Micro, Small & Medium Enterprise (MSME) Project

FINAL DRAFT

Micro, Small & Medium Enterprise (MSME) Project

Project Completion Report

Table of Contents

Introduction

Section 1. Access to Finance

1.1.Purpose

1.2.Main achievements

1.3.ATF Legacy

1.4.Lessons learned

Section 2. Business Development Services

2.1.The Rationale for the Innovative Approach

2.2.Main achievements

2.3.BDS Legacy

2.4.Lessons learned

Section 3. Investment Climate

3.1.Purpose

3.2.Main achievements

3.3.IC Legacy

3.4.Lessons learned

Section 4. Public Private Dialogue

4.1.Purpose

4.2.Main achievements

4.3.PPD Legacy

4.4.Lessons learned

Section 5. Project Management

5.1.Project and Financial Management

5.2.Communications

5.3.M&E

Annex A. List of grantees for ATF component

Annex B. List of grantees for BDS component

Annex C. List of MSME events

FINAL DRAFT

Introduction

This final report presents the main outputs, outcomes and impacts of the Micro, Small and Medium Enterprise (MSME) Project in Nigeria. Given the highly innovative nature of this project,particular attention is given to the legacy and lessons learned from the interventions undertaken.

The MSME Project

The MSME Project (2005-2011) was a pilot programme undertaken jointly by the World Bank and the Federal Government of Nigeria (FGN). The Executing Agency was the Nigerian Investment Promotion Commission (NIPC) which implemented the project through a Project Management Unit (PMU) managed by Nathan Associates London Ltd. (previously known as Emerging Markets Economics Ltd. and Nathan EME Ltd.) and Development Associates (DA).

The aim of the Project was to improve performance and employment amongst MSMEs in selected non-oil industry sub-sectors and in three states of the country (Abia, Kaduna and Lagos) through increased private investment.To achieve this, the project aimed todevelop and strengthen the capacity of local intermediaries to deliver financial and non-financial services to MSMEs; and reduce selected investment climate barriers that constrain MSME performance. It did this through five components:

Component 1 - Access to Finance (ATF)

Component 2 - Business Development Services (BDS)

Component 3 - Investment Climate (IC)

Component 4 - Public Private Dialogue (PPD)

Component 5 - Project Management (including Monitoring and Evaluation (M&E))

A core objective of the pilot project was to implement specific types of MSME best practice models drawn from global experience. The goal was to see if the new and innovative approaches that the project applied delivered the desired outputs and outcomes in an efficient way across a few states of Nigeria. Nationwide coverage was initially not sought as it would result in too many disparate activities and locations, over-stretching management capacity and compromising project performance at outcome and impact levels. However, the World Bank committed to give consideration to extending project scope and outreach at a later date if the project results were positive.

The innovative nature of the project

A range of new approaches and instrumentswere launched under this pilot project. The most relevant were:

• Establishing a partnership between the public and private sectors in Nigeria to deliver the Project. This included as the apex governing a Review Committee (RC) comprising a majority of representatives from the private sector as well as key government agencies.
• Provide a range of key services (e.g. ATF, BDS) combined with investment climate reforms to ensure an enabling investment climate for MSMEs. This was a recognition that MSMEs needed improved access to finance and BDS in order to be able to grow as well as a reduction in the cost of doing business to increase the incentive to invest.
• Reliance on private sector delivery channels to deliver the ATS and BDS components in order to promote responsiveness to enterprise needs and commercial sustainability.
• In order to enhance outreach and hence impact, rather than working directly with enterprises themselves, focus on intermediaries providing services to MSMEs.In practice, what this amounted to was that, instead of the then normal practice of stimulating MSME demand for services by subsidising the cost of services, the project stimulated the supply of services.
• Use of a transparent, open to all bidding’ process for selecting intermediaries that left the onus of what services would be delivered, the choice of who would provide technical assistance (TA), thetarget number of beneficiaries and intended impact of servicesand the commercial sustainability of the service provided to applicants to define. Such an arrangement left room for greater innovation and was considered less open to moral hazard than the normal approach of projects telling intermediaries what services they should supply and at what cost and providing the TA themselves.
• The use of performance grants agreements (PGAs) with intermediary service providersas the main instrument for ATF and BDS. The instrument was intended to allow project resources to be used more cost effectively, paying for results rather than inputs and it was expected to make intermediaries more accountable to the project for delivering results.
• Inspired by the emerging thinking on developinga more joined up financial sector, breaking the boundaries between microfinance and commercial banking by helping to up-scale the former and downscale the latter. Microfinance was to be up-scaled by moving away from the NGO driven model that catered for the needs of survival businesses to establishing commercial microfinance institutions (MFIs) that were able to lend larger sums suited to the needs of growth oriented enterprises. The commercial banks were to be supported in acquiring the skills and systems needed to lend smaller amounts of money profitably.
• Combine supply side stimulation of generic BDS services with BDS provision in specific value chains. It was believed that the latter could be especially effectivein increasing linkages between firms within the value chains to facilitate the transfer of know-how combining access to BDS with a market for products (embedded BDS).

Themanagement structure adopted by the MSME Project was also innovative in two respects:

1. The selection of NIPC rather than a Ministry to serve as Executing Agency. The choice of an autonomous agency responsible for promoting private investment provided the scope for less bureaucratic decision making and a more responsive attitude towards the needs of the private sector. The NIPC was, at that time of project design and appraisal, an autonomous agency that reported to the Presidency.
2. At the apex of the governance structure was a Review Committee (RC) that provided policy direction and decided on all large items of expenditure. The majority of the membership of the RC was drawn from the private sector.

The MSME Project was also innovative in that it piloted an enhanced partnership between IDA and IFC in the Africa region with the aim ofleveraging strategic investors and investment funds; benefiting from economies of scale in knowledge acquisition and transfer resulting from the implementation of similar projects systematically across multiple countries; and better support to the FGN in its efforts to foster private-public dialogue, private sector investment and more effective donor coordination.

Report outline

This report has been structured following the five components of the project. Section 1 presents the access to finance component. Section 2 assesses the business development services component. Section 3 looks at the investment climate component and, within it, at each of its four subcomponents (business registration; credit bureaus; ADR; and secured lending). Section 4 presents the public private dialogue component. And finally section 5 assesses the project management component, including financial management, communications and M&E.

Section 1.Access to Finance

1.1.Purpose

The access to finance (ATF) component of the MSME project aimed to support financial intermediaries to increase their outreach in providing market-driven, commercially sustainable financial services to MSMEs in the three target States of Abia, Kaduna and Lagos. More specifically, this component was expected to provide grants to finance technical and capacity building assistance to commercial financial institutions (finance companies, commercial banks) and technical partners with expertise in the provision of financial services to MSMEs.

At the time when this project was designed, MSMEs had limited access to credit in Nigeria. The microfinance industry in Nigeria was essentially “social microfinance”, meaning that it involved specific measures of subsidy from government or voluntary donors. The average size of loans was very low and it mostly provided support to survival businesses. On the other end, commercial banks worked very little with MSMEs as they faced problems such as lack of collateral, bad quality of business plans and/or perceived high risk of doing business with them.

The ATF component aimed to demonstrate that there was space in Nigeria for “commercial microfinance”, that is, a commercially sustainable (not requiring continuing subsidy) provision of financial services to MSMEs. Commercial microfinance institutions would serve a group which are not the poorest of the poor, the bottom 20% of the income distribution, but what is called the “enterprising poor”, the middle three quintiles of the income distribution and in some cases even move into the top quartile. This commercially sustainable industry would bridge the “financial gap” that existed in the market, addressing the savings and borrowing needs of large numbers of MSMEs (and individuals) in the country.

This intervention aimed to be transformative of the whole financial sector in Nigeria. The aim was to have a joined up financial sector that was able to meet the needs of all size of enterprise and to move funds to where they were most productive. The project envisaged this happening by achieving two outputs:

• Up-scaling traditional microfinance, which was previously focused on survival loans, so that it served the needs of the enterprising poor.
• Helping commercial bank downscale their services, thus improving access to finance for businesses at the smaller end of the SME size spectrum.

What was particularly innovative in this respect was the fact that IDA did not attempt to build capacity of existing MFIs as many interventions seek to do. From the outset, the focus was on de-novo (new institutions). Hence, what the Project sought was to have new investors take a share of MFI investment and to introduce new, more commercial business models.

Additionally, as opposed to previous IDA interventions, this component would not provide any financial resources to microfinance institutions (e.g. supporting capitalisation of MFIs, providing credit lines). All financial investment would have to come from commercial banks or investment in microfinance institutions.

The Project would only provide resources for technical assistance. And, even here, the instrument to be used was not the usual procurement of TA by the project to support the MFI. Instead, the MFIs were expected to select their own service providers and to involve them in their businesses on their own terms. The project was free to select the applicants that it found likely to provide the best value for money and provide resources against the delivery of milestones agreed in a performance grant agreement. But for the rest, it was up to the investors to procure and manage the TA.

1.2.Main achievements

The ATF component of the MSME Project has been successfully completed. There are currently 4new, commercially oriented MFIs running profitably and one commercial bank which has downscaled its lending. Together they account for between 10-20 percent of all microfinance bank lending in Nigeria and are the leaders in the field.

These operate under a regulatory framework that was developed with assistance from the project and is under the jurisdiction of the Central Bank of Nigeria (CBN). This regulatory framework is slowly being revised to accommodate problems as they emerge.

As of September 31, 2011 there were roughly 39,000 borrowers withN6.2 billion (US$41.3 million) of outstanding loans and 1.2 million savers with over N20.4 billion(US$136 million of savings (most of the latter in the downscaling commercial bank). The total portfolio at risk (PAR) at 30 days was under 6%. Putting aside the older troubled portfolio of one institution (Susu MFB), the actual PAR at 30 days is under 2.3%. Over 50% of borrowers for reporting institutions were women and the level of financial sustainability was between 55.3 and 117percent.

The table below details the targets for this component and what have been the achievements as of 31/09/2012.

Targets from PIM / Achievements as of 31/09/2011
1.1At least two new microfinance institutions are established.
For each MFI:
1.1.1At least 30,000 active clients by end of year 4.
1.1.2At least US$20 million outstanding portfolio by end of year 4.
1.1.3Financial self-sufficiency ratio at least 100% by end of year 4.
1.1.4Loan loss rate below 5% by end of year 4. / 1.1Four new MFIs have been established (AB Microfinance Bank; ACCION Microfinance Bank, MicroCred Microfinance Bank, and Susu Microfinance Bank).
1.1.1Active borrowers and savers for each MFI are: AB (15,061/38,199); ACCION (12,089/59,084); MicroCred (5,294/10,096) and Susu (2,778/37,304) as of 31/09/2011. Total borrowers were 35,232 and total savers were 144,683.
1.1.2Total outstanding portfolio is US$33.9 million. Outstanding portfolio for each MFI is: AB (US$18.6 m); ACCION (US$10 m), MicroCred (US$3.3 m); and Susu (US$2 m) as of 31/09/2011.
1.1.3Financial self-sufficiency is 89% (AB), 117% (ACCION), 55.3% (Microcred) and 105% (Susu) as of 31/09/2011.
1.1.4Loan loss rateis 0% (Microred), 2% (AB) and 6% (ACCION)as of 31/09/2011 (the other grantee did not report). However, it was agreed that portfolio at risk (PAR) at 30 days was a better indicator: 0.65% (AB), 3.93% (ACCION), 0.78% (Microcred) and 4.99%* (Susu) as of 31/09/2011.
1.2New private sector investment in MFIs at least US$15 million / 1.2New private sector investment in MFIs wasUS$30 million (N4.5 billionpaid up capital) as of 30/06/2011.
Note: This figure does notinclude paid up capital from the two microfinance banks that the MSME Project financed and are now closed.
1.3At least one commercial bank establishes an MSME downscaling programme.
For each commercial bank:
1.3.1At least 5,000 active clients by end of year 4.
1.3.2At least US$10 million outstanding portfolio at end of year 4.
1.3.3Financial self-sufficiency ratio at least 100% by end of year 4.
1.3.4Loan loss rate below 5% at end of year 4. / 1.3One commercial bank (Oceanic) established an internal microfinance section as of 31/09/2011.
1.3.13,818 activeborrowers and1,073,429 active savers as of31/09/2011.
1.3.2US$7 million (N 1.017billion) outstanding portfolio as of 31/09/2011.
1.3.3This figure is not available as the microfinance department is a unit within the bank, but the ratio is at least 100%.
1.3.4There is no figure available for this indicator, but it was agreed that portfolio at risk (PAR) at 30 days was a better indicator: this was 5.9% as of 31/09/2011.
1.4Bankers are aware of downscaling programme and develop more positive perceptions of commercial viability of downscaling. / 1.4There have been successful meetings with Banker’s Committee on downscaling and a number of commercial banks (Afribank, First Bank, UBA, and IBTC) have invested in subsidiary banks.Including the three banks that have invested in ACCION (NIB[Citibank], Ecobank, and Zenith Bank), seven out of Nigeria's 22 commercial banks have invested in one form or another in commercial microfinance.

*This figure is for new systems loans in Susu portfolio.

1.3.ATF Legacy

As presented above, the MSME Project has supported the establishment of four new commercial microfinance institutions in Nigeria (ACCION Microfinance Bank, Susu Microfinance, AB Microfinance Bank and Microcred Microfinance Bank) that are running profitably and are expanding. It has also enabled one commercial bank (Oceanic Bank Plc, now fully merged with Ecobank Nigeria) to downscale its services, leading to the creation of the first Microfinance Department within a commercial bank in Nigeria. The project had also provided grants to two other MFIs (Integrated Microfinance Bank and MIC Microfinance Bank) but their licenses were cancelled because of the impact of the August-September 2009 international banking crisis.

Overall, the institutions which remain account from between 10-20 percent of microfinance lending in Nigeria and are the leaders in the field. For example, ACCION was amongst the very first MFIs in Nigeria to receive approval from the CBN to start its operations. These institutions have contributed significantly to the flourishing of the commercial microfinance industry in Nigeria and the creation of a new market segment.

In Nigeria, overall, there are over 800 microfinance banks currently licensed. However, the majority of these (around 500) are former community banks that have become MFIs. The fact that the 5 institutions supported by the project account for between 10%-20%of the market shows that a new, more successful business model that involves larger loans on a commercial basis has made huge in-roads into the market. The fact that a number of banks not supported by the project have also invested in microfinance institutions is testament to the fact the project will have succeeded in developing a new segment of the market. A recent assessment of the former community banks shows that most remain short of financial and managerial capacity.

The demonstration effect has been particularly relevant in the case of Oceanic, as it has shown other commercial banks that it makes commercial sense to invest in microfinance. Although no other commercial bank has gone as far as Oceanic in creating a Microfinance Department, seven other commercial banks in the country have decided to invest in microfinance banks, therefore paving the way to expanding their businesses in the area of microfinance.

The establishment of microfinance banks and downscaling of commercial banks has also allowed Nigeria to further close the “financial gap” that MSMEs suffered from. MSMEs can now have access to financial intermediaries whose technologies and products are better tailored to their needs, giving them, for example, the chance to access loans for investment in their businesses.

In fact, an independent impact study of the ATF component[1]revealed that it had succeeded in increasing access to finance for 25% of respondents. These were people who had not applied for loans in the past, because of the difficulties they perceived in obtaining loans, or had been turned down by other MFIs and banks.

The study found that the improved access to finance had a positive impact onborrowers’ business with monthly turnover increasing 44% on average compared to pre-intervention levels a year previously. This represents a very rapid real increase as inflation during the period was around 7%-8%. Moreover, 83% of respondents agreed with the proposition that the sales were affected by obtaining a loan, so it is possible to attribute the increase in turnover to the provision of microfinance. An even higher proportion of respondents (86%) agreed that obtaining a loan had a (positive) effect on profitability of the business.