Workshop on SME Finance – Reaching Scale: A dialogue between global practitioners and East African Bankers 26 – 27 June

1. A practical example from Mozambique Socremo - Banco de Microfinanças Workshop on SME Finance – Reaching Scale: A dialogue between global practitioners and East African Bankers26 – 27 June 2007, Dar es Salaam, Tanzania

2. Structure of the Presentation • Country Features • Socremo – Banco de Microfinanças • SME Business Experience • Policy Environment • Technical Assistance / Support • Key Lessons

3. Country Features General Population of app. 21 million, growth 1.8% p.a. GDP growth 9.8%, Inflation 12.8% in 2006GDP per capita around USD 310 Banking Sector 12 commercial banks, including 3 microfinance banks Shallow banking system with low lending propensity Microfinance Industry Underdeveloped industry with narrow product range Very limited statistics information,Around 66,696 active clients, USD 29.5 m portfolio (9 MFIs) Business Environment Difficult investment environment (high bureaucracy)Restrictive (old) labour law and property right high taxes & charges Infrastructure Relatively good infrastructure in Maputo and BeiraBad road links and erratic power/water supply elsewhereTelecommunications access increasing (mobile phones) Human Resources One of the main problem for private business Low tertiary enrolment rates

4. Socremo – Banco de Microfinanças Mission To provide - in a transparent, professional and sustainable way – financial services to low and middle income groups, with special focus on micro and small entrepreneurs. Vision To be the house bank of low and medium income groups in Mozambique

5. Socremo – Banco de Microfinanças

6. Socremo – Banco de Microfinanças Socremo has developed from a only credit given MFI to a profitable commercial Bank, offering a range of creditand deposit products through its network of 8 branches,with total number of staff of 254 (2006).

7. Socremo – Banco de Microfinanças OwnershipStructure • Diversification of ownership;reducing the shareholding of the government; • Including reputable and experience investors; • Surpassing minimum capital requirement forcom. banks. Governance Structure • International best practice organisation structure; • Clear defined rules for each organ; • Policies and procedures for all areas; • Comprehensive MIS. Legal Environment • Overage, inflexible laws and regulations; • Especially the labour law is very restrictive and there are no clear property rights. Microfinance Industry • No microfinance policies and regulations; • Limited coordination between stakeholders withinthe sector.

8. SME Business Experience

9. SME Business Experience

10. SME Business Experience

11. Excurse: Microfinance Bank of Azerbaijan

12. SME Business Experience Why targetingSME market • Graduation of old (good) micro clients; • Unserved demand in the market; • Additional income source; • Strong synergies with microlending; • Good additionally with existing products andgood cross-selling perspectives; • Important for economic development andsocial stability / job creation. Product Design • Continue building on existing credit history; • Increase amounts/terms; • Flexible interest rates regime(dependent on collateral availability, quality,quantity).

13. SME Business Experience Procedures • Stricter due diligence process, higherdocumentation requirements; • Temporary centralisation of decision-makingprocess (for training), later gradual release oflending authorities to branch level. Loan Officer • Build-up of specialised and dedicated team ofSME loan officer out of the pool ofexperienced micro loan officer; • Establish a separate unit within the CreditDepartment; • Introduction of specific incentive scheme forSME loan officer.

14. SME Business Experience CollateralChallenges • Pledging of vehicles (not practiced by otherbanks in Mozambique); • Introduction of obligatory promissory noteas additional collateral instrument for loansabove USD 10,000 equivalent; • Own evaluator to cut costs and escapecorruption.

15. SME Business Experience Contribution to Success • Drawing on existing client base; • Reliance on assessment principles ofmicro-technology, looking at the real economicsituation rather than official financial statements; • Quick processing time with minimum formaland documentation requirements; • Application of the same strict enforcement procedures as used for micro clients(PAR 1 day control); • Incentive System for loan officers; • Acceptance of vehicles as pledged collateral; • Assignment of an experienced branch manageras head of the SME unit within the CreditDepartment.

16. SME Business Experience MainChallenges • Finding the right balance between controllingby applying higher documentation requirementson the one hand and avoiding too rigidformalism on the other hand. Challenges Addressed • Introducing standardised assessment proceduresand forms taking into account the ‘average’level of complexity of a typical MozambicanSME while at the same time leaving flexibility for simpler (or more complex)assessments in case of need.

17. Policy Environment GovernmentRole and Actions • No direct role of the government; • Business registration and taxation requirementsvery onerous, preventing business from doingofficial business; • Lack of rules and bad implementation ofcollateral registration; • Intransparent and long court procedures, especiallycourt enforcement procedures.

18. Technical Assistance / Support TechnicalAssistance • Since 2005 Socremo is managed byLFS Financial Systems GmbH under aManagement Service Contract; • Financed by different partners, including DFID,KfW, seco, and AfriCap. • Socremo cooperates with Triodos InternationalFund Management B.V., Deutsche BankMicrofinance Funds, and Standard Bank, Maputo. RefinancingPartners

19. Key Lessons • Build-up SME business with experiencedlenders (=micro loan officers); • Build-up dedicated group of specialists with own procedures and own incentive scheme; • Start with pilot branches and centraliseddecision making, branch out only when asufficient number of staff (incl. branch managers)has undergone training. Three mainLessons

20. Key Lessons AdviceFinancial Institution • Start with smaller maximum amounts to gainexperience; • Create incentives for clients to provide bettercollateral (e.g. by making pricing dependanton collateral); • Apply usual principles of responsible loan officers and client graduation; • Take reality serious when definingdocumentation requirements and analysis(e.g. include related businesses). Advice Policy Makers • Ease business registration and taxationrequirements.

21. Thank you for your attention! Christoph DiehlAccess Microfinance Holding AGLinienstraße 12610115 BerlinGermanyTel.:     +49-(0)30-30 87 47 34Fax:     +49-(0)30-30 87 47 50christoph.diehl@accessholding.comwww.accessholding.com