The French Development Agency (AFD) has introduced a risk-sharing instrument to underwrite part of the risks when banks lend funds to small and medium-scale enterprises (SMEs) in the country.
The Support for the Risk of Financing Private Investment (ARIZ), which provides guarantee to cover part of the risks banks incur in lending to SMEs, is to encourage more lending to the sector. The instrument covers SMEs in the operational areas of the AFD.
This means SMEs and other private sector businesses in agriculture, agribusiness and manufacturing activities that fall within the AFD operational area can access the guarantee through their banks.
The 100-million euro fund meant for developing economies, especially African, can guarantee up to 50 per cent of risk when it comes to portfolio guarantees and up to 75 per cent in single deal guarantees.
The Resident Manager of AFD, Mrs Amélie July, and the Deputy, Mr Xavier Muron, told the Daily Graphic that the instrument which started in Ghana earnestly about two years ago had been running well with the current portfolio of guarantees standing at €5.8 million.
Since tne AFD signed its first guarantee agreement with Societe-General Ghana a couple of years ago, 140 SMEs have benefited from the portfolio guarantee, while five companies have accessed loans under the individual (single) guarantee.
The loans are restricted to capital investments such as purchasing equipment, expansion works and other such expenditures. However, it is only the local French banking subsidiary, Societe-General, which has taken advantage of the financial instrument at the moment.
The AFD country office said it had identified some banks which it would like to work with and was hoping to scale up the reach of banks leveraging the facility to deepen their activities with micro, small and medium enterprises.
“We have identified a few second quartile and medium-sized banks, as well as one first quartile bank which have appetite for SMEs and we want to work with them,” Mr Muron, who is also in charge of the private sector at the AFD, explained.
He said the aim of the AFD was at least to court one more bank each year that would use the ARIZ facility.
Short-term funds
One of the challenges holding back banks is the fact that local banks mainly have access to short-term funds and are thus, unable to channel them to SMEs which require medium to long-term funds for it to serve any purpose.
This means that to effectively access and leverage ARIZ, local banks must match the 1.6 per cent per annum rated guarantee with medium-term funds.
To help mitigate the challenge, banks can equally take advantage of medium to long-term facilities offered by the AFD’s private sector lender, PROPARCO.
ARIZ and industry
ARIZ is a response to the private sector’s lack of access to credit in developing countries such as Ghana, where the challenge has consistently featured among the top five challenges facing industry in the AGI Business Barometer Index.
The instrument is to support SME development and also to build their capacity to enable them to grow and create jobs.
Since 2,000, when it started across 34 AFD operational countries, ARIZ has guaranteed loans to over 2,000 companies. About 44 per cent of the guarantees were in West Africa, with Central, Eastern and Southern Africa accounting for 35 per cent.
For the banks
Mrs July and Mr Muron said banks that wanted to access the AFD facility must have robust risk management policies, loan and credit procedures including compliance with anti-money laundering procedures to ensure that the wrong businesses were not financed.
For SMEs
SMEs that qualify to access the guarantee on their loans must have a turnover of not more than GH¢7 million, with risk exposure (debt stock) not more than GH¢800,000. Those criteria are managed by a portfolio guarantee agreement to be signed with any commercial bank.
ARIZ can also cover loans up to €2 million (about GH¢6 million) in a single guarantee deal for bigger companies.