International Finance Corporation (2011),Washington, DC: World Bank Group

This report illustrates some effective ways to expand financing to small and medium sized enterprises in Africa.

Access to finance is crucial for a range of smallholder and small entrepreneur activities.  This report details seven International Finance Corporation interventions that successfully expanded financing options in developing countries.  There are numerous ways that finance can be provided to small entrepreneurs, with varying likelihoods of success in different contexts.  Therefore, this report provides information on what has worked and in what contexts.

The first finance intervention involved credit bureaus in Ghana.  Credit bureaus are one of the largest underappreciated obstacles to development.  As the IFC reports, “In Africa, the near absence of credit bureaus means banks hesitate and often refuse to lend to individuals or small or medium-sized businesses because they know too little about them.  When small or start-up businesses cannot access loans for new equipment or stock, or cannot take on more employees, broad economic growth is stifled” (4).  To address this problem, the IFC is pushing for the development of African private sector credit reporting infrastructure, including for example an interbank credit database that will facilitate loan processing and accuracy in underwriting decisions.   The IFC also advised Ghana in the development of its 2007 Credit Reporting Act, which will soon make credit bureaus operational.  It continues to advise Nigeria on the development of such services. 

The second financial intervention involved home mortgage lending.  Borrowing against the value of a house is “practically non-existent in Africa” outside of South Africa, due to constraints including high interest rates, inflation, currency fluctuations, uncertain long-term financing for banks, property registration costs, insecure titles, and complicated regulations surrounding land tenure, valuation, foreclosure, taxes, and community owned lands.  The result is that many Africans reside in informal housing—e.g. 80% of individuals in Nigeria.  The IFC is promoting African home mortgage lending through its “Mortgage Toolkit” distributed to banks with the goal of putting “houses in the hands of lower and middle income earners previously shut out of the market because no long-term financing was available to them” (9).  The IFC has supported mortgage lending reform in Ghana, Uganda, and Nigeria, and will do so in Rwanda and Senegal.

The third financial intervention involved leasing.  Leasing is an important “alternative financial instrument” where credit histories do not exist and small enterprises lack the collateral that would allow them to access loans.  As the IFC writes, the intent is to “increase access to finance for the cash-strapped entrepreneur whose business might demand a truck, a plough, a drill, or even a sewing machine or simple telephone” (13).  Leasing programs have stimulated capital formation in Russia, Ukraine, and Central Asia, and the IFC is working to replicate such programs with its African Leasing Facility Program that involves advice on regulatory reforms and then advice to financial institutions.  In Ghana, leasing more than tripled from $28 million to $108 million in only three years.

The fourth financial intervention consisted of microfinance.  In addition to promoting standard microfinance lending across Africa, the IFC has also promoted microfinance provision in several innovative ways such as advising commercial banks and non-profits on how to develop licensed microfinance wings.

 The fifth financial intervention targeted securities markets.  Sub-Saharan Africa is dominated by money markets characterized by expensive, short term lending from commercial banks.  Medium-sized companies are hampered in their expansion and growth plans by such lending markets.  Securities markets involving bonds and equities are lacking, and are necessary to provide the long term financing required. As of 2009, Kenya has only 56 listed companies, Tanzania 12, and Uganda eight.  Under the Efficient Securities Markets Institutional Development program founded in 2006 with the World Bank and Sweden’s Sida, the IFC has helped to provide advice, finance securitization transactions, structure collateralized transactions, and improve rating agencies.

The sixth financial intervention focused on banking for small and medium sized enterprises.  Lending to such companies is often perceived as risky.  Therefore the IFC Micro, Small, and Medium-Sized Enterprises Finance Program was developed to help banks develop products for smaller businesses, especially those run by women.

The final intervention involved trade finance.  Despite high oil and commodity prices, Sub-Saharan Africa’s share of world trade has fallen over the past 50 years.  The IFC’s trade finance program provides risk-guarantee coverage supporting bank loans to companies involved in foreign trade. 

Overall, these interventions illustrate a range of ways to expand access to finance in developing countries.  Credit bureaus assist small and medium sized businesses in getting loans; home mortgage lending supports formal ownership; leasing supports capital formation where loans cannot be accessed; microfinance supports capital formation where loans can be accessed; securities markets support the growth of medium and large companies; advice to banks on SME products increases lending in this segment; and trade finance encourages loans to companies engaged in export—perhaps particularly useful in times of rising global food prices.