Helping SMEs meet the requirements of formal financing - Increasing SME Access to Finance: A Four Pronged Approach
Helping SMEs meet the requirements of formal financing - Increasing SME Access to Finance: A Four Pronged Approach
instruments can help provide missing information or reduce
the risk stemming from some SMEs’ lack of transparency.
Franchising, which is very popular in Southern and East
Africa with the encouragement of South Africa, allows use
of a brand name or know-how that reduces the risk of
failure. Warehouse-receipt financing (in South Africa, Kenya
and Zambia) guarantees loans with agricultural stocks.
Other financial instruments, such as leasing and factoring,
can reduce risk effectively for credit institutions but are
still little used in Africa.
Credit associations that reduce risk by sharing it are more
common. They help financial institutions choose to whom
to lend, by guaranteeing the technical viability of projects,
and sometimes providing guarantees. But growth of these
bodies is limited by the lack of organisation among SMEs
in Africa and by their focus on certain sectors and
geographical areas.
Governments and donor sources have thus preferred creation
of guarantee funds to ensure repayment in case of default.
In several countries, especially in Central Africa, this has
not worked since provision of a guarantee has meant less
rigorous choice of investment projects and a lower rate of
debt recovery. Elsewhere, notably in Mozambique, borrowers
and financial institutions have worked together to maintain
a good rate of recovery and to reduce interest rates.
Financing SMEs in Africa
by Céline Kauffmann
Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication
of the African Development Bank and the OECD Development Centre
Helping SMEs meet the requirements of formal financing Increasing SME Access to Finance A Four Pronged Approach - To learn more about this author, visit OECD Development Centre's Website.
Like this article? Share it with your friends
Apart from the need to boost SME capacities, some financial
instruments can help provide missing information or reduce
the risk stemming from some SMEs’ lack of transparency.
Franchising, which is very popular in Southern and East
Africa with the encouragement of South Africa, allows use
of a brand name or know-how that reduces the risk of
failure. Warehouse-receipt financing (in South Africa, Kenya
and Zambia) guarantees loans with agricultural stocks.
Other financial instruments, such as leasing and factoring,
can reduce risk effectively for credit institutions but are
still little used in Africa.
Credit associations that reduce risk by sharing it are more
common. They help financial institutions choose to whom
to lend, by guaranteeing the technical viability of projects,
and sometimes providing guarantees. But growth of these
bodies is limited by the lack of organisation among SMEs
in Africa and by their focus on certain sectors and
geographical areas.
Governments and donor sources have thus preferred creation
of guarantee funds to ensure repayment in case of default.
In several countries, especially in Central Africa, this has
not worked since provision of a guarantee has meant less
rigorous choice of investment projects and a lower rate of
debt recovery. Elsewhere, notably in Mozambique, borrowers
and financial institutions have worked together to maintain
a good rate of recovery and to reduce interest rates.
Financing SMEs in Africa
by Céline Kauffmann
Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication
of the African Development Bank and the OECD Development Centre
Helping SMEs meet the requirements of formal financing Increasing SME Access to Finance A Four Pronged Approach - To learn more about this author, visit OECD Development Centre's Website.
Like this article? Share it with your friends
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