Micro-Finance - Initiatives

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    1

    MICRO FINANCING GOVT

    ( Pakistan) INITATIVES

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    AnAnalysis of SMEs

    The FinancingPoint of View

    DevelopmentSolutions

    from

    and

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    MTISBIR

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    First

    Microfinance

    Bank

    Network

    Leasing

    History

    1982

    First NGOs:

    AKRSP, OPP

    1992

    NRSP

    1994

    1995

    Bank of

    Khyber

    1997

    KASHF &

    PMN

    2000

    PPAF &

    Khushhali

    Bank

    2002

    NGOs: 22

    RSPs: 4

    MF Banks: 4(+1)

    Leasing: 2(+2)

    Banks: 1 (+?)

    Govt.

    Subsidized

    Small Farmer

    Lending

    1970s

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    What are banks doing?

    Shareholders in Khushhalibank

    Increasing consumer financing

    Lines of credit and cash management for NGOs

    Declining direct outreach to poor?

    Limited vision of microfinance and few

    partnerships

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    Active Borrowers

    510,000

    Outreach

    Gross Loan

    PortfolioRs. 5 Billion

    MF Banks

    30%

    Leasing

    17%Bank

    6%

    RSPs

    32%

    NGOs

    15%

    RSPs

    41%

    NGOs

    26% MF Banks

    30%

    Leasing

    1%Bank

    2%

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    3

    Information asymmetry( lack of information on SMEs at various levels -industry, regional and company ).

    SMEs are high risk due to:Limited capital flexibilityVulnerability to market changesInadequate management capabilityShort business/industry track record

    Inferior collateral offering

    Problems in SME Financing( From the Point of View of the Banks )

    2

    High transaction cost of loan packaging/administration relative to mostly low loan-absorptivecapacity of SMEs

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    4

    3

    Long processing time and poor service

    High interest rates

    Problems in SME Financing( From the Point of View of SMEs )

    2

    Voluminous documentation

    Largely inaccessible, as offered by banks due to:High loan floor, effectively barring SMEsNature/size of collateral requirement

    Years of business experience required

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    Types of SMEs

    The FinancingPoint of View

    from

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    4

    3

    Significant credit track record

    Sufficient collateral

    Already Bankable SMEs

    2

    Substantial business track record and/or size

    Established management systems

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    4

    3

    Absence of or limited credit track record

    Absence of or inferior collateral

    Near Bankable SMEs

    2

    Substantial business track record and/or size

    Established management systems

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    4

    3

    Absence of credit track record or, in the case ofrecovering SMEsnegative track record

    Absence of or inferior collateral

    Non-Bankable (But Promising) SMEs

    2

    Limited management systems

    Limited business track record and/or size

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    SMEs Banks & Other FundingOrgs

    Credit Delivery Intervention

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    For Already Bankable SMEs

    Wholesale funds

    Helps SMEs get lower interest rates

    Helps SMEs get longer repayment termsHelps SMEs in the province access credit(liquidity for the provincial financing system)

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    For Near Bankable SMEs

    Credit guarantees

    Helps SMEs enter into the formal financingsystem

    Helps banks open-up and learn more on how

    to finance near bankable SMEs

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    For Non-Bankable butPromising SMEs

    Direct Loans

    Helps SMEs access credit at better rates

    relative to informal sourcesTrains SMEs in formal financing andin starting a credit track record

    Helps an SME grow in its industry andto a respectable size over time withcontinuous financing

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    The SMEs & Other Credit

    Delivery Intervention

    DirectLending

    CreditGuarantees

    WholesaleLending

    Non-Bankable

    SMEs

    NearBankable

    SMEsBankableSMEs

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    Direct Lending Facilitiesof SMEs Group

    Short-Term Facilities(one year or less)

    1. SME-FRIEND-short-term financing of export orders

    2. SME-FIRST-short-term financing of receivables(eventually POs) of suppliers of top 1,000 corps.

    Loan Purpose: Transactional Working Capital

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    Direct Lending Facilities---Continued

    Medium-Term Facilities(above one year up to five years)

    1. SME-FORCE-medium-term financing of start-up orexpanding franchisees

    2. SME-GUIDE-medium-term financing of SME projectsendorsed by DTI-POs

    Loan Purpose: Production Upgrading/Expansion

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    Industry-basedDirect Lending Facilities

    1.Shoe Industry(already approved by SBC Board)

    2.Cable Operators(pipeline)

    3.Bakeshop Operators(pipeline)

    Endorsement Required:Technical assessment by the industryassociation on the proposed expansion

    Loan Purpose: (Production Upgrading/Expansion)

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    Direct Lending Facilities

    SME-FEEL-financing of micro-finance conduits

    Loan Purpose: Temporary Working Capital

    Medium-Term Facilities(above one year up to five years)

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    Basic Documentary Requirements

    a. Filled-up Application Form

    b. In-house Financial Statements

    c. Registration Papers

    d. Applicable Endorsement

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    Procedures for Loan Avail-ments

    a. SME submits basic documentaryrequirements to SMEs Bank.

    b. SMEs conducts project visit

    c. evaluates loan applicationd. informs SME of status of loan

    e. If approved, facilitates loan release

    documentsf. Releases loan (Land bank Cheque)

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    Financial Facilities

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    Fin Assistance in SMES

    PAK Org/Banks/NGO

    SME Bank

    All other Banks

    Listed with SBP

    First Women Bank Koshali Bank

    Agha Khan

    Foundation European Union

    GTZ (German &

    Dutch NGO)

    Oxfam

    CSF(USAID)Program

    Several Pak NGOs

    World Bank ADB Pak

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    Business Finance

    Primary Security: Mortgage of property.

    Mode of Financing:

    a) Running Finance: One year line of credit

    (renewable).

    b) Term Finance: Maximum up to 7 years (with 2

    years grace period).

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    Business Finance

    Repayment:

    a) Running Finance: Monthly debt servicing on

    the outstanding balance.

    b) Term Finance: Monthly installments.

    Markup Rates: 13.5 to 14 %

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    Business Finance

    Eligibility to Apply :

    Age: Between 25 to 65 Years.

    Borrowers: Resident Pakistani Nationals.

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    Business Finance

    Business Requirements: a) Minimum one year's business or

    professional experience in the presentbusiness (in case of small business

    enterprise) and minimum five years businessor professional experience in the presentbusiness (in case of medium businessfinance).

    b) Member of the relevant trade body (in caseof medium business enterprise) or relevantprofessional association (in case of selfemployed professional).

    H if h

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    However ,, if you chose venture

    capital? Who are the venture capital

    providers and what do they want?

    Types of venture capitalists (VC): 1. Business angels

    Often previous entrepreneurs that have sold thir firms Often older actors with knowledge of the market and you

    => they may like to help you

    2. Venture capital firms / funds A) Small actors e.g. SME Bank have 548 members

    Often specialised on a financing or market segment e.g. seedfinancing, growth financing, MBO/IPO or biotech, ICT,construction

    B) Large institutional VCs in Pakistan

    C) Corporate VC e.g.

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    The venture capitalist looks at:

    1. THE GROWTH POTENTIAL OF THE FIRM

    The most important for a VC is often how fast and

    how much a firm to be financed can grow

    How can the management perform that growth ,, is a

    standard key question

    Realism versus dreams?