Workshop on SME Finance – Reaching Scale: A dialogue between global practitioners and East African BankersWorkshop on SME Finance – Reaching Scale: A dialogue between global practitioners and East African Bankers

26 – 27 June 2007, Dar es Salaam, Tanzania26 – 27 June 2007, Dar es Salaam, Tanzania

A practical example from MozambiqueA practical example from Mozambique

Socremo - Banco de MicrofinanSocremo - Banco de Microfinançasças

Structure of the PresentationStructure of the Presentation

• Country Features

• Socremo – Banco de Microfinanças

• SME Business Experience

• Policy Environment

• Technical Assistance / Support

• Key Lessons

Human Resources

Banking Sector

Microfinance Industry

Infrastructure

Business Environment

12 commercial banks, including 3 microfinance banksShallow banking system with low lending propensity

Underdeveloped industry with narrow product rangeVery limited statistics information,

Around 66,696 active clients, USD 29.5 m portfolio (9 MFIs)

Difficult investment environment (high bureaucracy)Restrictive (old) labour law and property right

high taxes & charges

Relatively good infrastructure in Maputo and BeiraBad road links and erratic power/water supply elsewhereTelecommunications access increasing (mobile phones)

One of the main problem for private businessLow tertiary enrolment rates

General

Country FeaturesCountry Features

Population of app. 21 million, growth 1.8% p.a. GDP growth 9.8%, Inflation 12.8% in 2006

GDP per capita around USD 310

Vision

To provide - in a transparent, professional and sustainable way – financial services to low and middle income groups, with special focus on micro and small entrepreneurs.

To be the house bank of low and medium income groups in Mozambique

Mission

Socremo – Banco de MicrofinanSocremo – Banco de Microfinançasças

Socremo – Banco de MicrofinanSocremo – Banco de Microfinançasças

Current Shareholder Structure(USD 3.8 million)

KfW16,5%

AfriCap16,3%

SIFEM / SECO15,4%

UGC1,7%

Socremo (treasury shares)

18,4%

CCM1,7%

GAPI10,9%

LFS8,1%AccessHolding

10,9%

Socremo has developed from a only credit given MFI to a profitable commercial Bank, offering a range of credit

and deposit products through its network of 8 branches,with total number of staff of 254 (2006).

Socremo – Banco de MicrofinanSocremo – Banco de Microfinançasças

31 December 2005 31 December 2006 VarianceNumber of Staff 134 254 89,55%Number of Branches 6 8 33,33%Number of Deposit Accounts 3.182 9.284 191,77%Deposits (USD) 789.977 1.573.728 99,21%Number of Loan Clients 6.377 10.209 60,09%Outstanding Loan Portfolio (USD) 5.220.890 10.352.099 98,28%Portfolio at Risk > 1 day 1.25% 1.47%Total Assets 7.892.208 14.111.983 78,81%Equity 2.852.693 4.115.578 44,27%Profit before Tax 148.338 538.819 263,24%Return on Equity 5,20% 13,09% 151,78%

Key Financial Information

OwnershipStructure

• Diversification of ownership;reducing the shareholding of the government;

• Including reputable and experience investors;• Surpassing minimum capital requirement for

com. banks.

Socremo – Banco de MicrofinanSocremo – Banco de Microfinançasças

Governance Structure

• International best practice organisation structure;• Clear defined rules for each organ;• Policies and procedures for all areas;• Comprehensive MIS.

Legal Environment

• Overage, inflexible laws and regulations;• Especially the labour law is very restrictive and

there are no clear property rights.

Microfinance Industry

• No microfinance policies and regulations;• Limited coordination between stakeholders within

the sector.

SME Business ExperienceSME Business Experience

IV-2005 I-2006 II-2006 III-2006 IV-2006 I-2007

Outstanding SME Loan Portfolio (USD) 1.516.065 1.358.203 2.130.734 2.295.458 3.217.520 3.773.056

Total Outstanding Loan Portfolio (USD) 5.220.899 4.984.856 6.246.990 7.787.490 10.352.099 11.371.761

% of SME Loan Portfolio 29,04% 27,25% 34,11% 29,48% 31,08% 33,18%

# of SME Loans Outstanding 134 204 218 237 251 271

# of Total Loans Outstanding 6.377 6.472 6.741 8.240 10.209 11.124

% of Numbers of SME Loan Portfolio 2,10% 3,15% 3,23% 2,88% 2,46% 2,44%

PAR 1 (SME) n.a. n.a. 1,67% 2,34% 1,14% 1,25%

PAR 1 (Total Loan Portfolio) 1,25% 2,34% 2,00% 2,60% 1,47% 2,19%

PAR 30 (SME) n.a. n.a. 0,00% 1,30% 0,04% 0,69%PAR 30 (Total Loan Portfolio) 0,52% 0,96% 0,68% 1,31% 0,44% 1,07%

Portfolio Overview

SME Business ExperienceSME Business Experience

Portfolio Overview (USD)

4.116.256

2.295.4582.130.734

3.217.520

3.773.056

1.358.2031.516.065

5.492.032

3.626.6533.704.834

7.598.7047.134.578

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

7.000.000

8.000.000

IV-2005 I-2006 II-2006 III-2006 IV-2006 I-2007

Oustanding SME Loan Portfolio Micro, Consumer, Housing, Staff Loans

SME Business ExperienceSME Business Experience

Portfolio at Risk (PAR)

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

IV-2005 I-2006 II-2006 III-2006 IV-2006 I-2007

PAR 1 (SME) PAR 30 (SME)

Excurse: Microfinance Bank of AzerbaijanExcurse: Microfinance Bank of AzerbaijanBusiness Loan Portfolio Development

0

10

20

30

40

50

60

70

80

Dec-05

Jan-06 Feb-06

Mar-06

Apr-06

May-06

Jun-06 Jul-06 Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07 Feb-07

Mar-07

Apr-07

May-07

Volume (million USD)

0

5.000

10.000

15.000

20.000

25.000

Number

Micro Loans Small Loans Medium-sized Loans Outstanding Loans

• Graduation of old (good) micro clients;• Unserved demand in the market;• Additional income source;• Strong synergies with microlending;• Good additionally with existing products and

good cross-selling perspectives;• Important for economic development and

social stability / job creation.

SME Business ExperienceSME Business Experience

Product Design

• Continue building on existing credit history;• Increase amounts/terms;• Flexible interest rates regime

(dependent on collateral availability, quality,quantity).

Why targetingSME market

• Stricter due diligence process, higherdocumentation requirements;

• Temporary centralisation of decision-makingprocess (for training), later gradual release oflending authorities to branch level.

SME Business ExperienceSME Business Experience

Loan Officer

• Build-up of specialised and dedicated team ofSME loan officer out of the pool ofexperienced micro loan officer;

• Establish a separate unit within the CreditDepartment;

• Introduction of specific incentive scheme forSME loan officer.

Procedures

• Pledging of vehicles (not practiced by otherbanks in Mozambique);

• Introduction of obligatory promissory noteas additional collateral instrument for loansabove USD 10,000 equivalent;

• Own evaluator to cut costs and escapecorruption.

SME Business ExperienceSME Business Experience

CollateralChallenges

• Drawing on existing client base;• Reliance on assessment principles of

micro-technology, looking at the real economicsituation rather than official financial statements;

• Quick processing time with minimum formaland documentation requirements;

• Application of the same strict enforcement procedures as used for micro clients(PAR 1 day control);

• Incentive System for loan officers;• Acceptance of vehicles as pledged collateral;• Assignment of an experienced branch manager

as head of the SME unit within the CreditDepartment.

SME Business ExperienceSME Business Experience

Contributionto Success

• Finding the right balance between controllingby applying higher documentation requirementson the one hand and avoiding too rigidformalism on the other hand.

SME Business ExperienceSME Business Experience

ChallengesAddressed

• Introducing standardised assessment proceduresand forms taking into account the ‘average’level of complexity of a typical MozambicanSME while at the same time leaving flexibility for simpler (or more complex)assessments in case of need.

MainChallenges

• No direct role of the government;• Business registration and taxation requirements

very onerous, preventing business from doingofficial business;

• Lack of rules and bad implementation ofcollateral registration;

• Intransparent and long court procedures, especiallycourt enforcement procedures.

Policy EnvironmentPolicy Environment

GovernmentRole and Actions

• Since 2005 Socremo is managed byLFS Financial Systems GmbH under aManagement Service Contract;

• Financed by different partners, including DFID,KfW, seco, and AfriCap.

Technical Assistance / SupportTechnical Assistance / Support

RefinancingPartners

• Socremo cooperates with Triodos InternationalFund Management B.V., Deutsche BankMicrofinance Funds, and Standard Bank, Maputo.

TechnicalAssistance

• Build-up SME business with experiencedlenders (=micro loan officers);

• Build-up dedicated group of specialists with own procedures and own incentive scheme;

• Start with pilot branches and centraliseddecision making, branch out only when asufficient number of staff (incl. branch managers)has undergone training.

Key LessonsKey Lessons

Three mainLessons

• Start with smaller maximum amounts to gainexperience;

• Create incentives for clients to provide bettercollateral (e.g. by making pricing dependanton collateral);

• Apply usual principles of responsible loan officers and client graduation;

• Take reality serious when definingdocumentation requirements and analysis(e.g. include related businesses).

Key LessonsKey Lessons

AdvicePolicy Makers

• Ease business registration and taxationrequirements.

AdviceFinancial Institution

Thank you for your attention!

Christoph DiehlChristoph DiehlAccess Microfinance Holding AGAccess Microfinance Holding AG

Linienstraße 126Linienstraße 12610115 Berlin10115 Berlin

GermanyGermanyTel.:     +49-(0)30-30 87 47 34Tel.:     +49-(0)30-30 87 47 34Fax:     +49-(0)30-30 87 47 50Fax:     +49-(0)30-30 87 47 50

christoph.diehl@accessholding.comwww.accessholding.com