Sida Credit Guarantee Facility Background The Swedish International Development Cooperation Agency (Sida) and the Middle East Investment Initiative (MEII) are developing a multi-million, multi-year guarantee facility and technical assistance program (SGF) to support and develop the economies of East Jerusalem; the Gaza Strip; and Area C of the West Bank. Small and medium sized enterprises (SMEs) are the life blood of the Palestinian economy. They comprise 90% of the region’s business units, are responsible for over 55% of all productive output, and employ more than 80% of private sector labor. Among the many severe political and economic circumstances that Palestinian SMEs face, lack of access to credit is most challenging. Under the Oslo accords, the Palestinian territories were divided into (i) Area A, which is under the full jurisdiction of the Palestinian National Authority (PNA); (ii) Area B, which is under PNA civil jurisdiction but Israeli security control; and (iii) Area C, which is under full Israeli jurisdiction. As a result, the access to credit challenge for Palestinian SMEs outside of areas A and B is an even greater obstacle to growth and job creation. Furthermore, the Gaza Strip since 2007 has not been under PNA control; and East Jerusalem is under Israeli jurisdiction. As a result Palestinian banks have largely avoided those areas.
The SGF Approach Conservative lending policies have long dominated banking in the Palestinian territories. Credit risk has been managed by minimizing exposure and imposing high collateral requirements, thereby restricting credit availability to large, highly-capitalized businesses. In order to encourage appropriately structured credit to SMEs in the project’s target areas, SGF will provide its partner banks with Sidabacked loan guarantees. In addition, SGF will help narrow the unmet demand for housing loans in East Jerusalem and the Gaza Strip by providing long term loan guarantees to its partner banks.
transparency. According to a 2010 study by The World Bank and Union of Arab Banks, this is considered the largest obstacle to SME financing in the Middle East and North Africa. Lack of financial transparency among Palestinian SMEs has many reasons, but experience shows that in many cases it is a result of lack of capacity and knowledge on how to properly present financial information. In order to address this weakness, MEII will design and implement an innovative 3-year program that will provide technical assistance and training directly to SMEs in the target areas. The goal of this ambitious program is to increase SME access to credit by narrowing the information gap between borrower and lender and assisting banks to make better credit decisions. An independent team of business advisors will identify and work directly with SMEs in order to develop adequate financial disclosure and planning so that both lender and potential borrower are communicating transparently in the language of finance. This will help lenders appropriately structure credit based on borrower cash flow capacity, and significantly improve the chances of successful loan workouts when/if a borrower faces repayment difficulties. The business advisors will also seek out and provide technical assistance to female owned businesses in all of the Palestinian areas. MEII also plans to introduce an innovative web based platform to connect borrowers with creditors. The Finpoint platform, which will be translated into Arabic, was developed in Germany following the 2008 financial crisis. The site will harness the security, speed and simplicity of the web to streamline the lending process for both lenders & borrowers – connecting businesses with funding for growth, and helping banks to assess lending opportunities.
SGF at a Glance Program Goal Stimulate lending to marginalized Palestinian SMEs and households. SGF Dimensions Credit Guarantee between 50% and 85% of loan principal. Political risk coverage of 90% of loan principal. Technical assistance provided to SMEs 10-year program with medium & long-term vs. “quick fix” strategy Housing loan size $100,000 $350,000 SME loan size $10,000 - $500,000 Working capital and/or fixed assets loans All economic sectors eligible Any type of business, including start-ups.
SGF Impact $20 million in commercial lending SME Technical Assistance to bankable SMEs in the Global best practices in SME Banking marginalized areas of EJ, GS, and highlight the importance of business AC. Develop financial literacy and transparency of Palestinian SMEs. ers\jp11886\Documents\MEIIth-- SGF one pager.doc 500 8 Street NW, Washington, DC 20004, USA – Tel 202.799.4314 – Fax 202.799.5314 - www.MEIInitiative.org Encourage and support female entrepreneurs.