Recent African experience in

SME Financing – A case of

CRDB Bank LTD (Tanzania)

Presented by Elibariki Masuke

Presentation Outline1. Country Profile

2. CRDB Bank Ownership

3. CRDB Bank Mission and Vision

4. CRDB Bank’s performance

5. Why SME Lending

6. Definition of SMEs at CRDB Bank

7. Challenges faced by SMEs in Tanzania

8. Initiatives taken by CRDB Bank to support SMEs

9. Current status of SMEs at CRDB Bank

10. Evaluation of Bank’s Initiatives

11. Policy Environment

12. Lessons learned

1.0 Country Profile- TanzaniaTanzania is located in East Africa and the countries boundaries are as follows;

� North : Kenya and Uganda (Mount Kilimanjaro, Lake Victoria,

Serengeti Natinal Park and Ngorongoro crater)

� West: Rwanda, Burundi and Democratic Republic of

Congo (Lake Tanganyika)

� South: Zambia, Malawi and MozambiqueSelous game reserve

� East: Indian Ocean ( Zanzibar Island- Stone Town)

1.0 Country Profile …

Total population by year 2006 was 37.5mn

(Tanzania mainland)

GDP per capita by end of 2006 was TZS 399,554

Average Deposit rate (12months) in 2006 was

8.3%

Average Medium and long-term lending rate in

2006 was 15.6%

Inflation rate by April 2007 was 6.1%

* Source: BOT (Bank Of Tanzania) and Ministry of Planning, Economic and Empowerment

2.0 CRDB Bank Ownership

CRDB BANK LIMITED is a private commercial bank which was established in July 1996.

The bank is owned by over 11,000 shareholders and the major groups are private individuals with 37% ownership, cooperatives with 14%, and companies with 10.2%, DANIDA with 30% and Parastatals 8.8%.

CRDB Bank has wide network coverage with 39 branches all over Tanzania Mainland.

3.0 Mission and Vision of CRDB Bank

The bank aspires to be a local leading profitable bank, which is customer need driven, with high quality products and services, offering competitive returns to shareholders.

The bank has a mission of being a leading local bank, providing quality financial services with a strong focus on retail clients and customized corporate services, while ensuring competitive returns to shareholders.

4.0 CRDB Bank’s performance

Overview of Bank’s performance by end of 1st quarter of 2007 was as follows;

Total deposits were TZ S 843billion

Total assets were TZS 941 billion

Total loans and advances were TZS 390 billion

Total Profit before tax was TZS 12.5billion

5.0 Why SME Lending at CRDB

Most commercial banks in Tanzania Including CRDB Bank cannot escape doing and expanding business with the SME segment, due to severe competition for the small corporate market.

Due to this dilemma CRDB Bank has been forced to modify the traditional banking philosophy and practice and search for methodologies of addressing the problems inherent in financing of small and medium enterprises in Tanzania.

6.0 Definition of SMEs at CRDB Bank

SMEs have been given many definition Worldwide but CRDB Bank defines SMEs are those with;

Staff between 1 and 100 amongst them are relatives of the entrepreneur

Capital of TZS 5 million to TZS 800 million

Annual sales turnover of TZS 20 million to TZS 500 million

Business loan requirement of TZS 1 million to 100

7.0 Challenges faced by SMEs in Tanzania

CRDB bank conducted a survey to find out what problems were hindering SMEs from accessing finance from the Bank and the following were the major outcomes;

SME segment perceived as a high risk and costly to finance. Reasons for high costs in screening of credit are:

High cost of screening and administering small loans spread over big areas. Absence of Credit Rating Agencies (CRAs: CRAs tend to reduce the unit costs of credit screening by exploiting economies of scale.)Inadequate Auditing and Accounting Framework:

-SMEs are not transparent in their accounting records and financial statements; -auditing firms have failed to disclose to the public the true and fair financial assessments.

7.0 Challenges faced by SMEs in Tanzania…

Inability of SMEs to fulfil collateral

requirements. Properties with titles are limited

to urban areas. Most rural location do not have

titles, and it is very expensive to do land

survey.

Some banks operates in limited geographical

areas

Lack of adequate guarantee schemes to back up

financing SMEs

Inabilities of borrowers to prepare and present

applications/ Business plan that meet bank

requirements

Poor knowledge on business operations

8.0 Initiatives of CRDB Bank to support SMEs

3.1 To design customised products for SMEs

The bank had developed two credit products

for SMEs which are working

capital loan and Investment loan

Amount ranges from 1mn- 100mn

Interest rates are charged on outstanding

balance

Repayment style is by instalments

In working capital loan the minimum repayment

period is 3months and maximum 12months

In Investment loan , minimum repayment period

is 12months and maximum is 60months

8.0 Initiatives of CRDB Bank to support SMEs…

Capacity building for CRDB staff and SME

customers

Capacity building for CRDB staff

a) The bank had to recruit new staff who specifically

deals with SMEs at branch level and head office level

b) All recruited staff had to undergo an intensive

training (class and field training)

Account Managers have been trained to develop

financial statements from the SME primary data.

This has enabled the CRDB bank to relax the

requirement of audited financial account when SME

want to borrow between TZS 1,000,000 to

TZS20,000,000

8.0 Initiatives of CRDB Bank to support SMEs…

Capacity building for SMEs

The bank is currently offering free business and

loan management training to SMEs.

All training materials are in Swahili language

The training is comprised of modules such as legal

& policy context of SME, securing business for

prosperity, record keeping, marketing,

human resource management,

costing , buying, stock taking and business

planning.

At the end of each training the trainees are issued

with a book branded “SME Toolkit” for further

reference

8.0 Initiatives of CRDB Bank to support SMEs…

Increase the range of collaterals accepted by the bank

Before implementation of SMEs concept, the bank used to require only traditional collateral.

Under SME scheme the bank has widened the range of acceptable collaterals to include non traditional collaterals such as Residential Licence (Leseni za Makazi), properties with offer letters, used motor vehicles and machines etc.

8.0 Initiatives of CRDB Bank to support SMEs…

Introduction of Customer relationship concept

at Branch level

The relationship concept has been extended to

branch level

The new post of SME Account Manager has

been introduced at branch level

Account Managers are key responsible staff for any

relationship between the Bank and SMEs

All of the above initiatives, enabled the bank to

create a strong relationship with its SMEs and

the end result is justified by the current

status of SME segment at the bank.

9.0 Current Status of SMEs at CRDB Bank

The SME concept was implemented as a project in year 2005 . The project has been a success with tremendous growth in terms of portfolio and number of customers.

The status of the project by May 2007 was as follows; S/n Activity May, 2007

1 Number of CRDB branches under SME programme

25

2 Loans issued to SMEs in terms of numbers

816

3 Loans issued to SMEs in terms of amount (TZS)

16.2bn

4 Number of trained SMEs 874

5 Number of trained staff 140

10.0 Evaluation of Bank’s Initiatives

Evaluation is done on individual customer to measure the impact on:

Training

Loan extended

The outcome shows that customers have:

Improved on business management

Improved in loan management

Increased their savings and banking culture

Business growth hence increase their wealth

Improvement on collateral (now formal)

The above resulted in clean loan portfolio for the Bank

11.0 Policy EnvironmentThe Government is playing a remarkable role in the market by making continuous reform on the following major area that leads to conducive market environment:

Developed SME policy – which gives a definition of Tanzanian SMEs e.t.c.

Reform on business licensing and registration by formulating BRELA which works faster

than the old system

Encouraging formalization of business and collateral through Mkurabita by making business formalization process and procedures easy

Also recognition of squatters by issuing Residential Licence

12.0. Lessons learned

A) Lessons leaned from experience gained

1) SME Segment is profitable, bankable loyal to banks supported them and SME customers are trainable to be good customers.

2) SME customers have collaterals but not traditional

3) SMEs segment requires relationship management concept

12.0. Lessons learned…

b) Advice to financial InstitutionsThis segment is profitable but investment to train staff and customers is of supreme importance to uphold the profitability

c) Advice to Policy Makers1) Communicate clearly to targeted audience prior and after reforms2) Speed up roll out of projects such as Leseni za Makazi (Formalization of non traditional security)3) Improve legal and regulatory framework that create conducive climate for SME lending

12.0. Lessons learned…

d) Advice to Development Partner

Guarantee

Funds

Training of Customers

Capacity

Building to Staff

THANK YOU FOR LISTENING

THE END