Recent African experience in SME Financing – A case of CRDB Bank LTD (Tanzania) Presented by Elibariki Masuke

1. Recent African experience in SME Financing – A case of CRDB Bank LTD (Tanzania) Presented by Elibariki Masuke

2. Presentation Outline • Country Profile • CRDB Bank Ownership • CRDB Bank Mission and Vision • CRDB Bank’s performance • Why SME Lending • Definition of SMEs at CRDB Bank • Challenges faced by SMEs in Tanzania • Initiatives taken by CRDB Bank to support SMEs • Current status of SMEs at CRDB Bank • Evaluation of Bank’s Initiatives • Policy Environment • Lessons learned

3. 1.0 Country Profile- Tanzania Tanzania 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 Mozambique Selous game reserve • East: Indian Ocean ( Zanzibar Island- Stone Town)

4. 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

5. 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.

6. 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.

7. 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

8. 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.

9. 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

10. 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.

11. 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

12. 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

13. 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 theSME 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

14. 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

15. 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.

16. 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.

17. 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;

18. 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

19. 11.0 Policy Environment The 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

20. 12.0. Lessons learned • Lessons leaned from experience gained • SME Segment is profitable, bankable loyal to banks supported them and SME customers are trainable to be good customers. • SME customers have collaterals but not traditional • SMEs segment requires relationship management concept

21. 12.0. Lessons learned… • Advice to financial Institutions This segment is profitable but investment to train staff and customers is of supreme importance to uphold the profitability • Advice to Policy Makers 1) Communicate clearly to targeted audience prior and after reforms 2) 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

22. 12.0. Lessons learned… • Advice to Development Partner Guarantee Funds Capacity Building to Staff Training of Customers

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