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IFCFinancial Institutions Group

Qamar Saleem

Senior Banking Specialist , EMENA

October 222nd 2014

Supply Chain Finance for SMEs

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Source: IFC Enterprise FinanceGap Database (2011)

There exists $2.1-2.6 Trillion global SME credit gap, formal & informal

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For “formal” enterprises, $1 trillion SME finance gap in emerging markets 

Source: IFC & McKinsey Database (2011)

32%

6%61%

East AsiaGap Estimate: 167,523 USD MM

21%

7%

72%

Sub-Saharan AfricaGap Estimate: 80,085 USD MM

Gap Estimate: 170,061 USD MM

Gap Estimate: 235,292 USD MM

27%

16%58%

Central Asia & Eastern Europe

51%

7%

41%

South AsiaGap Estimate: 14,884 USD MM

31%

9%61%

Middle East & North AfricaGap Estimate: 294,148 USD MM

Size of the pie roughly relates to the size of the Gap in terms of

Number of SMEs

21%

14%65%

Latin America

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Source: Enterprise Surveys

Percent of Enterprises citing biggest obstacle(SMEs between 5 -100 employees)

Financing Constraint seen as the top growth impediment amongst SMEs

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In 71% of countries SMEs cite Access to Finance as the biggest obstacle…. 

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IFC completed a review of leading SME finance practices and models as part ofour work with the G20

G20 SME finance Sub Group identified successfulpractices & policy measures for SMEs in 2011

Work involved review of 164 different models globallyand subsequent policy requirements

Key Recommendations from the G20 Sub-Group

Developing supporting legal & Regulatory framework for facilitating alternate finance (e.g. supply chain) 

Building reliable data sources for SME finance 

Strengthening the financial infrastructure

Effective government support mechanisms

 Address specific market failures e.g. women and non

 financial services

Building the capacity of financial institutions

SME Finance Policy Guide – issued October2011 by IFC

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Supportive legal & regulatory environment and alternate finance through e.g.supply chain finance can be highly effective

Support and legislate non-FI alternatives

to bank lending e.g. supply chain finance

The public sector is a major buyer ofgoods & services from SMEs, and can moreeffectively link SMEs to supply chainfinance through contractual and paymentrelationship 

Electronic security and signature laws,and market facilitation platforms, canfacilitate supply chain finance 

Strengthen credit reporting to even theplaying field between small and big banks

Capacity building for FIs and SMEs tosignificantly enhance scalability

Case Study: NAFIN,

Mexico

“Productive chains” program allows

SMEs to use big buyer receivables forworking capital finance

By 2009, nearly 500 Corporatesinvolved, and $60 Billion in finance

extended to more than 80,000 SMEsthrough 21 banks and non-banks

Case Study: Chile Compra,Chile

Chile Compra is a public, electronicsystem for purchasing and hiring, withmore than 850 purchasing organizations

MSMEs provide 55% percent of totalpurchases, and their participation ingovernment purchases is double their

overall share in the Chilean economy 6

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Large

Medium

Small

Micro

• More than 27 million formal Small, Very Small and Medium Enterprises in Developing countries, ofwhich 39% and 22% are unserved and underserved respectively1

• Addressing the SME needs through appropriate partners, products and processes is key to acceleratejob creation. The World Bank estimates that 600 million jobs are needed by 2020

1 Source: IFC Enterprise Finance Gap Database IFC Enterprise Finance Gap definition of MSMEs: Micro – 1-4 employees, Very Small – 5-9 employees, Small – 

10-49 employees, Medium – 50-250 employees

Why we should focus on supply chain finance for SMEs

Typical formal small and lower end of mediumenterprises are suppliers/buyers of large corporates

Large enterprises are served by the banks, micro – byMFIs, while SME segment is lacking an access to finance

Banks

MFIs

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SCF proposition typically falls under “Supplier finance” and “Buyer Finance”categories but both linked to large reputable corporate entities (Anchor)

Suppliers to the Anchor are financed

Key Benefits for small supplier:

Reduce their cost of working capital

Give them flexibility of accelerating their cash flowsthereby improving their liquidity

Reduce hassles of following up for payments

Receivable financing, allowing open account trade,reduces the cost of transaction processing, comparing tothe cost of LSs / Inland LCs.

Avoid delays in receipt of payment

Match funding based on the quantum of purchase orders

Minimize cost of collections

Buyer/Distributors to the Anchor are financed

Key Benefits for small buyer: Ability to access finance which would be more

challenging, collateral heavy and many times not possibleon a standalone basis. This will potentially generategrowth in the retailer business, which results in higherpurchases from anchor.

Strengthening of relationship with suppliers by ensuringcertainty of supply

Avail finance at more competitive rates given corporatelinkage

Assured funding linked to actual business needs

Easy to access the bank for further incremental limits asthese are linked to Anchor sales and unlikely to be easilydeclined.

Anchor Distributors Retail

Buyer Finance

SuppliersSub-

Suppliers

Supplier FinanceFinancing the procurement side of the corporatebusiness

Buyer FinanceFinancing the sales and distribution side of the

corporate business

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Multiple opportunities exist for Banks to become involved in the supply chainfinancing, however traditional receivable finance most commonly preferred

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Anchor PostShipment

PreShipment

Financing the procurement side of the corporate businessFinancing the sales and distribution side

of the corporate business

Made available to a Supplierbased on a Purchase Orderreceived from a Buyer

Financing typically covers theworking-capital needs of theSupplier, including rawmaterials, wages, packingcosts, and other pre-shipmentexpenses in order to allow it to

fulfil delivery against therelevant Purchase Order

The Supplier’s  bank providesfinance to the Supplier treatingthe Purchase Order as evidenceof a good source of repayment

Purchase Order Finance

The anchor initiates the program,

usually the bank deals with 1 buyerand multiple suppliers

Financing bank takes an

assignment of the receivables

which have been approved by thebuyer

Bank approaches each singlesupplier to finance their

receivables

The most common form involves

factoring of ‘Whole  Turnover’  or

significant element (75-90%) of a

seller’s  portfolio of open account

trading receivables

Reverse Factoring

Receivable Finance /Factoring

Buyer / Distributor Finance

Bank finances distributorafter presentation ofauthenticated deliverynote/invoice

Key risk mitigation: theanchor agrees on a first lossrepayment in the case of

default and can also agreeto establish a stop-supplyclause (but only when thedistributor is very dependenton the seller)

PostShipment

Buyer Finance

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Purchase

OrderFinance

Receivables

/ InvoiceDiscounting

Factoring

Buyer /

DistributionFinance

Agriculture

SupplyChain

Capacity

Building/Business Training

Only a few banks and FIs have set-up successful and scalable supply chainfinance solutions, but this is an opportunity mostly untapped

1010SCF product category offered by FI

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Supply Chain

Finance

(FI Dilemma)

Anchor

► Sensitivities

► Selection mechanism

► Technology usage

► Engagement plan

Revenue► Market sizing complexities

► Sales methodologies

► Building for scaling

► Product structure

Cost ► Skill gap bridging

► Sales outfit

► Operational burden

► Channels usage

Risk

► Policy & program

► Assessment tools

► Portfolio management

► Collections framework

While SCF offers an attractive opportunity, banks are confronted with challengesacross 4 main areas

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There is a need for FIs to better leverage SCF Ecosystem & synergize activities

TechnologyPlatforms

IndustryNetworks

IndustryAssociations

LogisticsProviders

SolutionProviders

Regulators

SMEs

NBFI

Corporations

MFIs

SpecializedInvestors

Banks

Market

Analytics

Advisors

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e.g. Coca Cola,

Nestle etc.

IFC, PwC, KPMG,

ChainFinance, Bain,

McKinsey

Vendors, Logistical

 firms, 3PL Carriers

Central Banks, Ministry of

Finance

Financing Platforms, Trade

Logistic Network platforms,

Invoicing / Payment Platforms

TWIST, ISO, ICCSWIFT, ACH, other clearing

house associations

ChainLink

PE, VC, HFs

Wells Fargo, HSBC, Citi

Software / IT vendors: IBM, Oracle,

SAP, Taulia

Insurance Providers, GE

Capital, Factoring (FCI),Leasing and Financing

Companies

Multilaterals

EBRD, WBG, EIB – providing SCF investment

and advisory solutions for the banks

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• Provides banks withadditional credit capacity tosupport clients’ suppliers

from higher-risk countries

• Provides funded andunfunded risk-sharing of up

to 100% of a client’saccounts receivable

• IFC may also provideliquidity and discount A/Ritself

• A/R is discounted using

market-based pricing

• IFC accepts bank proposeddiscount rate on risk-sharedreceivables

5. Financier pays discounted

invoice amount

2 Supplier views

invoices and requests

early payment of

approved

invoicesEmerging

market

suppliers

BuyerSCF

platform

6. Buyer pays full invoice

amount on due date

(automated transfers

established)

1. Buyer

uploads

invoices

(automated

process)

Bank

4. IFC provides funding or

guarantee coverage

3. Financier acceptsearly payment

requests

Mobilization

Program

partners

Funding and risk mitigation for banks’ supply chain finance clientele 

IFC through its Global Trade Supplier Finance (GTSF), is helping FIs tap thismarket opportunity

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$1.6 Billion commitments 700+ suppliers financed 7 Countries supported

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SELLER  provides somecontractual support:first loss or counter-guarantee, stopshipment clause, etc.

End customerin emerging market

Distributorin emerging market

Seller

(anchor)Sub-distributorin emerging market

Benefits to Bank:• Risk-mitigation: portfolio

management tool

• Strengthening businessline with global corporateclients

• Capacity expansion indistributor financebusiness

Focus: food, agribusiness,health, energy efficiency,infrastructure, andpharmaceuticals

Financing corporates’ emerging-market distribution chains 

IFC ROLE

• Funded or unfunded risk-sharing facilities andpartial guarantees

• Capacity building: IFC’s Advisory Services, including

SME Management Services, can engage to improvefinancial sustainability of distributors

BANK ROLEOrigination and monitoring in:

• Receivables-based financing to seller

• Overdrafts or loans to distributors/sub-distributors

• Floor-planning and equipment financing, includingend-user financing

Bank

IFC through its Distributor Finance Program is also facilitating access to financefor SME buyers/distributors

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IFC also provides supply chain finance program building advisory services to FIsby building capacity across 5 key areas

Market

Opportunity

sizing in SCF

Identify industries

with cluster localbuying and sales

and respective

opportunity size

  Review client’s

SME portfolio to

assess payment

linkages

magnitude

Review corporate

portfolio and

establish Anchor

linked

opportunities

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Market Sizing1

Anchor

Engagement &Product Plan

2 Sales Approach3 Credit Process3

Monitoring &

PortfolioManagement

3

 Assessment of

Corporate clients

with large

supplier/

distributor

opportunities

Design anchor

selection/engage

ment strategy

SCF product

selection with

phased approach

for the bank

Design products

and launch plans

including IT

platform advice

 Anchor/suppliers

due diligence

 Assessment of

sales origination

and closure

Corporate anchor

sales approachdesign

 After sales

approach advise-

(i.e. Corporate,

supplier/distributor

onboarding)

Product and

implementation

team structure

Joint meetings for

launching the pilot

program

Onboarding

program

 Assessment of

Credit Process

Product Program

design with

financialprojections

Review legal

environment for

enforceability of

claims

 Anchor and SME

documentation

Recourse/non

recourse

mechanism

Technology and

systems usage

Portfolio

Monitoring and

Collections

Review

Development ofportfolio risk

monitoring criteria

for the Supply

Chain product

program and an

early warning

system

framework Development of

standardized

collections and

operation

processes

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SCF Advisory is part of IFC’s SME Banking advisory services where we haveimplemented 84 advisory projects globally worth $50 million from 2007-13

Ceska Sporitelina

(Czech Republic)

FMB and NSB Bank

(Malawi)

Bank Muscat

(Oman)

Access Bank

(Nigeria)

AgroInvest

Bank

(Tajikistan)

CHUEE

Energy

Efficiency

(China)

Dewan (India)

Finterra

(Mexico)

Banco Atlantida

and Ficohsa

(Honduras)

Bank of St Lucia

(St Lucia)

Atlantic bank

(Belize)

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SME Banking Knowledge Guide: Outlinesleading practices and success factors forprofitable SME banking operations. Guidehas been translated into Arabic, Chinese,

French, Russian and Spanish.

SME Banking Training Program: IFCoffers two courses: An introduction orScaling up course. The three day courseconsists of modules, case studies andexercises covering the following areas:business models for SME Banking, identifyingMarket Opportunities, CustomerManagement, Products & Services, Sales,Credit Risk Management, IT & MIS,

SME Banking CHECK Diagnostic Tool:A guide to assess SME bankingoperations and design relevant

advisory services projects.

Assessing & Mapping the Global Gapin SME Finance: A joint IFC &McKinsey report that assesses andmaps the global gap in SME finance,including the number of enterprises byregion, size and formality, as well asSME’s access to credit and value of thecredit gap.

Customer Management Best PracticeGuide:  The guide outlines key successfactors in better serving the SME clients andallowing banks to maximize the revenueopportunity. It is primarily a technicalpublication, intended for bank directors andmanagers interested in acquiring the keycapabilities to enhance growth and revenue,

as well as building and retaining profitablecustomer relationships amidst ever-increasing competition for the SME segment.

Customer Management Tools: provisionof wallet sizing, du pont model andrevenue projection models for the SMEsegment

SME Banking Benchmarking: An onlineSME Benchmarking Survey,automatically benchmarks SME bankingpractices.

Market Segmentation Tool: Generatesinformation that can be used by theBank to make a decision whether toinvest in developing its SMEoperations, identify target SMEsegments, and decide how to targetthem, design & sell products

IFC’s SME Banking advisory services are supported by innovative tools 

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   A   D   V   I   S   O   R   Y

   I   N   V   E   S   T   M

   E   N   T

CapacityBuilding for FIs

• Build capacity of FIs in strategy, market segmentation, credit riskmanagement, product development through new approaches and systems to

scale up their financing for SMEs on a sustainable basis• Promote sub-sector focus: women-owned SMEs, sustainable energy SME

projects, agri SMEs, leasing, etc• Raise awareness on best practices in the SME Finance space

Financial Infrastructure

• Develop credit reporting infrastructure based on country needs• Support development of secured transactions, collateral registries, legal and

regulatory framework

• Build capacity of public/private stakeholders through advice and training

SME Financing& Investments

• Equity Investments in Financial Institutions / Equity Funds for SMEs• Funded lines to expand investment and working capital lines especially

in illiquid markets• Blended finance options to support the expansion of IFC’s risk appetite

(e.g. grace periods, performance based pricing, subordination, higherrisk /lower security or in limited cases, local currency positions) [for

selected projects]• Focus underserved segments, e.g., gender, fragile/conflict, agri, climate

Risk Mitigation&

Enhancements

• Risk Sharing Facilities / Partial Credit Guarantees to:• Enhance risk taking capacity and provide capital relief via low risk

weightings• Avoid FX mismatches and encourage domestic resources for SME

financing

IFC’s blend of Investment and Advisory solutions are targeted towards enhancingaccess to finance for SMEs

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Thank You