, where two microfinance banks recently completed their DCA agreements with a 99% utilization rate, well-designed bank training can have a major influence on DCA guarantee utilization. The USAID Trade Hub A2F team has also proven that demand-driven training for banks with or without guarantee mechanisms can increase their comfort level for their lending to new sectors and clients.

Section 6 - Lessons Learned Multiple lessons have been learned through the West Africa Trade Hub’s efforts to catalyze finance for ERCs through the Trade Hub’s PBCs and its interaction with guarantee funds, as described below. Lesson 1 – The Trade Hub’s original design underestimated the importance of financing to facilitate exports. Early Trade Hub (2003 – 2008) indicators included the value of deals facilitated but not the level of financing needed in order for ERCs to be able to deliver under those export deals. During its first phase, Trade Hub staff spent significant effort drumming up export deals, painstakingly creating linkages with international buyers of African exports and promoting AGOA among African firms. When market linkages were created or companies were convinced to export to the US, the financing fell short toward helping the companies fully achieve their export goals. Limited budget resources (programmed under the project’s Export Development component) enabled the Trade Hub in its early years to hire only one financial expert to cover the vast region. Low export results under USAID Trade Hub’s first phase were frustrating for the Trade Hub, USAID, ERCs, and host countries. The Trade Hub’s attempt in 2008 to change this situation via a strategic bank partnership with one, single regional bank (Ecobank), joint ERC-banker training and the development of a specialized DCA for the handcraft industry also did not meet expectations in part due to reduced demand given the global financial crisis. The Trade Hub learned from these experiences. In 2009, it developed and implemented a higherimpact A2F strategy. The lesson for USAID is two-fold. First, facilitating market linkages will not automatically lead to significant exports unless sufficient financing is proactively made available to exporting firms. Second, minimal investment in Access to Finance activities will lead to commensurate, minimal results.

Lesson 2 – Bank and ERC training provided in the Trade Hub’s early years was largely unsuccessful in channeling increased financing to ERCs. The Trade Hub changed the way it provided bank training in the second phase of its A2F work (2009 on). Rather than focus bank training on putting ERCs and bankers in the same room or holding one-off, business-to-banker events, the Trade Hub started to provide demand-driven, sector-specific training to multiple regional banks simultaneously. Beginning in 2009, these trainings were made more relevant when the FFs introduced concrete leads to FIs. Banks report highly valuing this type of collaboration. ERCs interviewed as part of this study greatly appreciated USAID Trade Hub’s early-on (2003-2008), pre-trade show trainings, in spite of the limited financing that ensued from these. These training sessions helped ERCs acquire the management and financial skills necessary for accessing finance from financial institutions later. If training is provided to SMEs in the future, the authors of this study segmenting the ERC customers based on their size and bankability, as different types of training will be required for ERCs and SMEs in different stages of export and finance-readiness. The next Trade Hub should also continue the proven strategy of only providing demand-driven training to banks in attractive sectors, driven by market realities. Lesson 3 – USAID Trade Hub’s revised Access to Finance strategy was largely successful in facilitating more financings to ERCs than were achieved under previous strategies. Since its inception, the Trade Hub has facilitated $49.8 million in private finance and investment to 3835 ERCs of which $2.2 million took place between 2003 to 2007 and $47.6 million from 2008 to 2012. $34.9 of this financing was facilitated by financial facilitators via performance-based contracts and follow-on loans to ERCs. $12.7 was facilitated through other forms of Trade Hub support (e.g. referrals, technical assistance, additional financial facilitation services). Nine countries have benefitted from this financing, as demonstrated in the map on the next page (Benin,

35 | Several ERCs that received finance and investment via the Trade Hub in early years (2003 – 2007) are not included in this total, as the Trade Hub did not collect this information systematically. The implication is that the number of firms supported may be higher.

West Africa Trade Hub| 31

Burkina Faso, Cameroon, Côte d’Ivoire, Ghana, Mali, Nigeria, Senegal and Togo). Overall, the Trade Hub’s A2F work has supported 53 financing transactions (some companies having benefited from more than

one loan). A2F has, in addition, played a key role in refinancing $7.1 million in “stuck” (i.e., unserviced) debt.36

loans facilitated by the usaid trade hub by country

Burkina Faso

Benin

1 6 3 4 1

Senegal

Nigeria

Ghana

Mali Togo Cote d’Ivoire

USAID Trade Hub’s country impact is skewed in favor of Ghana (see chart above). This is understandable given the Trade Hub is headquartered in Accra and Ghana’s favorable business climate; however, other countries are under-represented. In other words, there is geographic room to expand the USAID Trade Hub’s A2F work. The cashew and shea sectors obtained almost half of all of Trade Hub financing. The pie chart that follows

Cameroon

provides a visual breakdown of sectors supported with financial services support. The Trade Hub has been less successful in raising finance for the handcrafts/home décor, specialty foods and textile/apparel sectors, where strong African industry alliances do not yet exist. The predominance of finance for specialty foods is based on 2 large deals worth $26 million. Industry alliances played a critical role in the Trade Hub’s A2F work given their vetting of potential clients, and their ability to mitigate perceived risks of lending

36 | A total of 53 loan transactions were reported to USAID. However, early data collection efforts of loan information did not include detailed data on 3 loans made under WATH II (a project that has since been closed). Therefore, data in the “Loans Facilitated Map” includes information on 50 loans, for which detailed data is readily available.

32 | Access to Finance in West Africa

by banks through offering world-class technical assistance. Limited financing to other sectors also reflects the lesser “bankability” of ERCs in the specialty foods, handcrafts and apparel sectors. Their relative small size makes them less appealing to PBC FFs, and more costly and time-consuming to support by the Trade Hub’s already stretched financial services staff.

Total value of finance facilitated by the Trade Hub 2008-2012, organized by sector

1% 1%

23% 61%

12%

Cashew

Handcrafts

Shea

Apparel/Textiles

Specialty Foods

Other (including other sectors)

Total: $24,017,359

Lesson 4 – The Trade Hub’s A2F work successfully motivated financial institutions to conduct SME lending in new sectors. The Trade Hub’s strategy to provide banks with sector-specific training and technical assistance, following this with carefully prepared loan applications, was a successful approach to engaging the West African financial sector. Many of the banks approached by financial facilitators had not conducted SME or agricultural lending in decades, and are now asking the Trade Hub for more deals and similar clients. Working with social impact funds and leveraging their support to bring banks on board to financing deals was another strategy that can easily be replicated in the future. Almost 20% of all financing transactions facilitated by the Trade Hub involved social impact funds. These funds and the financing discipline and technical assistance which they brought to the table played a critical role in mitigating risk and, consequently, encouraging follow-on lending by other FIs. In some cases, loan transactions with a single client motivated banks to create new loan strategies; after financing Cajou Espoir, ECOWAS’ Bank for Investment and Development rolled out a “cashew desk” to expand financing to this sector throughout the region. Nigerian banks have followed suit, financing two cashew processors with the help of a financial facilitator, and then creating a public private partnership among cashew producers and financial institutions that shares collateral risk. In other words, just a few loan transactions with ERC customers have led to broader financial sector impact. Lesson 5 – A market of financial facilitators serving SME export ready companies in key Trade Hub sectors has been created, and can be sustained by resources other than USAID’s to provide similar BDS services in the future. The Trade Hub’s three, original FFs continue to provide BDS services to SMEs, two of whom without USAID subsidy. The third FF remains on contract under the Trade Hub to finalize a set of pending A2F deals, and a fourth financial facilitator was identified and hired under BEAM to rapidly expand financial services to SME ERCs in new countries. PBC successes reflect the Financial Facilitators’ technical skills, experience, market knowledge and relationships. Some FFs are beginning to mentor less experienced facilitators, building a network of associates. ERCs and FIs both acknowledge the high value

West Africa Trade Hub| 33

of having access to experienced FFs. Following the Macedonia example, a larger group of certified FFs could serve many more SMEs, ultimately reducing the cost of facilitation per client engagement. A new generation of FFs could work on more straightforward deals for smaller SMEs with backstopping from the senior FFs. However, the results from working with smaller companies may take longer to achieve and/or may not be as easily captured in the traditional “loans disbursed” indicator. At this point in the Trade Hub’s life, the resources or mandate no longer exist to expand or formalize this network of BDS providers. The Trade Hub recognizes that this small network of financial facilitators does not permit adequate coverage, given the thousands of potential clients throughout the region. The current structure of PBCs incentivizes FFs to seek out the most profitable and achievable deals. This incentive structure for FFs and the targeting of SMEs can be revisited as part of the future Trade Hub to determine how it can allow for a cost-effective expansion to new market segments and sectors. Macedonia’s Access to Finance Programs re-evaluated the PBC incentive structure each year and perfected these over time. Future Trade Hub projects can continue to experiment with incentives and frequently re-evaluate and innovate the PBC model to be in tune with the fast-moving West African financial services field. The USAID Trade Hub experience confirms that if given a choice, ERCs prefer not to pay success fees for BDS services. Donors share some responsibility for this situation, as many subsidize BDS services for SMEs in West Africa. This study demonstrates that subsidy for BDS services can be phased out by donors over time, allowing for a more natural development of this service sector. ERCs interviewed for this study report paying for many types of BDS services already with internal resources (e.g. accounting, business plan development, tax preparation). The Trade Hub’s experience in phasing out USAID subsidies for BDS services and asking ERCs to absorb this cost, is that this is possible once ERCs see the value of BDS services (loans made). Working with a FF whose fees are initially subsidized by USAID (and which can mobilize the technical support of an industry alliance) helps to demonstrate the effectiveness of financial business development services. Initial subsidies and facilitation successes encourage ERCs to pay success fees themselves for follow-on services, especially when they understand from the start that in time, they will be responsible for these. Two FFs currently receive financial support from ERCs to defray the costs of service provision; one FF receives payment in the form of company equity. Ensuring that future,

34 | Access to Finance in West Africa

financial BDS provided to ERCs includes a USAID subsidy phase out plan will be an important design strategy moving into the next phase of the Trade Hub. Lesson 6 – PBCs had significant development impact, particularly on women’s employment. The introduction of PBCs unlocked - in a relatively short period of time - significant amounts of private capital (loans, letters of credit, export financing) and financial services (loan restructuring, new debt products such as shared collateral schemes) to exporting firms in key sectors. Multiple recipients of loans under the Trade Hub A2F program were women-led ERCs. The “winners” of this performance-based approach are the most capable, sophisticated and asset-rich ERCs. Supporting larger, commercially viable companies has a profound development impact on employment and food security. Larger companies often have more capacity to employ and train workers, build economies of scale and process and distribute value-added products. These activities result in collectively higher sales and greater income generation among the ERC’s employees and shareholders. Loans facilitated in recent years by the Trade Hub have assisted in generating 5,455 full and part-time jobs, 83% of which are held by women. In the words of one Financial Facilitator, “When I now go to visit Cajou Espoir, I see the impact in the new trucks and employee bicycles and motor bikes surrounding the plant. The employees also tell me they are happy, their children are in school, and they are eating better.” The challenge for USAID and for the next Trade Hub project is to broaden and deepen the network of FFs to expand their support to additional ERCs. Loans made to the Trade Hub ERCs in key sectors can also contribute to broader economic development, by creating new clusters of economic activity. One financial facilitator working on a new PBC is in advanced discussions with three cashew processing companies in Benin under the Benin Gold brand name as well as with a fourth American-owned start-up processor. If these financing deals are closed, these four companies are expected, within a few years, to be processing and exporting between 15,000 and 20,000 MT of processed cashew, directly employing 1,500 factory workers, and partially supporting an additional 10,000 seasonal harvesters of raw cashew nuts, most of whom are women. The expected impact on local communities of this new industry is amplified by its concentration within a 200 km radius in the north of Benin.

Lesson 7 – Performance indicators for A2F’s work were not adequately designed or implemented. USAID Trade Hub’s impact on Access to Finance can be captured by multiple outputs and indicators. The Trade Hub use of indicators between 2003 and 2012 included:

• Value of investment facilitated to exporting firms • Number of financial sector professionals trained • Value of new loans disbursed to ERCs • Number of new loans disbursed to ERCs • Number of jobs (full and part-time) by ERCs (disaggregated by gender)

Looking forward, the Trade Hub may consider among several more indicators to measure its A2F’s impact and “cost-benefit”, particularly given the wide diversity of the Trade Hub’s client base. Indicators and metrics to consider could include the following:

• Number of FFs trained/certified by the Trade Hub • Return on investment of PBCs • Value of repeat loans disbursed to ERCs with Trade Hub assistance

• Value of debt restructuring to ERCs • Number and value of working capital loans • Number and value of fixed asset or “capacity to export” loans

• Loan servicing • Number of loans made to women-led firms • Number of referrals to ERCs of banks and financial institutions

• Value of DCA-backed loans leveraged • Number and types of new loan products designed in collaboration with financial institutions

• Percentage of success fees as a percent of the total value of total loans facilitated

The Trade Hub did not initially invest in perfecting a system to organize data collection or reporting of A2F indicators. A2F statistics reported to USAID were often overly conservative and even, at times, inconsistent within the same report. Reporting should have been more centrally managed. A2F staff involved in collating indicators and reporting also was not ad-

equately trained to manage the data collected. Future Trade Hub projects should ensure that A2F results are appropriately communicated internally and externally, including on the Trade Hub’s web site. PBC data collected by FFs was similarly overly conservative. Some FFs under-reported the amounts of their facilitated loans in order that these loans would fall within their PBC contract ceilings. In other cases, the amounts of follow-on loans were not recorded. The indicators that were collected did not reflect the size or scope of the loans facilitated, nor the technical skill required to structure these complicated loans. In short, poor data collection undermined the measurable success of the Trade Hub’s A2F work. These data weaknesses have since been rectified. The A2F team now collects a set of indicators in one centralized database. This includes the ERC’s name, bank partner, financing, number of financing transaction, date of facilitation, amount of USAID subsidy (in the case of a PBC) and whether the financing was facilitated by a PBC. The Trade Hub also tracks initial loans and follow-on financing, debt servicing as well as some development impacts, such as gender-disaggregated job creation. Expanded and improved indicators and data collection systems will in the future better reflect A2F’s achievements, enable adjustments to be made as necessary and improve development impact. Banks, even DCA-supported banks in West Africa, will continue to require land title or other “hard assets” as collateral. Given that perhaps only a quarter of the population has access to collateral and that banks show little interest in lowering their collateral requirements, in the future Trade Hub project, USAID must set realistic loan disbursement goals and apply necessary resources on a sustainable basis in order to achieve them. Lesson 8 – Multiple guarantee funds are in place throughout the region and can be better exploited to help more SMEs to access financing. No one bank or financial institution can serve all the financing needs of one A2F program. Rather, a successful A2F program requires the mobilization of a network of financial institutions, each with its own SME strategy, staffing, funding resources and propensity to take on risk exposure. Guarantor fund partner banks do not generally widely publicize their guarantee funds, perhaps due to a wish to hold clients fully accountable as long as possible for their obligations. It remains to be seen how effec-

West Africa Trade Hub| 35

tive a wider range of guarantee funds in West Arica will improve the region’s A2F. Regardless, guarantee funds have an important role to play in the region given that banks will continue to have high collateral requirements. The next USAID Trade Hub project is advised to continue to strengthen partnerships with FIs which have access to innovative guarantee instruments. The Trade Hub and its partners could consider creating a “SME Financing Alliance for West Africa”. A growing number of donors, banks, FIs, investment funds and social investors are eager to strengthen their financing links with SMEs, and some excellent work along these lines is underway. However, this work can be better coordinated and expanded. As with the multiple alliances initiated in part by the Trade Hub, there is more opportunity to assist financing partners to come together in partnerships to share experiences, discuss risk–sharing, and build a multidimensional and sustainable A2F platform in West Africa37.

only when the guarantees are deemed prudent and cost effective. DCA training for banks must be demand-driven and tailored to conclude financings in the shortest time possible. In addition to marketing the availability of guarantee funds as a means to supplement collateral for ERCs, FIs should use the DCAs to build ERCs’ own borrowing capacity to the point where the ERCs can solicit finance from any financial institution, with or without the support of guarantee funds. Several possibilities for collaboration exist with DCA under BEAM and as part of the next version of the West Africa Trade Hub. This collaboration can lead to improving the DCAs’ success in mobilizing private capital to sectors of the West African economy which are targeted by USAID.

Lesson 9 – USAID DCA guarantee programs currently operating in eight West African countries could serve more ERCs. Utilization rates for existing DCA guarantee funds are currently low (averaging below 40% utilization).38 The Trade Hub has had limited success to date maximizing DCA guarantee funds. This may reflect that the DCAs generally target a different clientele base and size of loan than does the Trade Hub (i.e., microenterprises under DCAs; SMEs under the Trade Hub). Typical DCA loan sizes range from $500 to $100,000, the latter being very high end, and the average loan size for loans facilitated by Trade Hub FFs under PBCs is $863,000. The average loan size for nonPBC loans facilitated by the Trade Hub is $453,000. In other words, West African DCAs as currently structured seems geared to support micro-enterprises or the smallest SMEs rather than larger SMEs. The existence of a DCA program does not inherently imply that FIs will loosen their credit standards or have the long-term funding necessary for long-term loans. Experience has shown that banks manage the DCA within their existing strategic, risk management and funding guidelines. They will deploy DCA guarantees 37 | A couple of such multilateral efforts already do exist. One of the most notable is Making Finance Work for Africa (MFW4A). It is doing excellent work, and USAID is a founding and active member. However, its agenda is very large, encompassing everything from banking regulations to small-scale financing. These macro-needs risk overshadowing the possibility of an “SME Access to Finance Alliance” which would focus the platforms’ attention on this critical market segment. 38 | DCA figures generously provided by USAID’s DCA office in Washington, DC.

36 | Access to Finance in West Africa

Lessons Learned Summary Table The first table presents lessons learned on the USAID Trade Hub’s overall Access to Finance work, 2003-2012; the second table presents lessons learned on the performance-based contracts implemented with USAID Trade Hub subcontractors; the third table presents lessons learned on guarantee funds.

On the West Africa Trade Hub’s (WATH) Overall Access to Finance Work 2003 - 2012 Lessons

Observations

Implications

1 – Trade Hub’s original design (2003 – 2008) undervalued the importance of access to finance needed to facilitate exports.

• Indicators on finance or investment

• Facilitating market linkages alone

were not included in earliest PMPs.

• One consultant covering all of West Africa was insufficient.

will not lead to significant exports if sufficient financing is not available to support export deals.

• Minimal USAID investment in A2F means minimal results.

2 – Bank and ERC training in Trade Hub’s early years was largely unsuccessful in leveraging significant private capital to ERCs.

• ERCs greatly valued financial man-

agement, cost and finance trainings as necessary precursors to readying themselves for accessing finance from FIs.

• Banks now demand sector-specific training from the Trade Hub.

• Different types of training will be re-

quired for ERCs in different stages of export- and finance-readiness.

• One-time business-to-banker events are largely ineffective at generating deals.

• Trainings to banks must be demanded by banks themselves, and be driven by market realities.

3 – Trade Hub’s revised A2F strategy from 2009 onward was largely successful in facilitating significantly more financings to ERCs than were achieved under previous strategies.

• Trade Hub facilitated $2.2 million in

financing between 2003 – 2008, and $46.7 million in financing to 38 ERCs between 2009 – 2012 ($34 million via PBCs and $12.7 million through other WATH support).

• Debt restructuring was required to move some ERCs forward.

• Industry alliances, strategic bank

partnerships and social impact funds have been critical risk mitigators for Trade Hub’s A2F work.

• Cashew and shea account for more than half of all facilitated finance.

• Country distribution favored Ghana

• Performance-based contracts are

more effective than labor-based contracts in facilitating finance quickly.

• Leveraging industry alliances, ex-

panding and continuing bank partnerships and leveraging social impact funds are successful strategies that should continue.

• Deploy many FI partners rather than a few.

• Debt restructuring will continue to be

an important service for larger SMEs.

• Many financial products are required

to serve the West African SME market.

(Trade Hub’s HQ) in A2F transactions.

West Africa Trade Hub| 37

Lessons

Observations

Implications

4 – Financial institutions have been motivated to enter into SME lending, in particular to agriculture.

• Banks and funds continue to seek

• Financial facilitators, social investment

good financing opportunities, even in the agricultural sector.

• The agricultural sector provides good loan opportunities.

5 – A market of FFs serving SMEs and ERCs in key Trade Hub sectors has been created, and can be sustained by resources other than USAID’s to provide similar BDS services in the future.

• All Trade Hub PBC facilitators are still at work supporting ERCs and SMEs in key WATH sectors, and some are being compensated by ERCs themselves.

• PBC successes reflect the FFs’

experience, technical skills, market knowledge and credibility with FIs.

• ERCs and FIs acknowledge the greater value of experienced facilitators.

• Facilitators are beginning to mentor

less experienced facilitators. Some are building a network of associates.

• Facilitators seek out the most profitable and achievable deals.

funds and industry alliances were critical to reducing the risk perception among banks to lend to new customers and new sectors.

• BDS via financial facilitators was a

critical missing piece to A2F success of the Trade Hub.

• ERCs are willing to pay fees to facilitators when they see results.

• PBCs can be subsidized by USAID

on a sliding scale, emphasizing initial deal closure and then phasing out subsidies over time.

• PBC incentive structures could be

adapted to encourage facilitation of smaller and more difficult deals.

• Trade Hub/USAID could create a

network of certified FFs, adapting CARANA’s Macedonia example.

• Trade Hub/USAID could lead efforts to establish a “SME Financing Alliance for West Africa”.

6 – PBCs had significant development impact, both on industry growth and women’s employment.

• 83% of the 5,455 full- and part-time

• Firm level support has a broader im-

• Large loans to companies in key

• More ERC companies can be served

jobs that were generated through PBCs are held by women.

sectors (shea, cashew, staple foods) involved thousands of smallholder farmers and employees.

pact on the development of industry clusters (i.e. Cashews in Benin).

by PBCs and A2F, but these must be segmented, resources allocated, and assistance designed based on their “finance readiness”.

• Different methodologies (PBCs and others) will be needed to serve different companies with a variety of financing needs.

38 | Access to Finance in West Africa

Lessons

Observations

Implications

7 – Performance indicators for PBCs were not adequately designed or implemented, and data collected was overly conservative.

• Inadequate measures did not fairly

• Increased and improved indicators

reflect skilled technical deal structuring, critical investment referrals, or loan repayment.

• Poor data collection in early years

undermined the success of Trade Hub’s A2F work and ensuing poor communication of it.

• Lack of insightful indicators did not

enable Trade Hub management to make adjustments during the course of the project.

will better reflect A2F’s achievements and will improve development impact.

• Expanded indicators could include

short-term/long-term loans, repeat or follow-up loans, number of facilitators involved, product innovations, repayment, success factors behind successful deals.

• Adjustments should be made

throughout the life of the project based on timely assessments.

• Data collection and tracking were

significantly improved in later years.

8 – Dozens of DCAs in West Africa.

• Multiple donors and banks with guarantee funds.

• Other guarantee funds might be leveraged by Trade Hub.

• Utilization rates not widely advertised. 9 – USAID DCAs currently operate in 8 West African countries, targeting multiple sectors.

• Sectors targeted include agriculture,

• May be difficult for Trade Hub to lever-

• Many DCAs are new, and utilization

• West African DCAs may be better

education, health, housing and energy. Most DCAs favor bank lending among micro-enterprises. rates are low (under 40%).

• Trade Hub has had limited success leveraging DCAs to date.

• Average DCA loan sizes range from

age West African existing DCAs given target sectors, target loan sizes and DCA guarantee fund limits. leveraged to support microenterprise ERCs or the smallest ERCs.

• BEAM efforts should apply Trade Hub lessons in leveraging DCAs.

$400 - $100,000. PBC average loan size is $863,000. Average loan size of other ERC loans facilitated by Trade Hub is $453,000.

West Africa Trade Hub| 39