WORLD BANK G ROUP /SMALL AND MEDIU M E NTERPRISE DEPARTMENT VOL.1, NO.3 FA L L 2 0 00 20953 PA Rethinking Financial IN THIS ISSUE: Services for SMEs PAGE1 Micro, small, and medium enterprises are the lifeblood of developing countries, creating jobs and raising incomes in environments where economic opportunities Internet are otherwise scarce. But for all their importance, they Access face a daunting obstacle: far too few have access to for SMEs regulated banks, savings and loan associations, invest- ment funds, and other formal financial institutions, For the most part, local financial intermediaries (Fls) j see small business simply as high-risk, low-return A li operations not worth their time. Micro, small, and PAGE medium enterprises generally don't have the manage- l ment and accounting skills required to provide transpar- ent financial statements, and most lack enough credit d :- history or fixed assets to serve as collateral. This makes - 7 them seem much too costly for local Fls to consider. SME And in the few cases where FIs do emerge to target Deprtranent Pathe sector, regulations such as capital adequacy ratios, Launched interest rate caps, and bank licensing requirements often thwart their efforts. . New IFC investee Broad systemic change is needed. The hard part is i PlantersBank making it happen. How can local banks come to see has built a business financing PAGE that, for all its informality, small business can be good _ Philippine SMEs. business? business start-ups. But it depends on shrinking The thinking in the development community on this pools of donor aid, and is increasingly being subject has recently begun to change. In the past, criticized for distorting local markets and contribut- Partner the emphasis was often on increasing subsidies to ing to a "culture of non-repayment." It also seems Profile: IPC microenterprises and SMEs. Development organizations to strip away the incentives Fls need to grow traditionally have subsidized direct credit to SMEs and comfortable with taking small business credit risk-the provided grants for business training programs and first step to increased lending. cheap loans to intermediaries carrying 100 percent government guarantees. This approach has had some Now things are moving in another direction, with a positive effects on poverty via job creation and small new goal of increasing small business access to a See FINANCIAL SERVICES, page 7 HARNESSING THE POWER Internet Access for SMEs The Internet is radically changing all aspects of the small business environment. Those who make strategic use of it can dramatically lower their costs of doing business-not only by new efficiencies in acquiring information and marketing products, but also by a changed framework for relating to customers, accessing capital, and carrying out internal business proesses. Those who ignore the new technologies risk falling further bhind. So far, the benefits of e-business have largely been confined to industrialized nations and the largest companies of the developing world. To spread the gains more widely, the World Bank Group has begun financing a wide range of projects to help I: /0. ; ; % ' SMEs make better use of the Internet. One recent example is RICENET, a new Web site that the Cambodian Rice Millers Association is launcning on a pilot basis with $40,000 from the IFC- managed Mekong Project Development Facility (MPDF). Although neighboring Thailand and Vietnam are the world's top two rice exporters, Cambodia so far exports almost no rice, one of its most important crops. This contributes to its remaining one of the world's poorest countries. RICENET will help by: - Enabling local millers to gain up-to-date national and international information on the -ice sector. SME Department Director Harold Rosen meets RICENET users, * Giving them a new low-cost communications platform for discussion among Cambodia themselves or with suppliers and customers, both in Cambodia and abroad. (below). * Training local Internet/IT teams that can facilitate broad computer usage in rura areas. Computers with Internet access are being installed with the MPDF grant, and the project is expected to move to sustainability as local users show a willingness to contribute to central costs at the end of the pilot phase. RICENET is part of a World Bank Group strategy that will address the five priority areas that can help SMEs advance in their strategic use of Internet technoogy: E-ACCESS Access to an Internet connection-which requires quality phone service and a reasonably priced Internet service provider (ISP)-is the necessary prerequisite to SME FOCUS applying the new technologies. Projects in this area may include investment in is published quarterly by the ISPs, Internet caf6s, and related training for small businesses. World Bank Group Small and Medium Enterprise E-INFORMATION/KNOWLEDGE Department Increasing SMEs' access to quality information via the Internet requires not 2121 Pennsylvania Avenue, NW only making more information available online, but also ensuring that it is Washington, DC 20433 USA selected and packaged in accessible formats. Projects in this area will include Director: Harold Rosen the establishment of portals with content tailored to SMEs in specific sectors or Editor: Catherine A. Sunshine countries, as well as syndication of content that can be redistributed to Design: studio grafik, Herndon, VA Newsletter coordinator: LuHjeta Tola appropriate local sites. For example, the World Bank and IFC are jointly working on the Global Development Gateway, a site whose content will For further information or to include this k;nd of material. request additional copies: L.Tola, (202) 458-7562 E-mail: Ltola@ifc.org E-COAAMERCE a:i¢Sminar SMEs can expand their potential customer base by making n Th oue Spotlights Financial Services products available online, either via their own Web sites or through online "malls" that serve multiple retailers. They i interrediaries are a critical link in the chain of services can also cut supply costs by online purchasing, as a recent tt hat small businesses start up and succeed. A key chal- e-commerce start-up in the Philippines that IFC financed along n fr dnors ad technical assistance providers is to build V with PlantersBank and others shows. Such projects may also snacial intermediaries that can work successfully in , include investing in "vertical portals" that bring buyers and te mallbusinss sector long after donor funds have been sellers in one industry online together in fragmented niches that .. th aw,, are dominated by SMEs. th 'M thi s chaltenge was the focus of the Small Business E-FINANCE i ervices Seminar co-hosted by IFC and the Since significant opportunities for cost savings can emerge Nteln elent Finance Company (FMO) in The when financial transactions are done online, IFC has H e tJune. Parbicipants exchanged ideas, tools and tech- begun considering projects with India's Global Trust Bank niqies, ad lesns learned on how to help financial intermedi- and others to set up virtual banking Web sites focused on smal thesmal business sector in emerging markets. SMEs. These initiatives can help the banks widen their C itt hseffort is the involvement of technical assistance service offerings significantly by obtaining better information t can work with local banks to build long-term about clients. pyMany of the best technical assistance firms working if this tr were on hand to share their insights. E-OPERATIONS Business operations in all sectors are being re-engineered .ilely, distussions,: participants shared their experiences in to take advantage of Internet technology. This results in cost- f'narciaf services innovation, systems devefopment, credit risk cutting and the availability of more advanced services, including mAoqoerent, business planning, technology implementation, accounting systems, supply chain management and database andpynning. Tough issues were dealt with openly and management, to SMEs. Projects in this area may include honstly These included, for example, the lack of transparency investments in applications service providers tailoring their aid co io among the international financial institu- products to SMEs, as well as training programs to help SMEs te lge of building flexibility into technical assis- integrate such technologies into their business operations. while maintaining control; the difficulty of mak- Other possibilities include helping small and medium financial 4igaimcin a sector without creating market distortion; enterprises move their own operations online, as well as picaences on donor programs; and the need for multi- helping SMEs take advantage of the burgeoning services laten4ers to simplify their lending procedures. becoming available for trade finance, equity finance, and other financial services. * At the sessi'S end, participants produced a blueprint for a m*oefcused, coorinated approach to helping small business- that loors and technical assistance providers can build on. w,iJlcipants wIcontinue this work in the late fall at a follow- upmetng ihoted by IFC. S ME l n tran et iio,infOrniafI tLaoarciino (alagomacino@ifc.org). Is o n Live! The Small and Medium Enterprise Department is pleased to announce its new Intranet Web site at http://ifcnet.org!srne. = _ ~ The site is available to staff of the World Bank Group, including its / E. I-tt;St^AtiET iti-tV tjttf_ field offices and facilities. Here's a sampling of what you'll find: S m M EtWRISE ABOUT US: Organizational chart, key players, vision and strategies of the SME Department. LINES OF BUSINESS: Country mapping, business environment, knowledge management, metrics and evaluation, e-business, r regional programs, facilities, capacity building, pilots, partnerships, I funds mobilization. '-Zc'tap ' .,.~---.-, '_-p 7ix e | COMMUNICATIONS: Presentations, press releases, fact sheets, and this newsletter. CALENDAR: SME events within and outside the World Bank Group. Visit us soon at http://ifcnet.org/sme DEPARTMENT MIS: Work programs, deliverables, tracking of projects, management team minutes, budget. Collaboration with the World Bank Group's SM\E Department is expected to include staff exchanges, coordination of approaches to donors, and efforts to measure the development impact of technical assistance activities. For more information: Farzin Mirmotahari (fmirmotahari@ifc.org). Russia's new Camnpina yogurt processing plant buys milk from "Friendly Credit" for Brazilian local dairy farmers. Entrepreneurs PEP Targets SMEs in The World Bank is providing new money to an innovative pilot Former Soviet Union that helps microenterprises in Brazil. A $50 million loan will further develop the country's acclaimed CrediAmigo (Friendly Agribusiness is a key sector of the Russian economy, and over the Credit) microfinance project. years IFC has sought to strengthen it through active support of land privatization and farm reorganization. With more than $27 million in technical assistance, IFC has helped transform nearly 500 collective or state farms into new private farming enterprises. i When a Dutch dairy cooperative, Campina Melkunie, wanted to build a new yogurt processing plant outside the Russian capital, IFC provided not only financing but also support in sourcing high- quality raw milk from local farms. In 1997, using $1.1 million in grants from its Dutch Technical Assistance Trust Fund and another $235,000 from Campina itself, IFC helped the Dutch firm identify potential suppliers. It then helped negotiate supply contracts with eight dairy farms in the area, each having between 100 and 800 employees and annual revenues of $200,000 to $4 million. SL|| IFC, Campina, and Rabobank also teamed up to create a I new agricultural leasing company to help the farmers acquire equipment they need to meet Campina's quality standards. Financing microentrepreneurs in one of Brazil's poorest regions. _ S. '4 The leasing company intends eventually to work not only with Campina but also with other interested processing companies. Brazil has Latin America's largest concentration of informal The yogurt plant is now fully operational and is having an impact microenterprises, many of them located in its underdeveloped in a region where agricultural production declined by as much as northeast. While commercial banks have generally ignored the 60 percent after the fall of the Soviet Union, before beginning a microenterprise sector, Brazil's Bank of the Northeast has slow recovery in 1997. aggressively pursued this market, which represents more than 2.2 million potential clients in this region alone. The countries of the former Soviet Union need many more such initiatives if they are to increase privatization, lessen regional The World Bank worked close y with the Bank of the Northeast imbalances, and develop the transparent business practices to develop the CrediAmigo program, starting in 1996 with needed to attract foreign direct investment. To help them reach study tours for the bank's senior managers to successful these goals, IFC has created a new financial and organizational microfinance programs in Latin America and Asia. The World framework for its technical assistance in the region, the Private Bank also provided technical assistance through Acci6n Enterprise Partnership. A joint venture between IFC and donors, International and the Consultative Group to Assist the Poorest PEP will work in Armenia, Belarus, Georgia, Russia, and Ukraine, (CGAP). emphasizing sustainable grassroots efforts. The CrediAmigo pilot was launched in 1997. Within two years Building on IFC's track record of technical assistance in the region, it had grown into the largest microfinance program in Brazil, with PEP will create a stable funding base and a permanent structure 51 branches and more than 40,000 active clients. Most clients for administering projects. Private donor funding is expected to own small shops or kiosks or manufacture items such ,1 total $15 million per year for the next three years, with IFC as clothing, shoes, and soap in their homes. The average contributing an additional $9 million over this period. loan is $250. CrediAmigo's experience shows that its focus on microenterprise life, and tourism resources. An exception is MedCen Samoa, makes good business sense as well as contributing to social devel- a private,19-bed hospital outside the Samoan capital. opment. Loan delinquency rates of less than 3 percent confirm that informal microentrepreneurs are good clients for for- Co-founders Dr. Mamea Emosi Puni and Dr. Taualatasi John mal financial services, even though most are illiterate and poor Adams approached the SPPF in 1994 with their high-risk venture. The hospital would require the largest capital raising CrediAmigo attributes its success to the careful selection and in Samoa's history. Moreover, the proposal for a private training of loan officers and the development of a simple loan facility that would operate on a user-pays basis raised social product with minimal application requirements. While covering issues. Most people in this tiny nation of 165,000 are costs, the program's interest rates are still less than a fourth of subsistence farmers, and per capita GDP is around $800 a what informal moneylenders demand. year. Everyone, including IFC and the World Bank, had to be convinced that this wasn't going to be a hospital just for The latest infusion of cash "will provide a secure source of the tiny Samoan elite. funding for the program's expansion over the next five years, as well as finance the additional technical assistance and equipment The breakthrough came with an SPPF market survey showing required to support growth on a sustainable basis," says World that village families would indeed use the proposed hospital Bank project manager Steven Schonberger. The program expects and pay for it with money sent by relatives living and working to serve at least 150,000 clients during the project period. in New Zealand, Australia, and the United States. The SPPF became deeply involved in the $2.2 million project. The Loan funds will be provided to CrediAmigo branches at Brazilian Development Bank of Samoa provided $700,000 in the form market rates to permit evaluation of real profitability. The loan of term debt, while IFC made a $500,000 quasi-equity will also support an evaluation to determine how improved investment. The balance came from 21 local shareholders. access to formal financial services affects the households of SPPF, says Dr. Puni, was "the glue that brought people and microentrepreneurs. institutions together to make this place a reality." The Bank of the Northeast is discussing with Brazil's Central Opened in 1998, MedCen provides high-quality care with Bank how the CrediAmigo program can evolve toward an an emphasis on obstetrics/gynecology and pediatrics. It independent financial agency that offers a wider variety of charges affordable prices and has taken some pressure off the services to its clients. Annual evaluations will be carried out with state-funded health system. The hospital employs 34 people CGAP and IFC to evaluate progress toward this goal. Bank of and has boosted Samoa's skills base. the Northeast has highlighted the importance of continued partnership with the World Bank and CGAP in the development Cut off from treatment by the vast Pacific Ocean, Robert Louis of a sustainable microfinance program. Stevenson died in Samoa of tuberculosis in 1894. Today, MedCen, with the assistance of the SPPF and the support of This article was adapted from the June 13, 2000 issue of the Samoan government, is helping to ensure that isolation no Today, the World Bank's online newspaper longer threatens the health of the Samoan people. For more information: Steven Schonberger For more information: Denise Aldous (sschonberger@worldbank.org). (daldous@ifc.org). Samoa's Med Cen Hospital "Heaven on earth, the ideal life," Robert Louis Stevenson once rhapsodized about the region then known as the South Seas. For the British author the South Pacific islands were a vast distance from the cares of his homeland. But the very isolation that attracted travelers is a continuing problem for the people of the region s micro states today. "We have very small populations and very little land," says Samoa's prime minister, Tuilaepa I " Sailele Malielegaoi. "There are trade and transport difficulties and a shortage of capital for development." In 1990 IFC responded to these challenges by establishing .......I........ .. its South Pacific Project Facility (SPPF). Many of the small IFC's South Pacific Project Facility helped bring quality private businesses SPPF has assisted focus on the region's timber, sea health care to Samoa. PARTNER PROFILE: Internationale Projekt Consult DEMAND FOR MICROFINANCE IS ENORMOUS. SUPPLY IS NOT. Usually missing from the equation: regulated, self-sustaining financial institutions with a social vision and a desire to target low-income entrepreneurs. But recent work by Germany's Internationale Projekt Consult GmbH (IPC) shows how important a bottom-line mentality can be in bringing financial services to this crtical underserved market. Created in 1980, IPC first worked on donor-funded microfinance programs in Latin America. Founder and principal owner Claus-Peter Zeitinger recalls seeing money constantly lost and discovering that "if you made a fuss like an owner, you were looked down on." He was repeatedly told that microfinance was about poverty reduction, not commercial viability. But he also saw how that approach kept microfinance from being sufficiently scaled up, forcing the vast majority of microenterprises to rely instead on exorbitantly priced informal-sector loans. Today IPC puts its own money at risk as an owner of microfinance institutions (MFIs). As such, it can insist on good results from both the development and financial perspectives. Through an investment fund it manages, Internationale Micro Investitionen AG, IPC owns stakes in commercial MFIs in Latin America and the Caribbean, Eastern Europe, and the former Soviet Union. Through a new $85 million partnership with IFC, the Global Microfinance Capacity Building Facility, the firm will expand to Africa and Asia as well. All institutions supported benefit from ]PC's a*ive stakeholder approach and essential grant funds from donors in the start-up phase. Custom-designed software manages operations at all [PC-affiliated institutions. IPC-trained credit officers also bring laptops on-site to microenterprises, drawing up cash flow statements in minutes. Credit officers are responsible for loans from start to repayment and-unusual in the commercial banking industry-their com- pensation is linked to the quantity and performance of the loans they manage. IPC has emerged as a key IFC partner in microfinance, along with U.S.-based nonprofit Acci6n International, local institutions ACLEDA Bank (Cambodia) I PC AT A GLANCE and K-REP (Kenya), and others. The German firm's microfinance ven- ture in Kosovo, the first licensed bank in the post-conflict era, opened WHAT IT IS: A for-profit consulting group in January and showed profits within its first six months despite the microfinance institutions in developing highly difficult business environment. The bank has drawn in ountries. German giant Commerzbank as a shareholder-thus gaining not only capital and prestige, but also invaluable expertise in inter- MISSION: To strengthen the microenterprise national capital transfers, a ch ef source of income for the sector by promoting sustainability and greater many Kosovars with ties abroad. scope for microfinance services. In Bolivia, local institution Caja los Andes began in 1992 as a HOW IT WORKS: Joins IFC and others to microfinance program run by a Bolivian NGO. IPC helped it launch new institutions through an independent evolve into a formal financial institution in 1995 and cut its investment fund, applying customized credit portfolio's administrative costs by more than half. This year technologies and staff incentives to ensure Caja Ics Andes expects a 15 percent return on equity. m returns on its investments. Institution-building grants from donors are critical in the start-up period, then phased out. For more information: PARTNER WITH IFC IN: Albania, Bosnia IPC GmbH and Herzegovina, Georgia, Ghana, Haiti, Am Eisernen Schlag 31 Kosovo, Mozambique, the Philippines, D-60431 Frankfurt/Main and Ukraine. Will work in other countries Germany through new Global Microfinance Capacity Building Facility. Tel.: 49-69-95-14-37-0 Fax: 49-69-95-14-37-25 E-mail: ipc gmbh@compuserve.com Web: www.imi-ag.de or www.ipcgmbh.de FINANCIAL SERVICES, from page 1 Continuing our. introduction of the World Bank wide array of long-term, financially sustainable services. Several innovative efforts of this kind are underway throughout the World Bank Group in Group's Small and partnership with other development finance institutions and local Fls. Among Medium Enterprise the strategies: investment in financially viable intermediaries targeting SMEs and increased technical assistance in reducing transaction costs. Department. The SME Department is working closely with the World Bank's Rural and Micro Finance/Small Enterprise Thematic Group and its counterpart within IFC's new Global Financial Markets Group to help these efforts succeed. Some ALEXANDER AMUAH recent market trends have eased the way, such as intensifying competition for _ _ hanaian the domestic blue-chip market and increasing recognition that small business Current position: Knowledge lending makes sense. In many developing countries, for instance, Citibank has management officer, SME Department Recent experience: Knowledge built a successful portfolio of emerging local companies that contributes management officer for World Bank positively to its bottom line. _ ~~~~~~Rural and Micro Finance/Small Enterprise _ _ ~~~~~Thematic Group. In the Philippines, PlantersBank is a profitable, privately owned institution that focuses solely on SME lending and has a healthy $400 million loan portfolio. iRENE ARIAS Its long-term local currency financing helps thousands of small businesses _ _ ~~Spanish Current position: Investment analyst, grow, setting a good example for others. IFC recently invested $27.3 million SME Department. to scale up its operations and has also begun using it to train banks in Recent experience: Research assistant, Vietnam as well. Planters will also be a shareholder in a planned IFC-backed Central Asia - Caucasus Institute. commercial microfinance institution in the Philippines' poorest province, Mindanao. RAJIV KOCHAR In Senegal, where microenterprises and SMEs provide income to more than 90 i - _ Indian percent of the employable population, IFC has provided a package of partial Current position: Team leader, guarantees to Senegalese banks designed to spur up to $40 million in market metrics and evaluation program, rate, CFA franc-denominated SME loans over the next five to seven years. SME Department. Recent experience: IFC Financial Markets Subloans will range from $30,000 to $450,000 equivalent and carry maturities Group; Extending IFC Reach Program; of three to five years, and will be targeted at Senegalese companies with annual revenues of $3 million or less. ERIKA RHOADES The Senegalese and other regional banks will work with IFC to build their _ Arericanr capacity for SME lending and strengthen the overall environment for it. One Current position: Program officer, component, expected to be funded by a grant from the SME Department's SE Department. _ Y j Recent experience: Investment new SME Capacity Building Facility, will help them adapt credit scoring models analyst, IFC Central and Southern that significantly lower the appraisal costs of small business loans. Europe Department; consultant, IFC Southeast Asia Department. IFC's initiative was conceived to complement an upcoming World Bank private sector development project in Senegal that will focus on improving the WENDY JAGERSON TELEKI broader business climate by promoting legal and judicial reforms, vocational CurAmeric n training, and local business associations. If successful, the twin punch from _ _ ~~~~Current position: Program officer, SME Department. both sides of the World Bank Group should go a long way toward improving Recent experience: Consultant on SME the competitiveness of SMEs, the key source of Senegal's private sector-led development, World Bank; project manager, IFC Europe Department; also held positions with growth. Finca International, Fuji Bank and Trust, and Eurasia Foundation. "We are seeing a great response to this new strategy to foster greater private sector growth and thus reduce poverty," says IFC's Hany Assaad. "We will ROB WRIGHT be doing everything we can to work with external donors and partner Americdn organizations to learn from each other and collaborate in this effort to Current position: stimulate greater growth of small and medium enterprises." - Communications officer, SME Department. Recent experience: Editor of IFC's quarterly magazine, Impact. g Ei!FFus World Bank Group Small and Medium Enterprise Department 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA Printed on recycled paper with soy-based inks. CALENDAR Seminars In the World Bank Group GLOBAL CONFERENCE ON MICROENTERPRISES. OPENING OF BALKANS ENTERPRISE FACILITY. September 26-28, 2000, in New Delhi, India. September 21-23, 2000. Sponsor: World Association for Small and Medium Enterprises. E-mail: arun@wasmeinfo.org (Arun Agrawal) WORLD BANK GROUP/INTERNATIONAL MONETARY FUND ANNUAL MEETINGS. NETWORK ON POVERTY AND INEQUALITY MEETING. September 19-28, 2000, in Prague, Czech Republic. October 11, 2000, in Rio de Janeiro, Brazil. Press room opens: September 18. Sponsors: Latin American and Caribbean Economic Association; Program of seminars: September 23-26. World Bank; Inter-American Development Bank. Plenary sessions of the Boards of Governors: September 26-28. www.iadb.org/sds/eve.cfm/0/english/ E-mail: ariannalWiadb.org (Arianna Legovini) DONORS' COMMAITTEE MEETING. October 24-27, 2000, in Vienna, Austria. Ill INTER-AMERICAN FORUM ON MICROENTERPRISE. Sponsors: Committee of Donor Agencies for October 17-20, 2000, in Barcelona, Spain. Small Enterprise Development; Donors' Working Group Sponsors: Inter-American Development Bank and Agencia Espaiiola de on Financial Sector Development; Cooperaci6n Internacional. Austrian Development Co-operation. http://www.iadb.org/sds/utility.cfm/159/english/general/1595 E-mail: mdutch@worldbank.org (Mary Dutch) E-mail: ricardoeWiadb.org (Ricardo Esteves) RURAL AND MICROFINANCE NEW OPPORTUNITIES IN THE KNOWLEDGE-BASED BEST PRACTICES: ECONOMY: THE ROLE OF SMEs IN THE NEW MILLENNIUM. HOW TO DESIGN OPERATIONS October 29-November 1, 2000, in Seoul, Republic of Korea. CONSISTENT WITH BANK POLICY. Sponsor: International Small Business Congress. Fall 2000 (dates to be announced), in Washington, D.C. http://isbc2000.kfsb.or.kr/ Sponsors: Private Sector Development; E-mail: isbc2000Okfsb.or.kr Financial Sector Development; Rural and Microfinance Thematic Group. 2ND OECD CONFERENCE ON WOMEN ENTREPRENEURS IN SMEs. November 29-December 1, 2000, in Paris, France. Sponsor: Organization for Economic Cooperation and Development. www.oecd .org/dsti/sti/industry/smes/news/women2000.htm