Diaspora Loan Guarantee
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The envisaged contribution is a Sida-US International Development Finance Corporation (DFC, formerly USAID/DCA) loan portfolio co-guarantee intended to promote access to finance for Diaspora related Micro Small and Medium sized enterprises (SME) in Bosnia and Herzegovina (BiH), working in the productive sector to encourage increased production, access to expor...
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More about the contribution
The envisaged contribution is a Sida-US International Development Finance Corporation (DFC, formerly USAID/DCA) loan portfolio co-guarantee intended to promote access to finance for Diaspora related Micro Small and Medium sized enterprises (SME) in Bosnia and Herzegovina (BiH), working in the productive sector to encourage increased production, access to export markets, job creation and improve overall economic growth. The risk sharing of the guaranteed amount states that Sida and DFC together takes up to 50% of the risk (Sida up to 26% and DFC up to 74%), or $1,820,000 and $5,180,000, respectively up to $7,000,000, and ProCredit up to $7,000,000. The guarantee period is seven years. The guarantee structure is flexible in that the bank can utilize the guarantee under three different risk coverage levels; 30%, 50% and 70%, with a cap of 1.5 MUSD for loans with 70% risk coverage. The guaranty percentage must not exceed an average of 50% on a portfolio basis. One desired impact/outcome is that DFC/Sida's guarantee can be demonstrative in the long term. This would be the equivalent of impact level objective in which more banks, building on Procredit's example, adopt similar approaches related to SME lending and Diaspora related SME lending in particular. The objective is to facilitate the access to finance for Diaspora related SMEs that often lack requirements of collateral and if they are start ups or young companies, they also lack necessary credit history. The Cumulative Expected Loss is estimated to US $184,285 which corresponds to 1,619,865 SEK when the exchange rate of 8.79 SEK/USD is applied (exchange-rate as of 21 August 2020). The total need for subsidy for the expected loss is the same amount since Sida only receives the Origination fee of the payments from the bank, which will offset only a portion of the Administrative costs. The Guarantee is estimated to mobilize and unlock the potential in the range of US $14M (lowest amount based on 50% risk share by the bank on average) - US $23M (highest amount) worth of loans for diaspora linked SMEs. Sida's share of the mobilized amounts to 26% of US $14M, ie US$ 3 640 000, corresponding to 31 995 600 SEK when the exchange rate of 8.79 SEK/USD is applied. The Guarantee, if fully utilized, will have an acceptable leverage and an effect that could contribute to increase the share of competitive SMEs in BIH and promote much needed economic growth and employment of the private sector in BiH, particularly as it is about developing the disapora linked market niche.
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Total aid 1,619,865 SEK distributed on 0 activities
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Result
The guarantee is fully utilized. The utilization rate has picked up considerably from 2021 at the end of which the guarantee was 52% utilized. 84 loans have been covered by the guarantee facility. Out of these 16 are to woman owned diaspora business and 12 are to first time borrowers. Currently, indicators being tracked are those related the overall SME portfolio as requested by US DFC (Sida partner and co guarantor) on annual basis. The information covers volume of total lending to SMEs and lending conditions (collateral coverage, interest rates, tenor). Baseline was not set nor detailed indicators for monitoring impact. The assumption during the design of the guarantee facility that apart from utilization percentages, and economic sector distribution (target of diaspora business and start ups lending) other targets are not seen to be part of the results dialogue with the bank as it utilizes the guarantee.
Theory of change: Through the provision of a Sida-DFC co-guarantee to ProCredit Bank in Bosnia Herzegovina, the objective is to facilitate the access to finance for Diaspora related SMEs that often lack requirements of collateral and if they are start ups or young companies, they also lack necessary credit history. These SMEs are expected to contribute to much needed growth and employment in BiH, as well as, to support higher levels of export. The contribution is also aimed at increasing the share of competitive SMEs in the economy. Expected Results: The overall aim is to increase economic development and job creation through increased lending to the under served high growth potential Dispora related SMEs in sectors that the Guarantee targets. The expected outcome upon expiration of the guarantee is: - Expansion of the borrowing diaspora related enterprises in terms of scale of operation, profit, number of employees etc. - increased and continued lending to the target groups, esp Diaspora related SMEs with or without green investments, upon expiration of the guarantee by the partner banks and other lenders - Lower requirement for collateral for the borrowers by lenders, and generally improvedloan conditions Desired impact: - Demonstrate to the rest of the financial sector the market for SME loans for business expansion, including lending to dispora related businesses, where collateral requirements and lack of capital markets is a problem for the SMEs. -The development impact is that increased access to credit will promote development and upscaling (into higher value chains) of the productive SMEs, leading to economic growth and more employment opportunities. ProCredit Bank d.d. has a 15-16% share in the SME market and a short term goal to reach 20%. They use an approach where they directly visit about 1000 clients per year, new ones, with a success rate of 21%. The clients targeted include businesses aiming to reduce energy consumption and their impact on the environment. By investing in environmental protection measures, modern machinery and energy efficient business premises, ProCredit seeks competitive advantage in the SME market. The objective of this project is to introduce Diaspora loans in the SME portfolio through the loan portoflio guarantee-LPG. These clients are assumed to be eligible start ups mainly from related DFC/USAID and Sida financed TA and grant projects for SMEs. There are also already a few companies with some years, and some capital, that can grow in ProCredit's existing portfolio but they do not have sufficient collateral to cover entire investment. The LPG provided by DFC/Sida is intended to strengthen the Banks’s ability to provide loans to diaspora-linked businesses in Bosnia and Herzegovina, thereby stimulating economic growth. This Guarantee will be something new on the market.
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