A PPROACHES TO SME F INANCE K OREA I NSTITUTE OF F INANCE -T HE W ORLD B ANK J OINT C ONFERENCE Isfandyar Z. Khan Europe and Central Asia d l i World Bank ikhan2@worldbank.org @ g
C ONTENT C ONTENT � Universe of SMEs � The ABC of Government Intervention � Various programs for support � Key Takeaways World Bank Group World Bank Group- - Seoul April 3rh 2013 Seoul April 3rh 2013
C OMPANY RISK , CAPITAL REQUIREMENTS AND TYPES OF GOVERNMENT INTERVENTION Companies who work with new products have a longer development horizon (high tech segment – like life sciences, clean tech and IT) Risk profile is high, not suitable for debt financing Risk profile is high, not suitable for debt financing Companies that have a short development timeline and may already have a product and/or the first customers Risk profile is low, can typically be suitable for debt financing, p , yp y g, . 3
C ONTENT C ONTENT � Universe of SMEs � The ABC of Government Intervention � Various programs for support � Key Takeaways World Bank Group World Bank Group- - Seoul April 3 2013 Seoul April 3 2013
P UBLIC S ECTOR I NTERVENTIONS A PEXES AND OTHER WHOLESALE FUNDING FACILITIES Preconditions for successful application of an apex model include: • Prioritize the development of sustainable finance providers • Ensure the apex institution has a strong independent governance structure h i i i h i d d • Apply a funding policy based on clear selection criteria • Apply commercial (not subsidized) interest rates • Ensure the capacity to evolve and adapt its mission and products • Introduce flexible and market reactive disbursement plans • Ensure high quality operational management and staff skills Ensure high quality operational management and staff skills 5
P UBLIC S ECTOR I NTERVENTIONS P ARTIAL C REDIT G UARANTEE S CHEMES Loan Application SME SME BANK BANK Loan Disbursement, � Coverage ratios should ensure sufficient Repayment protection against default risk t ti i t d f lt i k Example: � Fees should be risk ‐ based and contribute Allocates FOGAPE, Chile to financial sustainability Guarantees based � Payment rules should take into account on lowest % covered(bidding effectiveness of collateral and insolvency regimes process) � PCGs can support the capacity (skills, Guarantee Program systems, products) of banks to provide SME finance � Evaluation mechanism: to measure ‐ Fee varies by FI, depending on loss (claim) rate outreach, additionality and sustainability. ‐ Loss rates (default) less than 2% ‐ FIs keep responsibility for analysis and collection FIs keep responsibility for analysis and collection 6
P UBLIC S ECTOR I NTERVENTIONS SME C APACITY , C REDITWORTHINESS , Capacity ‐ building can improve SME management capacity, market knowledge expertise and make SMEs more attractive to finance providers knowledge, expertise, and make SMEs more attractive to finance providers Capacity building should customize content for specific groups of entrepreneurs • Both public and private organizations have a role to play in capacity building • Donor support may be needed to ensure effective data and monitoring • mechanisms in benchmarking and program evaluation Turk Economici Bank (private) Turk Economici Bank (private) • Its capacity building support has resulted in a decrease in loan delinquency rates in its SME portfolio, new client acquisition and greater customer loyalty. • The primary goal of training is to build SME competitiveness and strategic planning capabilities, helping SMEs to take a market ‐ centric approach to their businesses, giving them the tools to identify and respond to new opportunities for products and services. 7
R EGULATORY AND S UPERVISORY F RAMEWORKS E NABLING R EGULATORY F RAMEWORKS FOR A LTERNATIVE SME F INANCE P RODUCTS : L EASING � A legislative framework for leasing should Clarify rights and responsibilities of ibiliti f the parties to a lease Remove Clarify the rights contradictions of lessors and within the lessees under existing existing bankruptcy . legislation Create non ‐ Ensure tax rules judicial are clear and repossession p neutral t l mechanisms 8
F INANCIAL I NFRASTRUCTURE S ECURED T RANSACTIONS Develop simple laws and regulations based on best practice on best practice principles Establish clear Create unitary legal priority schemes for priority schemes for ST systems not ST systems, not claims on collateral. fragmented Ensure a broad Modernize movable scope of secured collateral registries transactions law Simplify the creation Simplify the creation Allow all types of Allow all types of of security interests assets to be used as in movable property collateral 9
A RGUMENTS FOR G OVERNMENT INTERVENTION •Leads to principal-agent problems such as moral hazard , •Investors and banks are not able to correctly assess the differences •Investors and banks are not able to correctly assess the differences Asymmetric A t i information in risk adverse selection leads to “adverse selection” • lead to market imperfections and sub-optimal allocation of capital cap ta •Guarantee schemes have assumed a crucial role to help maintain the flow of credit to SMEs and support the growth of these companies Credit Rationing •Avoid “ dead weight ” proportion of the loans which would have A id “ d d i ht ” ti f th l hi h ld h bee granted anyways and constant reassessment • Completely or partially remove some of the cost of a “ first-mover disadvantage” Experience •Focus on maximizing the spill-over effect building •Ensure a high degree of residual of experience and knowledge. . • Socio-economic returns to society Externalities
Wheel of fortune for viable and sustainable innovation finance market…. Management Management Management Management teams teams Able to raise Able to raise Able to raise Able to raise I Invest in Invest in I t i t i new funds new funds companies companies Promoting a positive spiral Companies Companies Good track Good track grow grow record record Positive Exits Positive Exits 11 11
.. need a right environment … A viable and sustainable long-term market for innovation finance and a proficient investment climate requires a strong interplay of a variety of factors: � A healthy enabling environment often require: � convincing regulatory framework and institutional set-up. � contract enforcement, adequate intellectual property legislation regimes � tax code promoting business R&D as well as entrepreneurs and investments. � enforced limitations on institutional investors allocating capital to riskier asset classes and capital requirements. � Strong deal flow and commercialization of projects promoting a strong pipeline of � Strong deal flow and commercialization of projects, promoting a strong pipeline of high tech innovative start-ups � A professional and well-functioning investor market often require: � base of investors in the region that adequately address the needs of companies at � base of investors in the region that adequately address the needs of companies at the various developmental stages � investors with local attachment, integrated with the innovation cycle as well as having a global network (syndication network) functioning as mentorship � access to adequate financing to close finance gaps throughout a start-ups development process and be able to draw on (international) syndication partners. � strong partnership between companies and investors. 12 12
…...and a long term game plan • A viable exit-market often require: − Companies and investors require a viable exit market (exit refers to the process of an p q ( p investor exiting the investment and thereby trades an illiquid asset (shares in a private company) for a liquid asset (e.g. cash). Exits can mainly be pursued in two forms: initial public offering (IPO) or trade sale (merger/acquisition by a another company). − Successful exits can ensure the financing of the next generation of innovative companies as a positive track record is developed making more investors interested. Without positive exits the investment cycle can be impeded and in the long run it could p y p g result in the depletion of the eco-system. • These above-mentioned factors are prerequisites for a comprehensive development of a viable market for innovation finance . • In the short run, innovative SMEs often need to resort to government g programs or if possible foreign equity markets for financing. • When considering government intervention the entirety of the investment cycle should be reflected. 13 13
C ONTENT C ONTENT � Universe of SMEs � The ABC of Government Intervention � Various programs for support � Key Takeaways World Bank Group World Bank Group- - Seoul April 3 2013 Seoul April 3 2013
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