International Finance Corporation – Financing the “missing middle”

Mary Ellen Iskenderian

The UN Year of Microcredit has focused attention on the many international partnerships – including some built at the International Finance Corporation (IFC), the private sector arm of the World Bank Group – that have been developed in that critical field, doing much to scale up organizations that help some of the world’s poorest people lift themselves out of poverty.

Yet microcredit remains just one part of the poverty reduction puzzle. Its borrowers occupy the first rung of the economic ladder, followed in turn by small and medium enterprises (SMEs), which are also essential in building the strong local private sectors on which sustainable income growth ultimately depends.

In Bangladesh and Afghanistan, IFC uses donor partnership models that have brought new financing from a range of governmental and foundation donors to some 20,000 micro, small and medium enterprises since 2003. These models are now ready to be transferred to other projects and regions.

The middle market

As important as microenterprise is, formal sector small and mid-sized firms are often the key to creating jobs and growth in the developing world. Without a strong SME sector, local business communities tend to have just a few large and powerful firms and many small, unproductive ones. This produces high levels of poverty and income inequality, and holds back the development of the strong middle class that is so important to stability and good governance.

An active donor community has long supported SME development. But this has involved largely bilateral and multilateral donors rather than foundations, and to date its best work has not attracted the attention that microenterprise has. Nevertheless, the SME world has many proven partnership models that have helped donors meet Millenium Development Goals 1 (Eradicate Extreme Poverty) and 3 (Promote Gender Equality and Empower Women). They have done so by meeting the key needs of small and mid-sized firms: financing, business services, linkages with larger firms, and improved investment climates.

SME development is central to our work at IFC and carried out in close partnership with the donor community. While best known as an investment organization, IFC also teams with donor partners to fund 11 technical assistance facilities around the world with a combined annual budget of more than $50 million and more than 900 full-time staff.

Based in cities such as Lima, Cairo and Johannesburg, these facilities provide grant-based business support[1] to complement our investments and strengthen the private sector more generally. From our Washington DC headquarters we also manage an additional $20 million in annual grants, many of them used for microenterprise and SME development.

Case in point: Bangladesh

Bangladesh is one of the most successful centres of microcredit, with major NGOs such as Grameen and BRAC that currently reach several million borrowers. But the country’s poverty reduction efforts also need to include SMEs, which can create jobs giving workers more security, better salaries, benefits and training opportunities, as well as contributing taxes to government coffers.[2]

There are more than 150,000 small businesses and 27,000 medium-sized ones in Bangladesh, most of them cut off from commercial financing until now. Such financing will bring high development impact if it is made on a sustainable basis. This is well understood by the internationally recognized Bangladeshi non-profit organization BRAC, which, in partnership with IFC, has built the country’s leading commercial bank focused on SME finance, BRAC Bank.

BRAC Bank

Launched in 2001, in the last two years BRAC Bank has more than doubled its loan portfolio from $49 million to $107 million, while also increasing the number of nationwide branches and offices from 156 to 293. It serves more than 15,000 clients with loans averaging about $6,000 – above the threshold offered by local microcredit providers but below that of most large local banks that target the business elite.

IFC is a 16 per cent shareholder in BRAC Bank, and uses two different donor partnership models to help it obtain the top-quality technical assistance that it needs to grow, but is hard to find in Bangladesh.

One is the South Asia Enterprise Development Facility (SEDF), a $37 million programme launched in Dhaka in 2002, focusing on the needs of SMEs in Bangladesh, Bhutan, Nepal and north-east India. It is funded jointly by IFC, the European Commission, the Asian Development Bank, and the bilateral aid agencies of Canada, Norway and the UK. All donors pool their money under management of IFC. The people who manage our technical assistance programmes are part of IFC’s larger investment department for South Asia, so have close access to what’s going on in the local business and finance communities. This allows for cross-fertilization with IFC’s practical knowledge of financial markets, manufacturing, agribusiness and other key industries, commitment to sustainability in all lines of business, and access to the World Bank’s policy expertise.

As well as access to finance, SEDF has supported IFC’s investment in BRAC Bank by providing technical assistance on a cost-share basis in the following areas:

  • IT diagnostics and systems audits;
  • design of a credit scoring model and corresponding training;
  • exposure to other leading SME finance institutions, including Bank Rakyat Indonesia.

 

A much larger, $500,000 technical assistance programme is now being designed that aims to double BRAC Bank’s existing 15,000 client base by the end of 2006 and to triple its lending volume. As before, costs will be shared equally by SEDF and BRAC Bank.

This programme is designed to flow seamlessly from earlier support that BRAC Bank received from another of IFC’s partners, ShoreCap International.

ShoreCap was launched in 2003 by ShoreBank, a leading US-based community development and small business bank that also has a long track record of working in Bangladesh and other developing countries. This $28.3 million investment fund for micro- and SME finance institutions brings together ShoreBank, IFC, ABN-AMRO of the Netherlands, BIO of Belgium, and other investors. It also has a related $8 million pool of grant funds for technical assistance funded by IFC, the Ford Foundation, Skoll Foundation and Levi Strauss Foundation of the US, the UK-based Gatsby Charitable Trust, and others.

From ShoreCap, BRAC Bank has received support in risk management, strengthening human resources systems, lending methodologies, problem loan management, and internal auditing. It has also been connected with CEOs from other ShoreCap investee banks in Kenya, Armenia, Botswana, the Philippines and Cameroon.

The SEDF and ShoreCap models bring together a wide array of donors around a common agenda – filling a key gap in the fight against poverty in Bangladesh.

Afghanistan: the next frontier

In 2002, BRAC also began a major microcredit programme in Afghanistan which has since become the largest such programme in that country. As a complement to it, IFC has partnered with the microfinance arm of the Aga Khan Foundation for Economic Development (AKFED) to create a new commercial institution targeting slightly larger firms, the First Microfinance Bank of Afghanistan (FMBA). Opened in May 2004, it now has a $4.5 million loan portfolio – reducing poverty by supporting the work of 4,500 microenterprises and small businesses. Of these, approximately 17 per cent are businesses run by women, who were previously denied economic opportunity under Taliban rule.

As with BRAC Bank, IFC has both invested in AKFED’s new Afghan institution and teamed with other donors on critical institution-building support. A $650,000 grant from the World Bank Group’s Japan Social Development Fund was used to purchase a management information system that the new bank needed to monitor and administer financial products. These funds became part of an overall $4 million technical assistance package for FMBA, which included additional contributions from Norway, the USA, the European Union, IFC, and KfW of Germany.

With this funding in place, FMBA became the first local financial institution to receive a banking licence from the new Afghan government. It offers a viable model for IFC and donor partners to consider using again in other difficult post-conflict environments.

Finding the right model of partnership that allows all donors involved to pursue their development goals has been the key to both the Bangladesh and the Afghan projects. As with the many good examples that have been cited throughout the UN Year of Microcredit, these projects show what can happen when a community of like-minded players comes together around a common agenda.

1 This means that IFC uses the grants to defray a portion of the costs of delivering the technical assistance (usually the fees of expert advisers, and in some cases travel etc).

2 That there are local entrepreneurs in Bangladesh able to succeed is shown by the example of the garment sector. It currently employs more than 1.5 million people, most of them women, and holds its own in the world market by offering high-quality products, low-cost labour, and a proven ability to adapt to changing compliance norms and standards set by buyers in the US and Europe.

Mary Ellen Iskenderian is Partnerships Director, IFC. She can be contacted at Miskenderian@ifc.org


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