Creating Opportunities for Small Business [pdf]

Creating Opportunities for Small Business IFC, a member of the World Bank Group, fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing private capital in local and international financial markets, and providing advisory and risk mitigation services to businesses and governments. IFC’s vision is that poor people have the opportunity to escape poverty and improve their lives. In FY07, IFC committed $8.2 billion and mobilized an additional $3.9 billion through loan participation and structured finance for 299 investments in 69 developing countries. IFC also provided advisory services in 97 countries. For more information, visit www.ifc.org. Creating Opportunities for Small Business Table of Contents 2 3 5 7 11 15 Foreword Approach IFC and SMEs Improving the Business Environment Improving Access to Finance Providing Access to Markets, Business Skills, and Information Creating New Opportunities Through Innovation Measuring Results Frequently Asked Questions Contact Details Donor Partners 19 21 22 23 24 Creating Opportunities for Small Business 1 Foreword IFC’s vision is for people in emerging markets to have opportunities to escape poverty and improve their lives. This vision drives all of our work to develop the private sector. These efforts range from investing directly in businesses, to mobilizing private financing from other investors, to advising companies, governments, and other stakeholders in private enterprises. In most countries and regions where IFC works, small businesses generate the largest share of economic activity and employment. Starting and expanding a small business is one of the most promising and sustainable routes out of poverty for many millions of people. These entrepreneurs, and the people they hire, stand a better chance of providing for their families, sending their children to school, and leading a healthier life. A vibrant small business sector also creates choices for consumers and generates tax revenue that in turn improves public services. When I meet small business clients, I am struck by their drive and the impact that they have on their communities. Because the benefits of small and medium enterprises (SMEs) are so farreaching and powerful, we are targeting them as one of the most effective channels to help poor people in developing countries. Our vision is broad, but so are the challenges. Poverty remains widespread, and the financing to fuel the growth of smaller enterprises is often out of reach. Frequently, the business environment is confusing, with regulations posing numerous and costly hurdles to start, register, or operate a business. Women and other underrepresented groups still face many barriers that exclude them from participating fully in their local economy. IFC plays a catalytic and innovative role in developing small businesses. We can tap the policy experience of the World Bank and mobilize the resources of a wide range of partners, including governments, other multilateral and bilateral agencies, academic institutions, foundations, nongovernmental and civil society organizations, as well as our client companies. This report illustrates some of the strategic methods IFC employs to help SMEs. The larger framework includes broad interventions to strengthen and improve the business environment as well as enhancements to the financial system that expand access to credit. We have programs to improve business skills, enhance access to markets, and encourage competitiveness. We pursue these programs at a wholesale level, working with intermediaries that can provide information, training, and services to the broad business sector. This approach enables us to achieve a broader reach and increase the efficiency of our engagements. Where needed, however, IFC can also provide more targeted assistance to specific, strategic sectors, so we can learn what works before launching a larger effort. IFC’s work with SMEs has accelerated steadily since 2000, both through our advisory programs and our investments in banks, leasing companies, other financial intermediaries that onlend to smaller businesses, and private equity funds with handson managers who add value by applying lessons from experience and technology, not just capital. We refer continually to our strategy and work to ensure that the essential building blocks of private sector development are in place, especially a business enabling environment and access to finance. We have seen some encouraging results. In Lima, Peru, for example, IFC worked with the municipality to reduce the time to register a new business from two months to about six days. As a result, in 2006, 8,500 new businesses were registered in the city, a more than fivefold increase over 2005. Each year we ask the banks to which we lend about their small business clients. In 2006, 180 of these financial institutions disbursed $96 billion via 8.8 million loans to small businesses. This lending is growing rapidly: overall, for institutions that reported in both 2005 and 2006, the volume of small loans grew 72 percent. IFC’s work — including our efforts to measure results — is about ensuring that private capital is put to work for the benefit of people. This report not only points out what needs to be done in developing countries, but also shows the many results that have been achieved. Our work in helping SMEs achieve their potential is steadily transforming from a long-term objective to a solid accomplishment. Lars Thunell congratulates the Mayor of Metropolitan Municipality of Lima, Dr. Luis Castañeda Lossio, on the city’s business registration simplification program. Lars H. Thunell Executive Vice President and CEO, IFC 2 Creating Opportunities for Small Business Introduction In market economies, formal and informal, small and medium enterprises (SMEs) account for more than 90 percent of all enterprises. Typically, well over half the working population, especially poorer people, rely on SMEs for employment and income. In addition, SMEs play a major role in serving the $5 trillion market for goods and services to the 4 billion people at the base of the economic pyramid. Firms that start small but do a good job of responding to market demands become larger. With scale comes productivity, bringing better salaries for workers. Larger firms tend to thrive for a longer period than smaller ones. The challenge, then, is to create an environment in which new entrants with drive and good ideas can get started in business, and good firms can grow. Economic progress is associated with increasing average firm size — a healthy, vibrant ecology of firms is needed, with firms of all sizes participating. In many emerging markets, small entrepreneurs face substantial barriers to entering the market and competing. As the World Bank Group’s Doing Business project documents, the time and cost associated with starting a business, registering property, or getting credit are onerous in many developing countries. These barriers drive many would-be entrepreneurs into the informal sector, where their chances of expanding their businesses are more limited, and their employees miss out on the protections and benefits of formal employment. In many developing countries, too, well-connected large firms dominate, insulated by government patronage. Productivity suffers as a result, and income growth is stunted: in large firms, because they are sheltered from competition, and in small firms, because they are held back. Effective competition — that is, the ability of firms to enter, grow, and challenge incumbents on a reasonably equal playing field — is essential for progress. By the same token, failing incumbents must be able to exit quickly; they should not be subsidized to the detriment of new, better, and more innovative firms. The objective of any program of SME support, therefore, should not be to reward firms that happen to be small. Rather, the objective is to ensure a functioning ecology of firms, in which new ones can emerge, existing ones can grow, and large and small ones can contract and work together. This objective guides IFC in the design and implementation of its advisory and investment programs targeted at SMEs. The practical consequences of an environment that treats SMEs fairly is that more young people find jobs; women and other underrepresented groups in developing countries can participate economically; rural and indigenous communities are better integrated into the modern global economy; entrepreneurs have access to financing and better business skills and tools; and households, including the poorest, have better choices when they shop for goods and services. Michael Klein Vice President, Financial and Private Sector Development Chief Economist, IFC Creating Opportunities for Small Business 3 I N T R O D U C T I O N Supporting small and medium enterprises (SMEs) is a key factor to alleviating poverty. To help countries spark sustainable growth in this vital area, IFC works with other groups to assist entrepreneurs, drawing on both its investment and advisory experience and the World Bank Group’s expertise. In addition, to monitor and gauge the success of its interventions, IFC consistently measures and evaluates its programs. The latest methodology is employed and the evaluation approach is constantly benchmarked against leaders in the field. Our work with SMEs falls into four broad themes: 1. Improving the business environment IFC works with policy makers and other stakeholders to improve the business environment, infrastructure, and financial systems to help small businesses grow and prosper. 2. Improving access to finance A significant barrier to the growth of SMEs in many developing countries is a lack of access to affordable credit. IFC provides financing and advice to banks and other lenders that assist SMEs, and supports programs that target underserved markets and populations, such as women in business. 3. Improving access to markets, business skills, and information Working through intermediaries, IFC helps SMEs acquire the skills and services they need when dealing with local and international regulations and markets to achieve prosperity. Using intermediaries allows IFC to achieve scale and thus reach more small businesses. 4. Creating new opportunities through innovation Unmet needs in the market provide opportunities for innovation. IFC is involved in crafting and testing new products and services, and then transferring these innovations to those who can deliver solutions for underserved SMEs. 4 Creating Opportunities for Small Business I F C A N D S M E s Support for SMEs includes financial investments and advisory services projects that provide information and training. As at July 2007, investment-related support for SMEs includes almost $7.5 billion invested in more than 600 projects. 189 780 Volume of SME Related Investments by Region (Disbursements $ million) Central and Eastern Europe Latin America and Caribbean South Asia Sub-Saharan Africa East Asia and Pacific Middle East and North Africa Southern Europe and Central Asia World 1729 1229 689 849 582 1447 As at July 2007, SME-related advisory projects numbered over 1000, with a cumulative value in excess of $680 million. Each of these projects has been working to benefit numerous SMEs, either directly or indirectly, in areas such as better access to finance or improving the business environment. 120 Dollar Value of SME Related Advisory Projects by Region Total Funding as of July 31, 2007 ($, millions) 182 Central and Eastern Europe Latin America and Caribbean South Asia Sub-Saharan Africa East Asia and Pacific Middle East and North Africa Southern Europe and Central Asia World 81 63 108 64 24 41 More than one-third of SME-related advisory services spending specifically targets “frontier countries”— that is, low-income countries or countries rated high risk by investors and to which private capital flows are limited. Dollar Value of SME Related Advisory Projects in Frontier Countries Total Funding as of July 31, 2007 ($, millions) Frontier Non-Frontier Regional Projects 265 251 Creating Opportunities for Small Business 166 5 Improving the Business Environment S mall firms face more obstacles than large firms and are not as well equipped to overcome them. The greatest challenges that small businesses face are obtaining financing and meeting onerous regulatory mandates. Corruption and crime also adversely affect small businesses. To identify challenges in the business environment of a specific country or region, IFC assesses the investment climate; surveys SME policies; and collates data on regulatory burdens, transaction costs, governance, and productivity. IFC then makes specific recommendations — often in collaboration with other agencies of the World Bank Group — to improve the business environment for SMEs. IFC’s work tends to focus specifically on the cost of setting up and running a business and includes regulatory simplification (for example, business registration, licensing, taxation, collateral, access to land, and trade facilitation), alternative dispute resolution, and investment policy and promotion. Understanding and simplifying regulatory obstacles—The Doing Business Report IFC’s annual Doing Business report provides quantitative analyses of business regulation and documents improvements in surveyed countries over time. The report ranks the ease of doing business in 178 countries. The database indicators can be used to analyze specific regulations that enhance or constrain investment, productivity, and growth. Doing Business has shown that poorer countries impose heavier regulatory burdens than wealthier countries. Burdensome regulations and weak property rights prevent poor people from entering the business sector. Reports have also shown, however, that the benefits of reform are quite substantial, which gives IFC and its partners the incentive to continue the push for such reform. Since its launch in 2004, the report has been credited with inspiring more than 100 reforms around the world. Case Study: Making it easier to start and register a business in Lima, Peru Obtaining an operating license to start a business was a highly bureaucratic process in Peru, accounting for more than 60 percent of the time it took to legally register a firm. In January 2006, IFC worked with the central district in the city of Lima to streamline business licensing. Results • In the first year after the reform was introduced, the municipality registered more than 8,500 small businesses, more than in the previous five years combined. • The time to obtain a license was reduced from two months to six days. • The number of inspections was reduced from five to one. • License costs for small firms were cut in half. Because of the increase in informal economic activities in Lima, simplifying administrative procedures was an urgent priority to enable all entrepreneurs to have easier access to formalization and to generate formal employment in this economically important city. — Dr. Luis Castañeda Lossio, mayor of the Metropolitan Municipality of Lima Creating Opportunities for Small Business 7 Improving the Business Environment Improving the Business Environment Regulatory Reform Establishing business forums and other stakeholder groups enables the private sector to play a more active role in influencing policy and legislative reform. In addition, such engagement helps governments identify problems in the investment climate and design workable policy solutions to improve the business environment. Involving the private sector at the start makes policy reforms easier to implement. Alternative Dispute Resolution For a small business, resolving a commercial dispute quickly and fairly can mean the difference between growth and going out of business. In southern Europe, for instance, resolving a commercial dispute can take up to 500 days. Such delays cost time and money that businesses could use to run their operations. The Alternative Dispute Resolution Program focuses on mediation rather than lawsuits to resolve commercial disputes. A neutral third party (the mediator) helps the disputing parties to negotiate a solution. Because the agreement is negotiated, it can be more creative than a court-imposed judgment, and thus is more likely to result in a win-win resolution. Case Study: Working with the private sector in Tajikistan to lobby government for a more transparent business inspection process Malika Kalandarova is a small-business owner in Dushanbe. Since her mini-market opened in the Tajik capital two years ago, it has undergone numerous inspections by various authorities — almost all of which ended with unofficial payments. It was easier for me just to pay, because of my own lack of legal knowledge…. None of the inspectors provided me with information about the inspection procedure or my rights. — Malika Kalandarova In Tajikistan, a typical entrepreneur endured more than a dozen inspections in 2005, at a cost of approximately seven business days and 9 percent of annual profits in fines and unofficial payments. In discussions, entrepreneurs, business associations, inspecting agencies, government officials, and donors voiced their views about the inspection process. The Results • The discussions resulted in widespread agreement on the need for reform and defined the key areas to be addressed. • A new law on inspections was adopted in July 2006. • The new inspections law will free up more than $7 million per year for Tajikistan’s SME sector. For Kalandarova, the new law means that “the unofficial payments, which unfortunately became standard practice, will disappear from my financial plan.” Improving the Business Environment Saving small businesses time and money through mediation Using mediation to resolve disputes has benefited companies throughout southern Europe. Since its introduction in late 2003, the Alternative Dispute Resolution Program is credited with the following achievements: • Nine mediation centers have been established in Bosnia and Herzegovina, the former Yugoslav Republic of Macedonia, and Serbia and Montenegro • Sixty-two trained mediators have resolved more than 2,700 cases • $60 million in assets have been released Because of its success, the program is being replicated across the region. All four of the disputes concerning my company were resolved in less than three hours. The mediation process resulted in nearly $2 million being freed up for my business — so, in my case, this quick turnaround time literally translated into millions of dollars, which I am now able to reinvest in my business. — A businessman taking part in a focus group in southern Europe 8 Creating Opportunities for Small Business Improving the Local Infrastructure Poor infrastructure constrains opportunities for all businesses. In the absence of adequate telecommunications, electricity, transport, and other infrastructure, small businesses are restricted in their ability to carry out their operations. Since the early 1990s, IFC has arranged private infrastructure deals worth nearly $4.8 billion in more than 46 developing countries. Many of these investments have improved road and transportation networks, and electricity, gas, water, and telecommunications infrastructure, further enhancing the environment for business and allowing SMEs to grow. Creating Opportunities for Small Business 9 Improving the Business Environment Improving Access to Finance A ccessing credit is a make-or-break issue for many SMEs in the developing world. SMEs are major contributors to the gross domestic product and employment in economies around the world, yet their financial needs are underserved, which holds back their growth. Where financing is available, it is usually out of reach because of short payback periods and excessive collateral requirements. Nonbank financing options, such as leasing, are not always available. In many developing economies, certain segments of the population, primarily women, are excluded from business activity, because traditionally they do not own land, which is often the preferred collateral for loans. Increasing Lending to Small Businesses financial products to setting up full SME banking operations in commercial banks. Nearly half of 178 FIs surveyed had received advisory services from IFC. Volume of Micro Small and Medium Enterprise Disbursements = $96.4 Billion (Chart in Millions) 66,181 21,484 Micro Loans ($) Small Loans ($) Medium Loans ($) 8,813 IFC primarily finances small businesses indirectly, through financial intermediaries, such as investment funds and local financial institutions (FIs). FIs include commercial banks, microfinance institutions, and leasing providers. Over the past five years, IFC’s investment commitment has increased fivefold — to nearly $2 billion in fiscal year 2007, with an outstanding portfolio of almost $4 billion. IFC’s Micro and SME Commitments in FIs 2,000 1,600 Number of Micro Small and Medium Enterprise Disbursements = 8.8 Million (Chart in Thousands) 7,930 752 184 Micro Loans (#) Small Loans (#) Medium Loans (#) 1,958 1,416 1,086 721 509 Identifying and Sharing Global Best Practices in SME Banking IFC is reviewing how banks service SMEs. This review identifies key success factors in SME banking; examines the relationships among the business models, processes, and tools used; and identifies how the relationships affect the performance of these banks and their SME clients. The review has shown that fierce competition and declining margins in the corporate and retail banking sectors have been key considerations in banks’ decisions to enter the SME market. In addition, despite its challenges, SME banking is considered a high-margin business with strong potential for profitability, cross-selling, and risk diversification opportunities. The next phase of the review will develop a set of benchmarks to help FIs in emerging markets further expand into SME banking. US$ Millions 1,200 800 400 0 FY03 FY04 FY05 FY06 FY07 The FIs use these funds to help many small businesses. In 2006, these institutions disbursed almost 9 million loans totaling more than $96 billion. IFC provides advice to strengthen the capacity of FIs to provide lending, leasing, and related financial services to small businesses. Advisory projects range from developing new Creating Opportunities for Small Business 11 Improving Access to Finance Improving Access to Finance Case Study: Improving access to finance for women entrepreneurs in Africa Women entrepreneurs represent a large, untapped market for African banks. Financing them is good for business — and good for long-term sustainable development. Yet, most African banks are reluctant to provide finance to women. In Africa, IFC has promoted several programs to ensure that women entrepreneurs have better access to capital. In Uganda, dfcu Group commercial bank is supported by a $6 million IFC credit line, of which at least $2 million is dedicated to the women’s program. The program was launched in February 2007, and the entire credit line was disbursed within three months. Thirty percent of dfcu loans now go to women, compared with 10 percent before the program was launched. The lending program is supplemented by expert advisory services and training for women entrepreneurs. In Nigeria, a $30 million IFC credit line for Access Bank for on-lending to women entrepreneurs has resulted in more woman-friendly internal credit ratings and more flexible collateral options. Additionally, more than 350 women have been trained in business management skills, and more than 100 woman-owned businesses have received nearly $11 million. Access Bank is replicating this program in The Gambia. In Tanzania, Exim Bank is the first financial institution in the country to dedicate a line of credit to women entrepreneurs who run midsize companies. IFC has provided advisory services and a $5 million credit line to finance the program and increase structured financing offered to women entrepreneurs. The program trains women in application processes, business planning, and management. In the short time since its launch in early 2007, the program has • disbursed $800,000 to 10 woman-owned SMEs; • committed $1 million to a woman-owned microfinance institution targeting 30,000 women; • begun training women owners of SMEs; and • promoted greater flexibility in collateral requirements through emphasis on structured financing. Women-owned SMEs contribute jobs to our communities, and women have shown themselves to be good payers in many countries. Yet the banking sector has done little to help them in Tanzania. Our Women Entrepreneurs Finance Program is more than just good business — it’s a chance to show our innovative approach to the market. — R.R. Chandramouli, general manager, Exim Bank Tanzania Building Financial Infrastructure to Benefit SMEs Collateral requirements and credit ratings are key elements of the financial infrastructure needed for SMEs to efficiently receive financing. In the developing world, land is often the only acceptable form of collateral, whereas in other markets, about 70 percent of SME lending is secured by assets such as cars or business equipment. IFC is working to improve this aspect of financial infrastructure in emerging markets. The reform and development of collateral laws and asset registries improves the functioning of credit markets, particularly for SMEs. IFC is undertaking this work in China, Vietnam, and elsewhere in Asia, and will expand into new regions, such as Africa. Credit bureaus compile and distribute credit rating information on borrowers, which makes lending to small businesses less risky. To date, IFC has helped create credit bureaus in 6 countries; Romania, Costa Rica, Nicaragua, Guatemala, Honduras, and South Africa. Improving Access to Finance 12 Creating Opportunities for Small Business Leveraging IFC Capital through Funds In addition to providing broad-based loan financing to small business through local FIs, IFC provides direct equity to finance SMEs through private equity funds. Groups that specialize in guiding and advising SMEs manage many of these funds. IFC’s commitments through these private equity funds currently total $1.7 billion, which includes some $90 million in SME specialist funds. The IFC portfolio contains more than 100 funds that have SMEs as a significant part of their portfolio. In addition, 20 of these funds also specialize in SMEs. In Africa, IFC works through Business Partners International (BPI), a fund management group with a business model adapted to smaller SMEs. The BPI model provides SMEs with integrated packages of financing, advisory services, and market information. The financing comes in a variety of forms best suited to the requirements of those small businesses. Each investment is structured to meet the financing needs of the entrepreneur, the risk profile of the investment, and the cash flows of the business. Case Study: Madagascar: an integrated approach to developing small businesses Assistance to smaller businesses in Madagascar shows the potential gains when financial products and advisory services combine in support of the SME sector. • The IFC SME Solution Center teamed up with South African fund managers Business Partners International to set up the BPI risk capital fund. The $10 million fund for Madagascar (to which IFC contributed more than $3 million) has already made eight investments averaging $125,000 each. • In May 2007, equity investments of more than $1 million each were made in two new microfinance institutions. • The project includes advisory support. So far, IFC has provided advice to more than 80 companies and has trained 350 entrepreneurs. • A joint International Development Association (IDA) and IFC financing model that mobilizes local currency lending for SMEs launched its first project in Madagascar in June 2006. The project is a partnership between two local banks, IDA, IFC, and the Government of Madagascar. Under this program, the two banks receive credit risk coverage on their portfolios of new SME loans, as well as advice and training to ensure sustainability of the program. The banks have already disbursed $11 million in local currency loans to about 475 small businesses through the program. • The IFC World Bank Investment Climate team for Africa recently launched a comprehensive reform program in Madagascar to make it easier for small businesses to operate. The program will initially focus on reforming the country’s licensing and tax laws, with a special emphasis on the tourism sector. Improving Access to Finance Creating Opportunities for Small Business 13 Providing Access to Markets, Business Skills, and Information reasonable business environment and access to financing are not enough. Small business owners just starting out need advice on running a business and information about local regulations and potential new markets. Linking Small Businesses to Markets Linkage programs are designed around selected IFC investments to increase the participation of local small businesses in the project and to bring additional benefits to surrounding communities. At the same time, these programs may reduce costs to investors and enhance their ability to be responsible corporate citizens. IFC linkage programs achieve these objectives by the following: • Improving the technical and business skills of SMEs to help them qualify for new contracts (selling higherquality goods and services) to generate new sources of income • Facilitating access to finance for local suppliers • Strengthening local supply and distribution networks • Supporting community development projects with health, education, and infrastructure programs • Focusing on frontier countries and regions where fewer options exist for local enterprises A IFC has partnered with firms in extractive industries to establish linkage programs around the world — from BP in Azerbaijan and Georgia, to ExxonMobil in Chad, Cairn in India, and Newmont in Peru and Ghana. Providing Information and Training for SMEs Many small business owners in developing countries need advice on managing and expanding their business. These needs include writing a business plan, assisting with marketing and bookkeeping, managing cash flow and employees, and exporting. Business owners need this information in their local languages, tailored to local conditions. To meet this need, the SME Toolkit, a free online program, provides information and communication Achievements of the IFC Linkages Program as of December 2006: • Almost 1,300 new small business contracts had been awarded, with a total value of close to $1 billion • Some 170 small businesses had received financing totaling over $20 million • More than 500 small businesses had received advice • More than 7,000 small business owners and their staff had received training Creating Opportunities for Small Business 15 Providing Access to Markets. Business Skills, and Information Case Study: Helping small businesses access new procurement opportunities In December 2005, ExxonMobil turned to IFC for support in extending its e-procurement system. E-procurement is a Webbased initiative to reach local suppliers through IFC’s Global Linkage Program. IFC used its enterprise center in Chad (in partnership with the local chamber of commerce) to address limited Internet accessibility, low computer literacy, and language barriers between potential SME suppliers. To date, 16 contracts worth more than $30 million have been awarded to local firms. This e-procurement effort is part of a larger local business opportunity project that includes assessing potential suppliers, training, and mentorship. The results of this partnership look promising: the average local contract has grown from $100,000 in 2004 to $800,000 in 2007. Providing Access to Markets, Business Skills, and Information technologies to help owners of small businesses in emerging markets learn and implement sustainable business management practices. Since setting up the Toolkit in 2002, IFC has rolled it out in 22 countries, in 13 languages — in each case with local partners. Usage has grown rapidly and has reached 2.5 million visits a year. Participating countries include Nepal, Madagascar, Zambia, Mongolia, Bhutan, Belarus, Ukraine, and Indonesia, as well as regional sites in the Caribbean and Latin America. IFC has partnered with IBM to bring state-of-the-art business information, tools, and training services to small businesses. IBM has dedicated more than $1.6 million to transform the Toolkit and rebuild it on an innovative open-source platform. The Toolkit will soon include features such as live chat, online forums, directories, and survey capabilities. Providing Access to Markets. Business Skills, and Information Case Study: IFC creates an internet information resource for Belarusian entrepreneurs According to a recent IFC survey of Belarusian enterprises, 90 percent of respondents considered a lack of information one of the greatest barriers to private business development in the country, and 70 percent of polled SMEs had internet access. Using IFC’s global SME Toolkit (www.smetoolkit.org) as a model, IFC designed a Russian-language Web portal — BEL.BIZ (www.bel.biz) — to meet SME information needs in Belarus. BEL.BIZ provides up-to-date legal and regulatory information and practical advice on creating and operating a business. The portal holds online forums and runs a large-scale question-and-answer service with the help of 60 partners, including government institutions, business associations, legal and consulting firms, banks, and media. Inna Titenkova is a BEL.BIZ user who received assistance through the portal. Titenkova had dreamed of opening a video production studio but was reluctant to take the plunge in such a difficult business environment. Today, she runs a flourishing video studio and is grateful to BEL.BIZ for providing the information she needed to start and run a business. I have more information and confidence. The legal updates are particularly useful. The decision to start up a business was a difficult one for me, but now I know that I can always turn to BEL.BIZ for help. — Inna Titenkova, BEL.BIZ user 16 Creating Opportunities for Small Business Business Edge Business Edge is a comprehensive SME management training program focusing on common functional and operational deficiencies. It consists of 36 management courses on five topics (marketing, human resources, production and operations, finance and accounting, and productivity skills), a delivery methodology, and a business advisory component. Business Edge has reached more than 28,000 participants through more than 800 management training courses delivered in the Mekong Delta, China, and the Middle East and North Africa. Case Study: Business training in Kabul, Afghanistan Many Afghan entrepreneurs have not been exposed to basic business skills needed to run a profitable enterprise, largely because of the lack of training. IFC has partnered with Kabul University to introduce a course in basic business skills using the SME Toolkit and Business Edge. The Kabul University Business Skills Project was designed with two main objectives: 1) To demonstrate the viability of, and demand for, local business training 2) To build the capacity of Kabul University to provide business training on a sustainable basis The project included a training needs assessment survey, content development and translation, four three-week training courses with progressive involvement of Kabul University professors as trainers, and a plan for continuing the program after IFC’s involvement ends. Results Four training courses were conducted between July and November 2006. • 260 Afghans were trained, including 110 students, 120 representatives from local businesses, and 30 representatives from the government • 35 women took part in the training • 16 instructors were trained to provide additional business capacity building in the country • More than 80 percent of the trainees said the training topics were highly relevant and useful This has been one of the most successful programs at Kabul University. It is also a best practice for international cooperation. We look forward to working with IFC to produce more such examples of good practice. — Chancellor Abdul Hai Nazifi, head of Kabul University Creating Opportunities for Small Business 17 Providing Access to Markets. Business Skills, and Information Creating New Opportunities Through Innovation key role of IFC in developing SMEs is to support innovation. This includes determining unmet needs in the market, crafting and testing new products and services, and transferring these innovations to others who can deliver them to the wider SME community. Successful innovation requires knowledge of local markets, global expertise, and a strong network of partners that can complement IFC’s efforts and extend its reach. These partners share valuable knowledge of “what works” in many specialized areas. 1. Going Green — Financing Businesses That Benefit the Environment The Environmental Business Finance Program is an innovative model of SME financing that focuses on the environment. A Using IFC advice and loans from financial intermediaries, the program develops sustainable market opportunities for small businesses whose activities benefit the global environment. Since its inception in 1996, the program has committed more than $18 million to 24 intermediaries that have on-lent or supported SMEs in 25 countries. These SMEs have reduced their consumption of fossil fuels, thereby mitigating climate change, or have conserved biodiversity by using natural resources sustainably. The program provides innovative financing for SMEs in sectors that local banks typically perceive as too risky, such as renewable energy (including solar, hydro, and biomass), energy efficiency, sustainable timber harvesting, sustainable agriculture, sustainable coffee cultivation, and ecotourism. Sustainable coffee and organic fruit projects fall under this program. — Rinat Galeyev, director, Adonis Tatfondbank gave Adonis the financing to modernize both its lighting and steam-generating systems. The investment for this energy-efficient project amounted to less than $60,000, and the company expects to recoup that investment in less than two years. Across Russia, regional banks like Tatfondbank have financed 14 other energy-efficiency projects through IFC’s program. Reductions in total energy costs per year for SMEs are expected to reach almost $4 million; nonenergy cost reductions (such as material use cost savings) will amount to an additional $1 million or more per year. The bank’s program with IFC was a great way for us to optimize our expenses. We are very satisfied with the results. — Rinat Galeyev, director, Adonis Creating Opportunities for Small Business 19 Creating New Opportunities Through Innovation Case Study: Energy efficiency in Russia Innovative approaches to linking energy efficiency with finance have helped Kazan-based sewing factory Adonis compete against rival suit manufacturers. The company’s pressing machines had become more expensive to use as electricity costs in Russia rose, increasing the company’s energy costs and, as a result, its production costs. Through its Russia Sustainable Energy Finance Program, IFC identified Tatfondbank as an intermediary to provide financing and advice for companies like Adonis that were looking to reduce costs through energy-efficient modernization. Experts from IFC and the regional government’s Center for Energy Saving Technologies conducted an express energy audit at Adonis. The auditors found that the company could save $50,000 a year in energy costs by transitioning to a centralized, fully automated steam power system based on gas, and save an additional $7,000 by overhauling its lighting system. In total, the company’s electricity bills could decrease from around $115,000 to $65,000 a year — a 43 percent reduction. Before the energy audit, we never even thought that replacing energy equipment or the lighting system could save us so much money. But when we saw the auditors’ calculations, we knew we had to do it. Creating New Opportunities Through Innovation Sustainable coffee: IFC provided financing to Conservation International for on-lending to Mexican coffee growers who meet the international franchise Starbucks’ stringent C.A.F.E. (coffee and farmer equity) practices for coffee cultivation. Starbucks, in turn, signed agreements committing to buy this sustainably grown coffee at a price premium. The farmers who delivered their coffee to Starbucks earned significantly more than conventional growers. Organic fruit: Symbio Polska is an SME processor and exporter of organic fruit grown by Polish family farmers (themselves SMEs). The IFC loan enabled a gradually increasing credit line from a local bank to Symbio. With this capital, Symbio has quadrupled its sales in the past four years, creating jobs for 700 farmers and 1,500 more people in its supply chain. Energy efficiency: IFC has been innovative in the area of energy efficiency. Energy efficiency saves costs for businesses, improves performance and profitability, and reduces resource usage and waste, thereby contributing to the protection of the environment. 2. The Grassroots Business Initiative — extending the reach to small businesses IFC is looking at innovative ways to help the disadvantaged even further by strengthening and scaling up grassroots business organizations — that is, commercially oriented organizations with a marked social mission to create sustainable economic opportunities for the poor. This Grassroots Business Initiative (GBI) works to expand market access and business support to the poor in hard-to-reach regions and population segments. GBI’s strategy revolves around key areas identified as requiring special attention: • Strengthen agribusiness and crafts organizations/partnerships, as these industries are the primary sources of income for many of the world’s poor, particularly in rural areas. CraftNetwork has been created to facilitate trade, ensure quality, and train crafts retailers in Indonesia and Cambodia. CraftNetwork is expanding in Asia and is being replicated in Africa. • Develop youth and informal enterprise to stimulate local economies from the bottom up. The Youth and Informal Enterprise Initiative was created to give marginalized African youth the training, mentoring, and access to financing needed to foster viable businesses. Angel Investor Clubs, run by prominent local businesspeople, provide financial support to local youths starting new businesses. • Build a network of grassroots business organizations to support collaboration and knowledge sharing for common initiatives and learning. In its three years of operation, GBI has produced solid results: More than 40 projects impacting the lives of nearly 2 million people living at the bottom of the economic and social pyramid. More than 54,000 jobs have been created and almost $7 million disbursed in grants or investments in retail and wholesale projects. Eighty-five percent of this portfolio has been committed to frontier countries, with a growing share being devoted to sub-Saharan Africa. Creating New Opportunities Through Innovation Case Study: Community health care in Kenya Joseph Kariuki is trained as a community health worker and is now an entrepreneur. Joseph is one of the pioneers of the CFW Kenya Network of microfranchise clinics. A part of the Sustainable Healthcare Enterprise Foundation, this network offers affordable quality drugs and basic health care. Franchisees receive training and are required to carry out preventive outreach in their communities. In 2002, Kariuki moved to Kibingoti market and opened Joskar Clinic with the assistance of a nurse. Joskar Clinic has consistently been one of the top performers in the CFW franchise network. In 2006, Joskar Clinic served more than 17,500 patients. Thanks to the success of Joskar Clinic, Kariuki generated enough income to pay for his children’s education through high school. 20 Creating Opportunities for Small Business Measuring Results IFC’s commitment to measuring the results of its advisory services and investment projects is driven by its long-standing commitment to continuous quality improvement. In 2005, IFC launched the Development Outcome Tracking System (DOTS) to allow regular monitoring of the development results of all ongoing projects and to provide early feedback of IFC’s operations and advisory work. DOTS makes it possible to systematically measure job creation, investment, and increased efficiency and productivity results of projects. Enhancing Results Measurement over Time For both investments and advisory services, IFC is working to standardize its performance measures — by industry for investment projects, and by business line for advisory services projects. This standardization will enable comparisons across projects and aggregation of results. Reach indicators show the numbers of people touched by IFC’s activities. Investments, 2006 Hospital patients treated: 4 million Entrepreneurs: 40,000 Electricity customers served: 9.5 million Water customers served: 15.3 million Advisory services, 2003-2006 Banks: 1,768 Microfinance clients: 11.5 million Farmers: 50,000 SMEs: 2.5 million Continuous Learning and Sharing Knowledge with Other Development Partners IFC uses the findings from its reviews and evaluations to improve future program design. For instance, an evaluation of two agribusiness projects — a farm forestry program in India and a seaweed farming program in Indonesia — demonstrated the difficulty of changing individual farming practices, as well as the high costs of discovering specific market information, which often cannot be applied across industries and locations, or even from farm to farm. These lessons have since been used to improve these and similar programs across regions. Outside its own programs, IFC facilitates the exchange of ideas and good practice in the evaluation of advisory services among the donor community, foundations, and multilateral and bilateral agencies. Creating Opportunities for Small Business 21 Frequently Asked Questions How does IFC define small and medium enterprises (SMEs)? SMEs are formal enterprises whose financial needs go beyond simple microcredit. MICROENTERPRISES Where do I get more information on the SME Toolkit and Business Edge? Information on the SME Toolkit can be found at www.smetoolkit.org. Business Edge has been rolled out in the Asian Pacific, Mekong, and Middle East and North Africa regions. For more information, contact your local IFC office or go to www.ifc.org. Does IFC provide consulting opportunities for small businesses? IFC uses a combination of in-house expertise and local and international consultants for its projects. Information on World Bank Group opportunities for consultants can be found at www.worldbank.org under Procurement. Employ fewer than 10 people Total assets/turnover less than $100,000 per year SMALL ENTERPRISES Employ 10 to 50 people Total assets and/or annual sales between $100,000 and $3 million MEDIUM ENTERPRISES Employ between 50 and 300 people Total assets and/or annual sales between $3 million and $15 million IFC uses the following definition as a proxy for SMEs when working with financial institutions: • SMALL ENTERPRISES: loan size of $10,000 to $100,000 • MEDIUM ENTERPRISES: loan size of $100,000 to $1 million in most countries and $2 million in more developed countries Does IFC lend directly to small businesses, and if so, what criteria does it use? IFC does not generally lend directly to SMEs. IFC primarily finances SMEs through financial intermediaries, including investment funds and local financial institutions (FIs). Most IFC lending is through FIs, which consist of commercial banks, microfinance institutions, and nonbank FIs such as leasing providers. This approach enables IFC to assist many more businesses than it could by lending on a one-to-one basis. 22 Creating Opportunities for Small Business Contact Details Sub-Saharan Africa 14 Fricker Road Illovo 2196 Johannesburg South Africa Tel: (27-11) 731-3000 AfricaFax: (27-11) 268-0074 Middle East and North Africa Nile City Towers 2005 Corniche El Nil, North Tower, 24th Floor Boulac, Cairo Egypt Tel: (20-2) 461-9161/62/63/64/65 Fax: (20-2) 461-9130/60 Europe and Central Asia Buyukdere Cad. No: 185 Kanyon Ofis Blogu Kat 10, Levent, 34394 Istanbul, Turkey Tel: (90-212) 385-3000 Fax: (90-212) 385-3001 Central and Eastern Europe 36, Bldg. 1 Bolshaya Molchanovka Street 3rd Floor, Moscow 121069 Russian Federation Tel: (7-495) 411-7555 Fax: (7-495) 411-7556 East Asia and Pacific 14th Floor, One Pacific Place 88 Queensway, Admiralty Hong Kong Tel: (852) 2509 8100 Fax: (852) 2509 9363 Latin America and Caribbean Rua Redentor, 14-Ipanema Rio de Janeiro 22421-030 Brazil Tel: (5521) 2525-5850 Fax: (5521) 2525-5879 South Asia 50-M, Shanti Path, Gate no. 3 Niti Marg, Chanakyapuri New Delhi 110 021 Tel: (91-11) 4111-1000 Fax: (91-11) 4111-1001, 4111 1002 For more information about IFC and its work with SMEs, please e-mail infosme@ifc.org Creating Opportunities for Small Business 23 Donor Partners Donors are vital partners for IFC in delivering its broader mission of reducing poverty and improving people’s lives. The support of donors not only leverages IFC’s own contributions to Advisory Services programs but also enhances the impact of IFC’s operations through strengthened collaboration. IFC would like to acknowledge the following donor countries: • • • • • • • • • • • • • • • • • • • • • • Austrailia Austria Belgium Canada Cape Verde Denmark Finland France Germany Greece Iceland India Ireland Israel Italy Japan Kuwait Luxembourg The Netherlands New Zealand Nigeria Norway • • • • • • • Slovenia South Africa Spain Sweden Switzerland United Kingdom United States Other Partners • • • • • • • • • • • GEF African Development Bank (AfDB) Asian Development Bank (ADB) European Commission IBM Foundation Inter-American Development (IADB) Islamic Development Bank (IDB) KfW Development Bank (KfW) Bill and Melinda Gates Foundation The Case Foundation Visa International Foundation 24 Creating Opportunities for Small Business