Global and Regional Insights into Supporting SME Access to Finance

1. Global and Regional Insights into Supporting SME Access to Finance Andrew McCartney: Lead Global Specialist, SME and Gender Finance, FIG Advisory Services Sri Lanka, October 2014

2. SMEs are crucial for the creation of jobs, to reduce poverty and increase the shared prosperity. • The environment has improved for SMEs, but access to finance remains a key constraint for their growth, with a $1 trillion credit gap remaining globally • IFC’s work with the G20 identified a number of areas that policy makers need to consider in further supporting SMEs. These recommendations have also driven IFC’s own strategy to support the financing of 10 million SMEs by 2020 • SMEs are a key segment in Sri Lanka representing some 50%+ of GDP, but access to finance remains a constraint. • Our strategy for Sri Lanka is focusing upon addressing key areas, including: 1) Informality 2) Gender 3) furthering FI outreach with focus on post-conflict and lagging regions, as well as targeting specific growth sectors such as agriculture and tourism • IFC as market leader in this space has the investment and advisory products and services needed to further support SME growth in Sri Lanka Key Messages

3. SMEs are a strategic priority for IFC and is a key channel for supporting other strategic priorities IFC’s Vision : That people should have the opportunity to escape poverty and improve their lives IFC’s Purpose: SMEs Agribusiness / food security Infrastructure Fragile Situations Climate Change IFC’s Strategic Priorities Create opportunity for people to escape poverty and improve their lives by: SMEs Mobilising other sources of finance for private enterprise development Promoting open and competitive markets in developing countries Supporting companies and other private sector partners where there is a gap Helping generate productive jobs &deliver essential services to the poor &vulnerable 3 3

4. A lack of finance stunts SME growth in emerging markets and limits their ability to create jobs Percent of Enterprises citing biggest obstacle (SMEs between 5 -100 employees) Source: IFC Data Analysis Source: Enterprise Surveys • In 71% of countries SMEs cite Access to Finance as the biggest obstacle above access to electricity • In 66% of countries SMEs cite Access to Finance as biggest obstacle above access to electricity and transport

5. Access to finance for SMEs has improved significantly in the last 10 years globally, but significant gaps remain • Positive Trends • Emerging Trends globally • Remaining Gaps • SMEs in FCS and LICs • Very Small and Rural SMEs • Start-ups • Women-owned businesses • SMEs with weak collateral • High-growth SMEs • Local currency finance • Mobilization of capital markets to finance SMEs • Capacity building for SMEs • Improving financial infrastructure • Growing number of banks with basic or strong core SME lending operations • Increased penetration of mobile phones, internet & other new technologies • Number of SMEs in global, regional or national value chains are growing Over 80% of SMEs have an account with a bank while only 31% have a loan or overdraft • More stable macro environments • Financial sector deepening • Less crowding out of private sector credit • Spreads declining on corporate clients • Financial sector diversification

6. At the policy level, IFC has made a set of key recommendations as part of its work with the G20 to further enable SME finance • G20 SME finance Sub Group identified successful models & policy measures for SMEs • Work involved review of 164 different interventions globally and subsequent policy requirements • Resulted in nine major recommendations to support SME growth • Key Recommendations to the G20 Sub-Group • Developing specific country strategies • Developing supporting legal & Regulatory framework • Strengthening the financial infrastructure • Effective government support mechanisms • Building reliable data sources for SME finance • Building the capacity of financial institutions • Address specific market failures e.g. women and agriculture • Establish a Global SME finance Forum as a knowledge sharing platform SME Finance Policy Guide – issued October 2011 by IFC

7. Our SME strategy globally focuses upon supporting finance of 10 million SMEs by 2020 through 5 key priorities • 5 priorities for delivering on objectives: • Scale up partners: Supporting market leaders and first movers to reach SMEs at scale • Target Segments: Increased coverage for underserved segments • Innovation: Innovation to diversify services, and reduce the costs and risks of SME finance • Leverage: Increase mobilization and technical support for SME finance from other partners • Delivery excellence: Delivering best-in-class products and services to clients 1 2 3 4 5 Our Objective: Contribute to financing 10 million SMEs by 2020

8. Our SME strategy for Sri Lanka focuses upon 3 key themes Opportunity Theme Our Strategy 1 • Support FI’s to start targeting informal entities • Support simplification of registration & reporting Informality • High level of informality today, with only 2% operating as legal entities • Lack of business case currently • Represent a key constraint on growth in certain sectors e.g. tourism 2 • Support banks with investment and advisory package to reach women • Develop gender focused MSME program • Leverage innovative financing models • Partner with women organizations Women in Business • Women in low growth occupations • Low labor force participation in the last 3 decades • Higher level participation in rural areas • Unemployment rate for women double that of men 3 • 64% of MSMEs without checking/savings account • FIs need MSME lending products, weather index and other insurance products, mobile banking • Need for penetration to lower end of financial spectrum • FIs lack focus, liquidity and appropriate tools to lend to SMEs • Increase investments in FIs for growth and outreach (NE) • Provide product diversification, and improved lending methodologies • Support secured transactions and promote registration of movable collateral FI Reach 8

9. Strategy & Business Model Products, Services & Marketing Sales & Delivery Credit & Risk Mgmt. Investment Services • IFC is uniquely positioned to help address the SME Access to Finance challenge in Sri Lanka Main Pillars of IFC Services in SME Finance • Risk Sharing • Credit Lines • Loans • Equity • SME & Credit Insurance • Supply Finance • Trade Finance • Global knowledge and best practice sharing • SME specific diagnostic methodology • Local Market knowledge and research • MIS & data analytics support • Sub-segment identification (i.e. Women, Agri) • Value proposition and business model design • Tools to identify capability gaps • Product advisory specific to SME • Customer value proposition: • Product bundling • Segment mgmt. • Product programs • Opportunity sizing tool and solutions • Non-Financial Services (NFS) • Market research • Strategy development • 3rd party alliances • NFS value proposition • Supply Chain Finance • Islamic finance • Customer management • Acquisition • Cross selling & deepening • Activation & retention • Delivery Channels • Existing network-utilization improvements • Expansion (e.g. branchless, mobile, POS/Cards, agents) • Data & analytics • Credit policy advisory / re-engineering • Alternative credit assessment & behavioral scoring • Early warning framework & monitoring • Collections policy and framework 9