Written by Philippe Orliange, Director for Strategy, Partnerships and Communication, Agence Française de Développement. This article is one in a series of ‘In my view’ pieces written by prominent authors on issues covered in the OECD Development Co-operation Report 2016: The Sustainable Development Goals as Business Opportunities. Read the first piece in the series.
The financial model of the Agence Française de Développement (AFD) is typical of those of development banks in general.1 The agency borrows on capital markets at low interest rates, thanks to its good ratings as a solid, state-owned institution. It provides these funds to developing country borrowers in the form of development loans – subsidised or not, according to need.
This is the most direct way in which development banks “mobilise” private funds. Yet other vehicles for mobilisation need to be further explored; in particular, ways of enabling developing countries to mobilise their own domestic resources, through local banks, to finance small and medium enterprises. One of the main hurdles local companies face is insufficient access to bank finance in the volumes they need, with affordable interest rates, reasonable pay-back time and security. The AFD and its private sector subsidiary, Proparco,2 offer several tools to help them overcome these obstacles:
- Credit lines for small and medium enterprises. When there are clearly identified financing gaps in the local market, the AFD can provide support in the form of a credit line to one or several local banks, which will then lend to local small and medium enterprises. The beneficial terms of these loans to local banks are passed on to the end-borrowers. The local banks also usually offer additional loans on their own terms; these, together with what the enterprise invests itself, contribute around 45% of local resources within the overall investment. In addition, the AFD’s credit line is often complemented by technical assistance, both to the local banks and to each specific project.
- Guarantee mechanisms. The inability of small and medium enterprises to provide sufficient collateral is often a major barrier to obtaining a loan. Even when collateral is available, in the case of default, shortcomings in the local legal system may make it lengthy and costly for banks to recuperate their investments. The risk for the local bank can be reduced if a third-party “guarantor” agrees to pay part or all of the amount due on the loan in the event of non-payment by the borrower. These “guarantee” schemes, legally binding, allow small and medium enterprises to access credit at low cost. The AFD has developed such a risk-sharing tool, ARIZ,3 which is mainly used in the least developed countries, guaranteeing loans from local banks to over 5 000 companies in more than 30 countries to date.
In my view, using mechanisms like these can go a long way towards mobilising domestic resources, putting them to work for productive investments. This, in turn, will help to stem both licit and illicit outflows of resources – a goal at the heart of the financing-for-development agenda that the international community adopted at Addis Ababa in July 2015.
- See: www.afd.fr.
- See: www.proparco.fr.
- ARIZ stands for Accompagnement du Risque de financement de l’Investissement privé en Zone d’intervention de l’AFD (support for the risk of financing private investment in the AFD’s areas of operation).