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LESSONS LEARNED FROM USAID MICROENTERPRISE WORK IN BIG EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION. VIKAS CHOUDHARY, GMED INDIA, SALAH TAHER, QED/EGYPT; FERNANDO FERNANDEZ, AFIRMA MEXICO. MICROENTERPRISE DEVELOPMENT IN A GLOBALIZING WORLD: A USAID LEARNING CONFERENCE JUNE 15, 2006.

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LESSONS LEARNED FROM USAID MICROENTERPRISE WORK IN BIG EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

VIKAS CHOUDHARY, GMED INDIA, SALAH TAHER, QED/EGYPT; FERNANDO FERNANDEZ, AFIRMA MEXICO

MICROENTERPRISE DEVELOPMENT IN A GLOBALIZING WORLD:

A USAID LEARNING CONFERENCE

JUNE 15, 2006


The india gmed program vikas choudhary gmed india

The India GMED Program EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTIONVIKAS CHOUDHARY, GMED INDIA


Profile
Profile EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

Growth Oriented Micro-Enterprise Development Program (GMED)

  • Project Period: Oct. 2004 – Sept.2007

  • Funding: $6.2 million

  • Objective: Increase employment opportunities through fostering MSE growth

  • Unilateral project: No formal ties with any GOI entity


Sub sectors
Sub-sectors EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Agribusiness

    Fresh fruits and vegetables

    Organically certified food products

    Broilers (Maize Supply Chain)

  • Urban Services

    Solid Waste Management


Indian Agribusiness Context EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Big Domestic Market (3rd Largest Economy by 2020)

  • Food retail seen as the next big business opportunity

  • Huge Government development assistance

  • High incidences of rural poverty


Agribusiness Constraints EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Absence of organized fresh produce value chain

  • Low on farm productivity levels

  • High post harvest losses (20 to 40 percent)

  • High farmer- private sector suspicion level


Gmed s value chain approach
GMED’s Value Chain Approach EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Demand driven

  • Technical assistance, not grants

  • Develop scalable and sustainable models

  • No direct interaction with MSEs except for validation

  • Corporate partners as service providers

  • Focus on embedded services


Case Study : GMED-ITC Vegetable Initiative EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • 3 pilot clusters involving 350 farmers

  • Incorporating small holder farmer (2 to 10 acre)

  • ITC extension staff - Lead farmer-out grower model

  • Developing and disseminating package of practices

  • Facilitating Input supply (Drip irrigation,seed, etc)


Case Study : GMED-ITC Vegetable Initiative EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Outcome

  • Higher farmer productivity

  • Higher price realization

  • Scalability

  • 50-60 fresh produce cash and carry outlets in next 5 years

  • Incorporate 20,000 to 30,000 farmers into their fresh produce value chain


Partners for Development: EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTIONOvercoming the Obstacles, Capitalizing on the OpportunitySALAH TAHER, THE QED GROUP/EGYPT


Overview
Overview EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

The Egyptian financial sector has abundant funds; however, borrowers find it difficult to access such funds. The AERI-BDS project as a catalyst for development, has brought the different partners together to facilitate access to finance.


Presentation outline
Presentation Outline EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Development challenge

  • Availability of finance

  • Constraints facing smallholders (borrowers)

  • Opportunities for smallholders (borrowers)

  • The AERI- BDS project

  • Constraints & opportunities

  • Overcoming the constraints & capitalizing on the opportunity

  • The model

  • The partners

  • Concluding remarks


Development challenge
Development Challenge EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Investments to generate economic growth.

  • More than 500,000 jobs must be generated each year through to the year 2017.

  • According to Egypt’s Competitiveness Report 04-05, the major constraint in Egypt's business environment is access to finance.


Availability of finance
Availability of Finance EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • A national newspaper recently estimated that Egyptian banks have 155 billion LE of unutilized funds (approximately 25 billion USD).

  • Donor funded credit lines are abundant (e.g. EU funded Agriculture Sector Development Program line is capitalized at 108 million USD).


Constraints facing smallholders borrowers
Constraints facing Smallholders (Borrowers) EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • USAID's Micro Lending Programs exclude the crop finance sector. Banks, which are no longer part of this program, still implement such a policy.

  • High transaction costs. Since, the loan documentation and follow up is the same for all loans, large loans are more economic.

  • Lack of collateral to obtain a loan.

  • Lack of feasibility studies, financial analysis and loan documents .

  • Agriculture production is perceived as high risk.


Opportunities for smallholders borrowers
Opportunities for Smallholders (Borrowers) EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Agriculture accounts for almost a quarter of Egypt’s GDP.

  • Increased high-value horticulture crop exports from Egypt over the last few years (e.g. grapes).

  • Export opportunities continue to grow (e.g. pomegranates).


The aeri bds project
The AERI- BDS project EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • The BDS project is one of the AERI partner projects.

  • CARE and ACDI/VOCA work directly with approximately 10,000 smallholders.

  • They provide them with training and technical assistance in horticulture and dairy/livestock to increase agricultural exports and smallholder incomes.

  • They helped smallholders establish approximately 100 farmer associations.

  • CARE is issuing grants to associations for purchasing pack houses and dairy processing plants.


Constraints opportunities
Constraints & Opportunities EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • BDS-project conducted a credit demand study of a sample of 12 AERI-Farmers’ Associations (approximately 1000 smallholders).

  • 95% expressed a need for credit to finance short term agriculture production.

  • Access to finance remains the major impediment.

  • Financial institutions are not short on funds.


Overcoming constraints capitalizing on opportunities
Overcoming Constraints & Capitalizing on Opportunities EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • Credit available but not accessible is the

    foundation of the partnership.

  • Memorandum of Understanding (MoU) aimed at

    facilitating access to credit.

    • Assiut Businessmen Association (outreach)

    • Credit Guarantee Company of Egypt (overcoming the need

      for collateral)

    • AERI- BDS project (the catalyst)


The model

Contract EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

Guarantee

Agreement

Individual Loans to Small Holders

Credit line Loan

Small Holders

The Model


Assiut businessmen association
Assiut Businessmen Association EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

  • A strong presence

  • Large number of credit extension officers in a variety of credit business development (e.g. Small & Micro Enterprises Development Project, Medical Development project, Women Micro Credit Project & Group Lending Project)

  • An average of 3 – 4 days to issue a loan

  • Strong incentives for credit officers (collection rates fall within the range of 98 – 100%)


Assiut businessmen association cont
Assiut Businessmen Association (cont.) EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

Role:

  • Issue loans.

  • Follow-up repayments.

  • Cover the operation cost.

  • Make provisions for doubtful debt.


Aeri bds project
AERI- BDS project EMERGING MARKETS WITH HEAVY GOVERNMENT INTERVENTION

Role:

  • Credit demand study (the market opportunity study)

  • Technical Assistance to ASBA and CGC in setting up a lending mechanism for short-term agricultural production loan products

  • Creating awareness for the borrowers


Credit guarantee company for small medium scale enterprises cgc
Credit Guarantee Company For Small & Medium Scale Enterprises (CGC)

  • An Egyptian private joint-stock company established in 1989 by nine Egyptian Banks and one Egyptian Insurance Company.

  • Around 2000 participating bank branches throughout Egypt.

  • CGC manages a number of programs in different areas, e.g. Small and Medium Scale Enterprises -Health Care Providers Program - Small and Emerging Businesses Support Program - Poverty Alleviation…etc.


Credit guarantee company
Credit Guarantee Company Enterprises (CGC)

Role:

  • Issue the guarantee letter to the involved banks, against a guarantee fee.

  • Develop Memorandum of Implementation (MoI) focus on portfolio quality considering the best practices and operation efficiency.

  • Monitor the quality of the portfolio.


Concluding remarks
Concluding Remarks Enterprises (CGC)

  • Beyond the lifetime of the AERI project, the relationship created by the MoU is expected to continue on the basis of the MoI signed between the two parties.

  • Donors have no commercial interest, therefore, they facilitate communication between the different parties to generate sustainable growth and development.


INITIAL EXPERIENCE OF THE AFIRMA PROJECT IN MEXICO Enterprises (CGC)FERNANDO FERNANDEZ, AFIRMA MEXICO


Agenda
AGENDA Enterprises (CGC)

  • Snapshot of Mexico, its financial sector and MSME Access

  • AFIRMA Project Initial Experience

  • Coordination with the Government of Mexico

  • Future Challenges and Plans


Snapshot mexico and its financial system

Financial Sector: Enterprises (CGC)

International banks hold 85% of assets following ‘94-’95 “tequila crisis”

Primary sources of banking profits: high margins, service charges, government bonds

Remittances $20bn in 2005 (2.5% of GDP) – BdM

Very limited access among the poor & MSMEs

“Popular Finance” Sub-sector:

>40 federal programs

Government funds > US$50 billion

Micro- and rural finance sub-sector +/- 10 years behind others in the region

Inefficient, expensive, but with rapid growth recently

SNAPSHOT: MEXICO AND ITS FINANCIAL SYSTEM

  • Population: 106 million

  • World’s 12th largest economy

  • Macroeconomic Stability

  • Low inflation: 3%

  • GDP growth 2005: 3.5%

  • Income per capita: $6,790

  • Income inequality** - GINI: 54

  • Oil revenues, remittances

Source: World Bank Financial Structure dataset, 2004

** Source: UNDP 2005


FORMAL BANK LENDING IS HIGHLY CONCENTRATED Enterprises (CGC)IN MEXICO CITY

63% of total loan portfolio of the formal banking system*

* Source: Comision Nacional Bancaria y de Valres – Bank Supervisor (Sept. 2005)


THE MEXICAN FINANCIAL SYSTEM WORKS Enterprises (CGC)VERY WELL…FOR VERY FEW

Bank Lendingto the private sector / GDP: 16%

(Source: Banco de Mexico)

Source: Situación de la Competitividad de México, 2004. Instituto Mexicano para la Competitividad. http://imco.solutrends.com


Evolving characteristics of microfinance in mexico
EVOLVING CHARACTERISTICS OF MICROFINANCE Enterprises (CGC)IN MEXICO

Secretary of the Economy estimates 12 million microenterprises in Mexico

67 MFIs that work with PRONAFIM serve 1.8 millionactive credit clients

Compartamos: 450,000 active credit clients

Caja Popular Mexicana 700,000

Regular press coverage of microfinance during Fox Administration

Suggests a market penetration of 25%, but portfolio is concentrated

Consumer lending growing quickly (along with portfolio risk)


Project objective
PROJECT OBJECTIVE Enterprises (CGC)

“Contributeto the development of a dynamic financial sector in Mexico that provides sustainable services to under-served urban and rural markets, helping them manage risk and support local economic growth.”

FIVE PRIMARY TASKS:

  • Strengthen 13 partner financial institutions

    • from small NGOs to the largest Mexican-owned bank

  • Develop a local, commercially-based MFI support industry

  • Support innovations to expand access to rural financial services

  • Strengthen the capacity of sector regulators and supervisors

  • Improve the enabling environment for microfinance

Client of AFIRMA partner AlSol, Chamula, Chiapas


Applying financial sector management experience
APPLYING FINANCIAL SECTOR Enterprises (CGC)MANAGEMENT EXPERIENCE

Microfinance “Best Practices” are well documented and readily available …

… management best practices for financial sector projects, are much less so. AFIRMA is building upon lessons learned in USAID projects:

  • Prioritize support of well-thought-out business plans to increase capacity for sustainable growth

  • Anticipate partners demand within the framework of plans and project objectives

  • Maintain flexibility to respond to changing market conditions and partner needs; focus attention on what works

  • Act as facilitators of change: partners must take ownership

  • Continue support based on results, responsiveness, openness

  • Balance initiative to increasebreadth (# of active clients) and depth (most difficult segments to serve) of outreach


Afirma partners showed strong growth in 2005

2005 Total growth: 47%, Average Partner Grew 67% Enterprises (CGC)

AFIRMA PARTNERS SHOWED STRONG GROWTH IN 2005

Goal: +500,000 active clients in 2009

(baseline Dec. 2004)

2005 Growth among Partners:

Gross Loan Portfolio:

64%

Total Equity

53%

Points of Service: 29%


Working with the mexican public sector
WORKING WITH THE MEXICAN PUBLIC SECTOR Enterprises (CGC)

  • USAID resources <1% of all public micro and rural finance resources

    • Need sharp focus, coordination with government programs

  • Leveraging project resources working with:

    • Banco de Mexico (Central Bank)

    • President’s National Microenterprise Finance Program

    • Second tier (public) development banks

  • AFIRMA’s flexibility, capacity to keep abreast of developments and evolution of the sector highly valued

Challenge: coordinating closely with the current government while also avoiding all politics or appearance of alignment with one party or another


Establish immediate credibility with the gom to be in a position to give advice
ESTABLISH IMMEDIATE CREDIBILITY WITH THE GOM TO BE IN A POSITION TO GIVE ADVICE

  • Was necessary to gain trust in technical capacity (& intentions)

  • As with any government, “the” GoM far from homogenous

    • AFIRMA has highly professional, capable, trained counterparts within the government

    • Resources are not a constraint

  • Assisting the private sector to link with the Public Sector and at Federal and (more challenging) local levels

    • Helping set agendas of sector events, initiatives

Challenge: conflicting interests within “the” government, alignment, focus, competing programs (fed. state, local, etc.) can be constraints


Change in administrations and the cholula effect
CHANGE IN ADMINISTRATIONS AND POSITION TO GIVE ADVICETHE “CHOLULA EFFECT”

  • Conquistadors regularly built churches on top of native holy sites (e.g. Cholula)

  • Government programs do not go away at the end of administration

  • Instead, they are worked around, on top of, etc. as those who implemented them lose power (program remains)

  • Result: proliferation of programs with limited coordination / direction

Archeological site & church, Cholula, Puebla

Challenge: understand the full economic and politicalcontext and existing initiatives and develop innovative ways to support positive initiatives and influence others that may have perverse incentives.


SUPPLIERS REPRESENT AN IMPORTANT SOURCE OF FINANCE, ESPECIALLY FOR SMALLER FIRMS

Banks aren’t the most important source of corporate finance – much less so for rural MSMEs

Supplier credit important, but generally limited to:

Short-term, Product-specific working capital

Microenterprises?

Rural households?


Introducing adapting usaid s new vision for rural agricultural finance to mexico
INTRODUCING & ADAPTING USAID’S NEW VISION FOR RURAL & AGRICULTURAL FINANCE TO MEXICO

  • Collaboration among USAID/Washington, USAID/Mexico, QED, AFIRMA/DAI

  • Adapt Rural and Agricultural Finance approach to a Mexican Practitioner Audience, to:

    • Introduce & examine new analytical tools and innovative approaches

    • Use participant input to inform AFIRMA’s activities in rural and agricultural finance, including design of an Innovation Fund


Rural and agricultural finance in mexico challenges
RURAL AND AGRICULTURAL FINANCE IN MEXICO: CHALLENGES AGRICULTURAL FINANCE TO MEXICO

  • Subsidized interest rate not the biggest challenge

  • Presence of well-capitalized Government funds and proliferation of programs and levels

    • FIRA -> Bank -> “Lending agent” -> producer group -> farmer

    • creates confusion, inefficiency

  • Reaching “second tier” of producers who are unable to come up requirements for government-supported financing

  • How to use finance as tool to help producers “upgrade”

Challenge: sophisticated mechanisms exist for the highly developed export agricultural value chains. Popular belief is that the experience cannot be “downscaled”


LEARNING CONFERENCE STRATEGIC QUESTIONS AGRICULTURAL FINANCE TO MEXICO

  • How do we ensure our work meaningfully contributes to the lives of the poor?

  • How do we help link the poor into economic growth opportunities in this era of globalization?

  • What is the current and potential role of private sector investment?

  • How do we serve difficult-to-reach populations such as those affected by conflict, natural disaster, and HIV/AIDS?

  • How do we define “success”? How do we achieve it? What else needs to be done, and by whom?

  • How can we, as individuals and as organizations, leverage our comparative advantage and maximize opportunities through close partnerships and strategic alliances? 

Vikas Choudhary, [email protected]

Salah Taher, [email protected]

Fernando Fernandez, [email protected]

Geoffrey Chalmers, [email protected]


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