The African Development Bank (AfDB) said it will finance small and medium-sized enterprises (SMEs) by providing low denomination loans to banks and microfinance institutions.
The bank, which recently pegged credit need estimates for African SMEs at US$135 billion, has aligned its portfolio with the requirements of smaller retail lenders to firms in key economic sectors, such as agriculture.
Julius Karuga, AfDB’s senior investment officer in charge of the financial sector in East Africa, told Development Finance: “We have so far provided 10 institutions with credit lines of an average of US$3 million in local currency per institution, which is a much smaller amount than our average transaction size.”
Karuga said Tanzania’s second largest commercial lender, CRDB Bank, with which AfDB signed a US$120 million loan agreement in November 2016, demonstrates the bank’s success in working with local financial intermediaries. Such lenders generally have a better understanding of the local business dynamics in various economic sectors, he added.
CRBD is listed on the Dar es Salaam Stock Exchange and is owned mostly by institutional investors and pension funds. It has rapidly grown its SME portfolio lending to 270 small and medium businesses through its agency banking arm and uses mainly non-bank lenders to reach more businesses.
“The bank’s interest in this sector has certainly been a validation of the role played by this (SME) business segment because as a development finance institution, it makes economic sense to support SMEs,” Karuga said.
“This is evident in the bank’s belief that there is always a way to channel resources to certain business segments, either directly or through intermediaries that best understand the business dynamics of the targeted segments.”
In 2011, the bank created the African Guarantee Fund (AGF) growing business with the help of the Danish International Development Agency (Danida) and the Spanish Agency for International Development Cooperation.
The fund enabled the signing of guarantees worth US$230 million in 2015, pushing commercial banks to increase the amount to US$230 million in guarantees.