Box VIII.4: Supporting Credit Reporting Systems: IFC’s Global Credit Bureau Program

creditworthiness leads lenders: (i) to demand collaterals that cannot be offered by low-income households or SMEs (since they usually do not dispose of much assets such as land, real estate, equipment, or machinery; or the legal and property right regime is not adequate in such a way that financial institutions do not accept those assets as collateral), and (ii) to charge high interest rates and fees, and ask for excessive documentation requirements, which all contribute to increase the cost of accessing finance for poor households and SMEs. According to the World Bank’s 2012 Doing Business Report, economies in Africa are severely affected by the lack of any kind of credit information system.

In an effort to tackle these problems, DFIs offer advisory services and funding to develop credit registries, credit bureaus, and collateral registries. The potential of these instruments is significant: recent studies show that credit bureaus can reduce transaction costs by 30 to 40%, increase the loan approval rate for individuals by 89% when positive and negative information is included in the credit report, and enhance the probability of getting loans

Box VIII.4: Supporting Credit Reporting Systems: IFC’s Global Credit Bureau Program

IFC has been very active in the set-up or improvement of credit reporting systems in the developing world, including Africa. Through the Global Credit Bureau Program, it provided advisory services to several developing economies including African countries such as Algeria, Djibouti, Egypt, Morocco, Tunisia, Cape Verde, Ethiopia, Ghana, Kenya, Mozambique, Nigeria and Tanzania. The program aims to: · Develop credit information sharing environments through advice and support provided to government authorities, reviews of legal and regulatory frameworks, raising awareness and outreach, and setting standards (e.g. Morocco)

· Provide direct support to develop new private credit bureaus and public credit registries through feasibility studies, assessments, operational support, encouraging international best practices, etc. (e.g. Egypt, Algeria) · Enhance existing private credit bureaus through positive information sharing, valueadded services, and commercial solutions (e.g. South Africa).

In 2010, the Program provided advisory services in 64 countries. It created or significantly improved credit bureaus in 13 countries including South Africa, Nigeria, Egypt and Morocco. Since its inception, it has drafted or contributed to draft 24 new laws/regulations, and it has organized 90 outreach events in 59 countries.

Source: IFC (2010).

for SMEs from 27% (without credit bureaus) to 40% (with credit bureaus) (IFC, 2010; IFC, 2011a). On the other hand, collateral registries can decrease the cost of credit and increase the repayment periods (IFC, 2011a). As shown in Box VIII.4, DFIs support in this area may take different forms ranging from contributing to setting standards, to improving the regulatory framework for sharing credit information, organizing awareness campaign and outreach events (e.g. roundtables, conferences, etc.) or to providing financial literacy to users, providers and regulators. DFIs have been also supporting the development of payment systems and collateral registries.

2.3. DFIs Support to SMEs

Figure VIII.3 shows that about 50% of projects supported by DFIs in the donor database targeted private sector enterprises, with a particular focus on SMEs. Such projects consisted of: (i) provision of funding and capacity building to financial intermediaries that cater for SMEs (banks, private equity funds, leasing companies); (ii) set up of guarantee schemes for SMEs; (iii) development of programs that offer business development services to SMEs; (iv) creation of private sector representative organizations to strengthen private sector access to finance in Africa; and (v) support to reforms aimed at strengthening the role of non-banks financial institutions such as leasing and private equity.

A SME finance stocktaking exercise was conducted in 2010 to identify the SME finance projects which were successful along five criteria: leverage, scale and sustainability, replicability, results and track record, and implementation capacity (IFC, 2010). The results show that out of over 164 successful cases, only 33 were in Africa. And of these only one-third were supported by DFIs, mainly in sub-Saharan Africa (in particular, Southern, West and East Africa). A few characteristics are common to most of these few successful interventions. First, in the majority of the cases, DFIs’ support to SMEs came in the form of equity finance. Secondly, successful operations included financing and (or exclusively) capacity-building, thus suggesting that technical assistance and capacity building are crucial for building up skills needed to develop successful SMEs business lines in developing economies.

In addition to offering funding, DFIs support SMEs by providing risk management products. Through these financial products DFIs take the long term risk of SMEs, and in this way they enhance SMEs’ creditworthiness and profitability thus allowing them to have access to financial services they cannot access otherwise because of credit, market or country risks. Interest rate swaps, currency swaps, commodity swaps, partial credit guarantees and portfolio risk sharing facilities are just some examples of risk mitigation products offered by DFIs. The latter also help to enhance SMEs’ risk management skills by providing technical assistance and knowledge support. A few risk management initiatives recently undertaken by DFIs in Africa are reported in Box VIII.5.