Micro-Finance - Initiatives

8/10/2019 Micro-Finance - Initiatives

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MICRO FINANCING GOVT

( Pakistan) INITATIVES


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AnAnalysis of SMEs

The FinancingPoint of View

DevelopmentSolutions

from

and


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MTISBIR


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First

Microfinance

Bank

Network

Leasing

History

1982

First NGOs:

AKRSP, OPP

1992

NRSP

1994

1995

Bank of

Khyber

1997

KASHF &

PMN

2000

PPAF &

Khushhali

Bank

2002

NGOs: 22

RSPs: 4

MF Banks: 4(+1)

Leasing: 2(+2)

Banks: 1 (+?)

Govt.

Subsidized

Small Farmer

Lending

1970s


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What are banks doing?

Shareholders in Khushhalibank

Increasing consumer financing

Lines of credit and cash management for NGOs

Declining direct outreach to poor?

Limited vision of microfinance and few

partnerships


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Active Borrowers

510,000

Outreach

Gross Loan

PortfolioRs. 5 Billion

MF Banks

30%

Leasing

17%Bank

6%

RSPs

32%

NGOs

15%

RSPs

41%

NGOs

26% MF Banks

30%

Leasing

1%Bank

2%


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3

Information asymmetry( lack of information on SMEs at various levels -industry, regional and company ).

SMEs are high risk due to:Limited capital flexibilityVulnerability to market changesInadequate management capabilityShort business/industry track record

Inferior collateral offering

Problems in SME Financing( From the Point of View of the Banks )

2

High transaction cost of loan packaging/administration relative to mostly low loan-absorptivecapacity of SMEs


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4

3

Long processing time and poor service

High interest rates

Problems in SME Financing( From the Point of View of SMEs )

2

Voluminous documentation

Largely inaccessible, as offered by banks due to:High loan floor, effectively barring SMEsNature/size of collateral requirement

Years of business experience required


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Types of SMEs

The FinancingPoint of View

from


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4

3

Significant credit track record

Sufficient collateral

Already Bankable SMEs

2

Substantial business track record and/or size

Established management systems


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4

3

Absence of or limited credit track record

Absence of or inferior collateral

Near Bankable SMEs

2

Substantial business track record and/or size

Established management systems


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4

3

Absence of credit track record or, in the case ofrecovering SMEsnegative track record

Absence of or inferior collateral

Non-Bankable (But Promising) SMEs

2

Limited management systems

Limited business track record and/or size


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SMEs Banks & Other FundingOrgs

Credit Delivery Intervention


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For Already Bankable SMEs

Wholesale funds

Helps SMEs get lower interest rates

Helps SMEs get longer repayment termsHelps SMEs in the province access credit(liquidity for the provincial financing system)


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For Near Bankable SMEs

Credit guarantees

Helps SMEs enter into the formal financingsystem

Helps banks open-up and learn more on how

to finance near bankable SMEs


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For Non-Bankable butPromising SMEs

Direct Loans

Helps SMEs access credit at better rates

relative to informal sourcesTrains SMEs in formal financing andin starting a credit track record

Helps an SME grow in its industry andto a respectable size over time withcontinuous financing


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The SMEs & Other Credit

Delivery Intervention

DirectLending

CreditGuarantees

WholesaleLending

Non-Bankable

SMEs

NearBankable

SMEsBankableSMEs


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Direct Lending Facilitiesof SMEs Group

Short-Term Facilities(one year or less)

1. SME-FRIEND-short-term financing of export orders

2. SME-FIRST-short-term financing of receivables(eventually POs) of suppliers of top 1,000 corps.

Loan Purpose: Transactional Working Capital


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Direct Lending Facilities---Continued

Medium-Term Facilities(above one year up to five years)

1. SME-FORCE-medium-term financing of start-up orexpanding franchisees

2. SME-GUIDE-medium-term financing of SME projectsendorsed by DTI-POs

Loan Purpose: Production Upgrading/Expansion


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Industry-basedDirect Lending Facilities

1.Shoe Industry(already approved by SBC Board)

2.Cable Operators(pipeline)

3.Bakeshop Operators(pipeline)

Endorsement Required:Technical assessment by the industryassociation on the proposed expansion

Loan Purpose: (Production Upgrading/Expansion)


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Direct Lending Facilities

SME-FEEL-financing of micro-finance conduits

Loan Purpose: Temporary Working Capital

Medium-Term Facilities(above one year up to five years)


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Basic Documentary Requirements

a. Filled-up Application Form

b. In-house Financial Statements

c. Registration Papers

d. Applicable Endorsement


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Procedures for Loan Avail-ments

a. SME submits basic documentaryrequirements to SMEs Bank.

b. SMEs conducts project visit

c. evaluates loan applicationd. informs SME of status of loan

e. If approved, facilitates loan release

documentsf. Releases loan (Land bank Cheque)


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Financial Facilities


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Fin Assistance in SMES

PAK Org/Banks/NGO

SME Bank

All other Banks

Listed with SBP

First Women Bank Koshali Bank

Agha Khan

Foundation European Union

GTZ (German &

Dutch NGO)

Oxfam

CSF(USAID)Program

Several Pak NGOs

World Bank ADB Pak


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Business Finance

Primary Security: Mortgage of property.

Mode of Financing:

a) Running Finance: One year line of credit

(renewable).

b) Term Finance: Maximum up to 7 years (with 2

years grace period).


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Business Finance

Repayment:

a) Running Finance: Monthly debt servicing on

the outstanding balance.

b) Term Finance: Monthly installments.

Markup Rates: 13.5 to 14 %


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Business Finance

Eligibility to Apply :

Age: Between 25 to 65 Years.

Borrowers: Resident Pakistani Nationals.


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Business Finance

Business Requirements: a) Minimum one year's business or

professional experience in the presentbusiness (in case of small business

enterprise) and minimum five years businessor professional experience in the presentbusiness (in case of medium businessfinance).

b) Member of the relevant trade body (in caseof medium business enterprise) or relevantprofessional association (in case of selfemployed professional).

H if h


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However ,, if you chose venture

capital? Who are the venture capital

providers and what do they want?

Types of venture capitalists (VC): 1. Business angels

Often previous entrepreneurs that have sold thir firms Often older actors with knowledge of the market and you

=> they may like to help you

2. Venture capital firms / funds A) Small actors e.g. SME Bank have 548 members

Often specialised on a financing or market segment e.g. seedfinancing, growth financing, MBO/IPO or biotech, ICT,construction

B) Large institutional VCs in Pakistan

C) Corporate VC e.g.


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The venture capitalist looks at:

1. THE GROWTH POTENTIAL OF THE FIRM

The most important for a VC is often how fast and

how much a firm to be financed can grow

How can the management perform that growth ,, is a

standard key question

Realism versus dreams?

Competence and already shown results i.e. sales


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The venture capitalist looks at:

2. THE MANAGEMT TEAM

Will these people deliver what they say they will?

The father of venture capital G.Doroit: Bet on thejockey not the horse

How big is the risk that key personnel will leave the firm.All managers should be owners

Note that receiving financing relates to trust

Relevant experience is important


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Venture capitalists formula

It is the expectations that are crucial invaluations of a listed or not listed firm

How is a firm that you may buy 10 % ofvalued?

It is a complex and time dependent issue

The expected p/e value is important aswell as the size i.e. total sale

One way to value a firm is to use theventure capitalist formula, i.e. a version ofthe standard NPV


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Venture capitalist formula (VCF)a simple

way

Assume that a venture capitalist has estimated that the

likely profit of a firm is 100 after 3 years from now and

that the profit can be assumed to stay at that level.

Then you can assume that the firm value after 3 years

is: 10 * 100 = 1000. However, what do you today pay for

something that perhaps after 3 years is worth 1000?

NPV or VCF gives that if you are a VC with a discount

rate (r) of 50% so is the firm valued at 1000/(1+0,50)3~296,3 today. And 10% of the firm is then worth ~ less

than 29,6 for the investor

However, if rvc= 20% ,, so is the venture capitalist

willing to value the firm at 578,7. And if rvc= 100%?


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VCF

Note that in an exam it is that simple.However, in reality it is more complex.

In the real world the venture capitalist maywant to control the firm (more than 50% of thevotes) so that he can push the developmentof the firm. However, VCs are often happy with 10-30% of the

firm in the first financing round, and less in thesecond financing round.

Is there really buyers out there? The usual waythat a VC exits is through industry sale. So you

have to work on that concept. IPO is hard! To buyout the VC is not that common


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Impact OnPoverty

Focus on poor: 30% of GDP per capita

Focus on rural & agriculture: 70% of loans

Shifting with recent developments

PPAF: 9% Increase in income

KASHF: 15% Increase in income and social benefits

PMN Seminar Paper December 2003 mixed picture

Need more data

Could do more to reach poorer people


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Thank you.

Documents

Micro-Finance - Initiatives