Despite the great enthusiasm and energy of their proprietors, small and medium-sized enterprises constantly find it difficult if not impossible to obtain finance to develop or expand their businesses.
The African Guarantee Fund (AGF) works with financial institutions across the continent to help extend much needed finance to the sector.
The AGF’s group chief executive Felix Bikpo (above) explains exactly what his organisation does and its strategies and priorities going forward. Bikpo has more than 20 years’ experience in banking and finance with a specialised knowledge of the dynamics obtaining in Sub-Saharan Africa.
Over his diverse career, he has served as CEO of Access Pan-Africa, a holding company of Access Bank Plc Nigeria, Group CEO of Atlantic Financial Group, MD of Ecobank Niger, Executive Director of ETI (Ecobank Group) in charge of the restructuring of the West Africa affiliates and as Vice President of Citibank NA, in charge of Financial Control, in French-speaking countries. He was also was the first Managing Director of Fonds de Garantie des Investissements Prives en Afrique de l’Ouest (GARI Fund), now AGF West Africa.
What is the African Guarantee Fund, what are its aims and who are the shareholders?
African Guarantee Fund (AGF) is an AA- Fitch-rated Pan-African non-bank financial institution. AGF contributes to the promotion of economic development – vital for prosperity, stability and poverty reduction in Africa – through reducing the financing gap between financial institutions and small and medium-sized enterprises (SMEs).
AGF operates via two lines of intervention:
Provision of partial guarantees to financial institutions to facilitate access to finance for SMEs. AGF offers three types of guarantee: Loan Guarantees, Resource Mobilisation Guarantees and Equity Guarantees.
Provision of Capacity Development support to the Partner Financial Institutions to improve their ability to properly assess SME risks and to the Small and Medium-sized Enterprises to build their capacity for easier access to finance.
AGF was founded by the government of Denmark through the Danish International Development Agency (DANIDA), the government of Spain through the Spanish Agency for International Cooperation and Development (AECID) and the African Development Bank (AfDB). AGF has since been joined by Agence Française de Développement (AFD), Nordic Development Fund (NDF), Investment Fund for Developing Countries (IFU) and KfW Entwicklungsbank (KfW Development Bank).
The West African Development Bank (WADB) is the shareholder of AGF West Africa, AGF’s first subsidiary.
What is your business model and why is this the most effective method of supporting loans to SMEs?
AGF’s business model aims to reduce the financing gap between financial institutions and SMEs, currently estimated at more than $150bn. Our business model identifies the obstacles that have led to this financing gap and plays the role of the ‘missing middle’ between financial institutions and SMEs.
In Africa, the main source of financing for SMEs is the banking sector. Despite banks’ increased interest in providing lending to SMEs, they still face multiple problems in doing so – mainly due to problems of assessing and managing SME risks.
One of the main problems is that banks lack the internal skills to develop products tailored to SMEs. Furthermore, the resources of banks and other financial institutions are mostly short-term, and it is therefore difficult for the banking system to easily use their current excess of liquidity to finance the investment needs of SMEs.
The inability of SMEs to provide acceptable collateral to reduce the lending risk associated with them, the inadequacy of their capital structure and sometimes, the poor quality of their management increases the reluctance of banks to fully support their activities. Finally, there is a vast perception risk among lenders towards SMEs.
Our focus is to address the lack of access to finance by SMEs through the provision of adequate products.
What is your current capital? Could you also outline some recent funding agreements?
Our current capital is $150m.
Some of our recent agreements include a $50m re-guarantee agreement with the pan-African Ecobank Transnational, a $34m guarantee agreement with Tanzania’s NMB Bank and a $25m guarantee agreement with the Botswana Development Corporation.
What is the significance of your agreement with KfW?
The biggest asset of a Guarantee Fund is its credibility. Among the criteria upon which the credibility is set, financial strength holds a key position. In this regard, AGF must have an adequate level of resources.
KfW has become AGF’s seventh strong shareholder with a capital injection of 25 million euros. AGF has now acquired more capacity to address the financing barrier, and will now be able to channel more guarantees and technical assistance to banks and other financial institutions, thereby generating enhanced growth in the African SME sector.
With this capital injection, AGF has now successfully concluded the $90m first closing of its fundraising campaign.
We intend to raise an additional $320m capital over the next 4 years using a blended finance mechanism targeting Development Financial Institutions, private socially minded organisations, philanthropic organisations and governments.
SMEs are the backbone of all economies but in Africa they receive scant financial support. How is the AGF changing this?
AGF has to date issued up to $900m worth of guarantees. Through this, the loans that have been disbursed to SMEs amount to $1.5bn, enabling the SMEs to create more than 100,000 jobs across the continent.
SMEs are often dismissed as a bad investment risk; is this assessment correct?
It is true that despite the internationally recognised importance of SMEs, SME financing in Africa is often perceived by many financial sector players to be a risky activity as SMEs quite often more than not, fail to come up with the collateral levels required to secure credit facilities.
AGF addresses this risk perception through providing capacity development to our partner financial institutions to equip them with information and skills on how to properly assess and manage SME risks. The capacity development is also offered to SMEs to build their capacity for easier access to finance.
How much support do governments provide to SMEs?
Many governments are now intensifying their efforts to support the SME sector. There is, however, no doubt there is much that governments must do to improve the SME sector, including accelerating infrastructure and energy development, deepening regional integration, easing the regulatory environment, and ensuring healthy urbanisation.
Today, a lot of governments want to create local guarantee funds to benefit SMEs in their eco-systems. AGF is currently collaborating with some governments to help them set up risk-sharing facilities to support their local SMEs.
The AGF is now seven years old. How do you assess the performance of the organisation and what are you looking forward to?
AGF certainly has a lot to be proud of. From an initial focus on nine countries, we are now present in 40 African countries. We have issued guarantees of up to $900m which, as I mentioned earlier, has enabled partner financial institutions to issue loans estimated at $1.5bn to more than 20,000 African SMEs. We are also well on our way to creating 10,000 jobs per year by 2022.
Our Insurance Financial Strength (IFS) rating of AA- (very strong) was re-affirmed last year by the globally renowned Fitch Ratings. Our rating status is the first for a guarantee fund in Africa and only second to the AAA of AfDB, who are one of our shareholders.
In the words of KfW’s Director for Regional Funds, Thomas Duve, “AGF is a great example of an African solution for an African problem. Our institutional and economic strength, mirrored on our AA- credit rating, makes us a perfect partner for commercial African banks who are willing to finance SMEs.”