Investment boost for SMEs

Printeremail

 CHALLENGE
Not only is access to finance a key challenge for SMEs, but significant hurdles also exist for those non-bank financial intermediaries (NBFIs) who support them. NBFIs are non-deposit taking financial institutions that provide a broad range of financial services, including lending.

These institutions are regulated by the South African Financial Services Board and use debt funding to support their activities. Many NBFIs find external funding from traditional lenders expensive, if available at all, even when supported by credit enhancements.

INITIATIVE
Given the traditional lenders reluctance to provide credit to SME NBFIs, an idea emerged to try to access alternative funding from the capital markets. With that goal in mind, USAID’s FSP designed an SME Debt Fund to be managed by an asset manager and supported by a DCA guarantee.

This guarantee would be employed to raise capital through a private placement offering and hedge the risk of lending to the SME sector. The proposed partner and guarantee structure capitalized on the unique opportunity created by a recent change to Regulation 28 of the South African Pension Funds Act that now allows for greater flexibility in the allocation of assets from pension and institutional investors.

RESULTS
USAID’s Credit Review Board has approved an eight-year $150 million guarantee with South African based asset management firm Cadiz Life Limited. A 12-50% variable guarantee percentage will maximize risk-sharing coverage by applying a higher or lower percentage coverage based on client risk. The guarantee will make financing available to more than 300 SMEs and create over 20,000 jobs. At least 50% of the proposed facility will support the financing needs of Black Economic Empowerment Enterprises.

The guarantee aims to create a significant demonstrative market effect in South Africa’s financial sector by proving the viability of using pension and institutional investor assets as an alternative and sustainable source of debt funding. In this way, USAID has enabled NBFIs to fill the gaps in the supply of financial services to smaller businesses.