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The theme of 11th APEC SMEFI is “Engaging with SME Financing & Supporting Innovation”. Aiming to sustain support for SME growth in the Asia Pacific region, and to assist SMEs in adapting to the wave of globalization, APEC SMEFI will deliberate ways to solve SME financing barriers and explore lending approaches to strengthen SME up-growth.
BIAC - the Voice of OECD Business - is an independent international business association devoted to advising government policymakers at OECD and related fora on the many diversified issues of globalisation and the world economy.
Officially recognised since its founding in 1962 as being representative of the OECD business community, BIAC promotes the interests of business by engaging, understanding and advising policy makers on a broad range of issues.
The thinking around investing “soft money” for non-financial returns along with financial returns is getting more sophisticated. The practice of combining investment money with grants – more often called blended finance – is gaining traction. A discussion in The Hague at the DFI Working Group, hosted by FMO and the SME Finance Forum, drew on the latest thinking from some of the most cutting-edge (and experienced) practitioners of blended finance, and led to some clear messages for these investors.
This shared learning should lead to greater impact, more sustainable investments, a smaller footprint for these investments--and ultimately less donor-dependency.
But first, let’s agree what we mean by the term blended finance. Blended finance refers to finance that includes an element of subsidy, whether in the form of a grant as part of the investment, or in lower returns, higher risk, longer tenors, or in local currency loans. It is exactly that grant element that seduces existing and potential investors to commit to activities with clear public benefits (typically Social or Environmental).
The bigger players on the blending block in Europe are the publicly-funded Development Finance Institutions (the EU, EIB, AfD, KfW, and EBRD), while the IFC is an exemplary partner with a full blending policy and internal organization focused on agricultural lending, SME, and clean energy.
Why all the current interest in blending? With aid budgets under pressure, governments are recognizing that the private sector is a crucial player in the economy. They are beginning to bring in private actors as partners in development. Perhaps it’s making a virtue of necessity, but the result is a happy marriage that’s leading to greater rigor in the use of blended finance.
The ingredients that go into the secret sauce of blended finance need to be carefully balanced. Here are four principles that were widely agreed:
1. Add Value
Blending only makes sense if the recipient will do something new, different, more, better that he would not do without the blended finance. Determining your goal, and your intended impact, is the starting point for any blended finance. Blending should also leverage funds from other sources, funds that will be crucial for the longer term growth of the business, and continued achievement of the impact goals.
2. Soft Money Doesn’t Mean Easy Money
Blending is a teaser for the potential investor, who will take the best tease he can get. Every funder should aim to keep the subsidized element as low as possible, however, and not dangle it as a prize to sweeten an investment (to become the most attractive financier). The subsidized element should be linked to well-defined, and suitably ambitious, results.
3. Time bound
Grant funding can create dependency. Before starting, the client/recipient should have a plan how to continue his business when the subsidy ends. Blended finance should be time bound.
4. Beyond lending?
Much blending is currently done through lending. Theoretically, risks and returns can be aligned much more easily through Equity or other result-related products. Structuring this kind of investment is trickier, however. Equity implies shareholding, which is something the businesses looking for finance are often not interested in. Mezzanine structures are less standard, requiring creativity from those who structure the product and those who draft the legal contracts.
All this makes blending a complex chemistry of opportunities that will require constant adjustment.—And we’re talking practical science, not just theory. It’s still too early to codify shared principles, but it’s clear that it’s the successful investments and the failures that will provide the real learning as we continue to share experience.
The EIB Group is committed to maximising its support to SMEs as the drivers of economic growth and prosperity. In 2013 the Group reinforced its counter-cyclical role, providing its financial intermediaries with wide-ranging and innovative financial solutions tailored to fit the individual needs of Europe’s micro-enterprises, small business and mid-caps.
With support totalling a record EUR 21.9bn last year, the European Investment Bank Group maintained its role as a key player in the European solution for economic recovery.
Following the global financial crisis, policy makers’ attention has focused on lending to SMEs, as these were among the most affected when the credit cycle turned. Governments have introduced various measures that may alleviate short-term funding constraints but are unlikely to be a long-term solution. So is there a way to protect entrepreneurs in a more structural way from the cyclicality of credit?
Banks in Singapore are maintaining their support for small and medium enterprises (SMEs), despite the higher funding requirements for the higher risk that banks have to bear. But there are concerns that the higher cost of SME funding would be passed on to the small businesses.
THE government has challenged lending institutions to take risks and work with the small scale entrepreneurs (SMEs) to create more jobs and lift masses out of poverty. Limited access to finance is still a major constraint to SMEs.
Data from the National Micro Small and Medium Enterprises (MSME) baseline report (2010) indicate that there were about 2.7 million SMEs, out of which only 6.5 per cent have access to financial services.
The World Investment Forum is a high-level biennial multi-stakeholder gathering designed to facilitate dialogue and action on the world's key emerging investment-related challenges.
It is recognized by Governments and business leaders as one of the most important events for the international investment community, providing a high-level platform to interact with global leaders, senior policymakers, corporate executives, investors, investment promotion agencies, treaty negotiators, academia and civil society leaders from countries around the world.
According to new data from Federation of Small Businesses (FSB), more than 5 in 10 small and medium enterprises (SMEs) were paid after the agreed date by large companies in 2013.
As a result, FSB has urged the government to bolster the Prompt Payment Code (PPC) which, if re-launched, would make it easier for SMEs in the UK to complain about late payments and change the culture among large firms who time and again pay late or try to extend their payment terms.
In recent years, the development community has sustained support for microfinance but broadened funding to encompass the wider goal of financial inclusion. International funders have been adapting their priorities to meet this broader vision, and in 2012, funders committed at least $29 billion to support financial inclusion, an increase of 12% compared to 2011.
This data is the result of a survey of 22 international funders of financial inclusion, which represented 86% of all commitments reported the previous year.
