European Parliament INTA Committee Hearing: EU SMEs’ Access to Capital for Internationalisation

1. European Parliament INTA Committee Hearing: EU SMEs’ Access to Capital for Internationalisation 20 June, 2012

2. IFC is a Member of the World Bank Group MIGA Multilateral Investment and Guarantee Agency IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation Est. 1945 Est. 1960 Est. 1956 Est. 1988 Role: • To promote institutional, legal and regulatory reform • Governments of member countries with per capita income between $1,025 and $6,055. • Technical assistance • Loans • Policy Advice • To promote institutional, legal and regulatory reform • Governments of poorest countries with per capita income of less than $1,025 • Technical assistance • Interest Free Loans • Policy Advice • To promote private sector development • Private companies in member countries • Equity/Quasi-Equity • Long-term Loans • Risk Management • Advisory Services • To reduce political investment risk • Foreign investors in member countries • Political Risk Insurance Clients: Products: Shared Mission: To Promote Economic Development and Reduce Poverty

3. IFC Support to SMEs • Connecting SMEs with Larger Firms • Raising Quality Standards • Adopting New Sustainability Standards • Management Training • Free Online Toolkit • Strengthening Technical Skills • Building Financial Literacy • Business Registration • Tax Simplification • Other Issues • Short Term Finance • Long Term Finance • Capacity Building for Financial Institutions • Strengthening Financial Infrastructure

4. The G20 Turns to IFC • IFC supports the G20 SME Financial Inclusion Initiative: • Advisor to the Financial Inclusion Experts Group subgroup on SME Finance, a new high-level body tasked with sharing knowledge of successful models of scaling up access to finance for SMEs. • Establishing the SME Finance Challenge, a global competition to produce innovative private sector led proposals to strengthen SMEs achieving large-scale results. • Establishing an SME Finance Innovation Fund to implement the winning proposals from the SME Finance Challenge. • Research into 164 successful models, Scaling up SME Access to Financial Services in the Developing World.

5. SMEs are the Backbones of ALL Economies • SMEs are critical for the economic and social development of economies • Vast majority of companies are SMEs, in some markets 90% • Job creation and retention, more than 50% of employment worldwide • Major GDP contributors, tax generation • New business creation • Innovation and value-addition • Provider of goods and services • => BUT, only 6% of investment funding in G20

6. % SMEs that need but have neither a loan nor a overdraft Number of SMEs (Mn) <20 Total With deposits With loans or overdraft 20-39 40-59 Value of SME credit gap $Bn >59 Total value of the gap in SME credit:$1,500-1,800 Bn Total value of the gap in SME credit excluding high-income OECD:$900-1,100 Bn Bar graphs refer to millions of formal SMEs in the region (i.e., typically 5 employees and above) SME Finance Gap remains as large as ever at 2 Trillion+ 2.8-3.4 2.5-3.0 Central Asia & Eastern Europe 1.5-1.8 $153-187 Bn High-income OECD Middle East & North Africa 11-14 11-14 East Asia 1.9-2.3 1.5-1.8 0.8-1.0 5-6 11.2-13.7 $ 265-324 Bn 6.0-7.3 $600-700 Bn 2.0-2.4 Sub-Saharan Africa South Asia Latin America 3.5-4.3 3.1-3.7 2.1-2.6 $151-184 Bn 1.5-1.8 0.4-0.5 1.0-1.2 3.1-3.7 2.5-3.1 1.9-2.4 $13-16 Bn $72-88 Bn $212-259 Bn 36-44 25-30 29-35 17-21 SOURCE: IFC/McKinsey MSME database 2011 13-16 8-9

7. Financial institutions face 6 main challenges when it comes to providing finance to SMEs….. ….Banks need to build capacity across 6 main challenges to finance SMEs • Granular definition of SME supported by market research • Specific value propositions to target specific sub-segments of SME e.g. women • Greater focus upon customer management • Government initiatives and associations • Financial infrastructure • Regulatory and legal reforms Poor Customer Knowledge SME skills and literacy Poor business enablers • Educate SME through non-financial advisory provision e.g. SME toolkit • Provision of training, information & networking • Unsecured/ partially secured • Loan guarantees • Supply chain financing SME Finance Challenges Lack of collateral or capital Low profitability Lack of credit data • Value based sales and service coverage models • Retail-style products • Automated and reengineered processes • Low cost channels e.g internet, call centre • Retail and business linkages • Credit scoring • Psychometric testing • Operating account track record • Value chain finance IFC Internal Analysis, 2011

8. IFC has recently completed a review of leading SME finance practices and models as part of our work with the G20 • Key Recommendations from the G20 Sub-Group • Developing specific country strategies • Developing supporting legal & regulatory framework • Strengthening the financial infrastructure • Effective government support mechanisms • Building reliable data sources for SME finance • Building the capacity of financial institutions • Address specific market failures e.g. women and agriculture • Establish a Global SME finance Forum as a knowledge sharing platform

9. What is needed? • Variety of targeted interventions for SMEs at all stages of development to address market failures • Risk-share facilities, venture capital, angel funds… • Offer support beyond financing • Encourage/support SMEs to internationalise • Partial/full guarantee schemes for trade finance

10. Thank you! www.ifc.org aengel@ifc.org