80245 April 2013 - Number 94 SUPPORTING ACCESS TO FINANCE FOR MICRO, SMALL & MEDIUM ENTERPRISES WITH PARTIAL CREDIT GUARANTEES: THE MOROCCAN EXPERIENCE Teymour Abdel Aziz1 development of small enterprises was elaborated in 2011, which includes a simplified Introduction: Micro, Small and Medium taxation system, adapted social charges, Enterprises (MSMEs) represent an important extended social security coverage, and specific pillar of the Moroccan economy. Estimates banking products. The Budget Law of 2011 indicate they account for more than 90 percent introduced major incentives for small firms, of all enterprises and contribute to 21.6 percent including a reduction of the corporate profit tax of total employment. These numbers only from 30 percent to 15 percent, tax incentives for reflect the statistics of the formal economy: businesses that integrate into the formal sector, Their contribution to the real economy is and tax incentives for sole proprietorships significantly higher if the economic activity of opting to transform into corporations. Morocco the informal sector were to be included. Most has also adopted a new definition of MSMEs, MSMEs are in the services sector (44.5 percent), with the objective to replace a broad range of followed by manufacturing (37.2 percent) and different definitions with a simple and uniform trade (17.6 percent) (Fig 1). definition across ministries and agencies. Fig 1: Sector Distribution of SMEs in Morocco In addition to fiscal, legal and regulatory reforms, a number of support mechanisms aimed at strengthening the capacity of Small and Medium Enterprises (SMEs) have been established. The Government’s “Agence Nationale pour la Promotion des PMEs� (ANPME)2, is an agency dedicated to the promotion of SMEs. It manages financial support programs and provides business development services. Discussions are under way to set up a similar institution providing Source: Haut Commissariat au Plan (2002) business development services and technical support to smaller, micro enterprises. Government Strategy and Policies in Support of MSMEs: The Moroccan government has Access to Finance and MSMEs: Morocco has acknowledged the importance of MSMEs for made significant inroads in expanding access to the national economy and has developed a financial services for both individuals and number of initiatives aimed at improving the MSMEs. A 2011 World Bank survey has enabling environment for these firms. A new featured Morocco as a regional leader in national strategy aimed at promoting the providing SMEs with access to credit: the share of SME loans in total loans amounts to 24 1 Teymour Abdel Aziz is an Economist with the MENA Financial and Private Sector Development Group (MENA FPD). This quick note has been cleared by Simon C. Bell, 2 Sector Manager, MENA FPD. For More see http://www.anpme.ma/ percent, which is the highest ratio in the MENA credit through an extensive network of Region (Fig 2). Morocco has also been able to microcredit providers. maintain the highest rates of microcredit access in the MENA region; although the sector’s Targeting Underserved SMEs: In order to rapid expansion slowed down after the crisis in facilitate access to finance to underserved 2007. Morocco stands out in terms of SMEs, the Moroccan authorities have Microfinance Institutions’ branch networks, established the Caisse Centrale de Garantie comprising 83 percent of the MENA Region’s (CCG)3, a public financial institution providing reported total. The leasing and factoring partial credit guarantees (PCGs) for loans to industry, two key sources of financing for MSMEs. By sharing the risk with financial MSMEs, are amongst the most developed in the institutions for loans to underserved segments, MENA Region. The Moroccan post has been an such instruments can reduce the impact of the important provider of savings and payment market failures which cause these groups to be services for the low income population for excluded from financing. Well-designed partial many years. The recent establishment of a full- credit guarantee schemes are considered one of fledged Postal Bank aims to provide a more the most market-friendly types of interventions, comprehensive set of financial services, as they generate fewer distortions in the credit including credit, to reach individuals and market and are more consistent with a well- MSMEs in underserved areas. functioning banking system. Through the provision of risk mitigation tools, PCGs Fig. 2: Share of SME Loans (% of Total Loans) provide a strong incentive for banks to get into the MSME market, while retaining sound incentives for loan origination and oversight. While the CCG was established in 1949, it has only had a very limited impact on SME financing. It lacked a clear strategy and targeting, and banks complained about cumbersome procedures and burdensome claims processing rules, leading to a limited uptake of their products. As part of its 2009- 2012 development plan, the CCG saw its products overhauled. It introduced new Source: Union of Arab Banks/Roberto Rocha, Zsofia Arvai and guarantee products on SMEs (no guarantee can Subika Farazi, 2011 “Financial Access and Stability: A Road exceed 10 million MAD and combined Map for the Middle East and North Africa� World Bank, guarantees on a single borrower cannot exceed Washington D.C. 15 million MAD, ensuring that guarantees are used for SMEs). Guarantee products have been Still, while Morocco has made significant re-designed to better match SME needs progress in expanding access to finance to according to their life cycle (investment loans, SMEs, the largest part of bank financing goes to working capital, restructuring, and private the larger enterprises in the SME spectrum. equity). Guarantee parameters have been Smaller enterprises, start-ups, youth and revised in line with international best practice women led firms continue to face significant (equity allocations, fees, simplification and challenges in accessing credit. They tend to harmonization of eligibility criteria). This have less collateral, weaker management helped streamline and strengthen the national capabilities and are more vulnerable to credit guarantee mechanism, previously information asymmetry, reducing the considered complex and fragmented. likelihood of receiving bank credit. They are Furthermore, improvements in the claims underserved by the existing financial system, payment process reduced the administrative situated between larger established SMEs, burdens for client banks. which are served by the commercial banking sector, and microenterprises, which access 3 For more see: http://www.ccg.ma/fr/index.php April 2013 · Number 94· 2 The Reforms Deliver Results: Since the 2009 intended to be simple and attractive for banks introduction of new products the CCG which could use it to more easily include credit significantly increased its activities. The launch products in the financial packages they offer to of new products coincided with the global small enterprises. economic crisis, resulting in a significant slowdown in overall economic activity. In this The reforms of the CCG have been showing context, the government used CCG guarantee positive results. A recently commissioned products as a countercyclical instrument to impact evaluation study revealed that 72 enable SMEs, especially exporters, to overcome percent of the loans guaranteed by the CCG financial difficulties. CCG commitments for would not have been financed by banks in the companies almost doubled between 2008 and absence of a guarantee. The CCG also benefits 2009 mainly driven by guarantees for working many female entrepreneurs. The share of capital loans. women-owned SMEs covered by guarantees of the CCG was at 30 percent in 2011, significantly Fig 3: Volume of SME loan guarantees higher than the national average of 12 percent4. (MAD million) World Bank Support to the CCG: The World Bank supports the CCG’s ambitions to expand access to financing to SMEs through financial and technical assistance. The Morocco MSME Development Project, effective since June 2012, provides $50 million to support CCG’s partial credit guarantee program for MSME loans, including its new Damane Express product for very small enterprises, and “Ilyaki�, a new guarantee product dedicated to women led Source: CCG businesses. In addition to financial support, the World Bank aims to strengthen the capacity While the new design of the guarantee system and sustainability of the country’s leading PCG has had a significant impact on the volume of scheme through the provision of technical guarantees, it has not helped to broaden the assistance in the areas of risk management and base of the recipient firms. In fact, the number product development, as part of the regional of guarantees issued annually has almost MSME TA facility, in close collaboration with stagnated between 2008 and 2010, while the the IFC. average size of guarantees has increased from 0.7 to 1.3 million MAD. With this backdrop, the CCG has developed a new guarantee product Contact MNA K&L: to accompany (and leverage on) banks’ Gerard A. Byam, Director, Strategy and Operations. MENA Region, the World Bank strategies towards small enterprises. Regional Quick Notes Team: Omer Karasapan, and Roby Fields This new product, the Damane Express, relies Tel #: (202) 473 8177 on simplified financial eligibility criteria for The MNA Quick Notes are intended to summarize borrowers and introduces a new, innovative lessons learned from MNA and other Bank “delegated approach� (i.e. individual Knowledge and Learning activities. The Notes do not necessarily reflect the views of the World Bank, its applications will not be reviewed ex ante by the board or its member countries. CCG) and will not differentiate among various types of credit (only requiring that they do not exceed one million MAD). Guarantees are delivered rapidly by the CCG as soon as it receives electronically the information collected 4 Source: CCG (2011), WB ICA survey (2008) – Note: The by the bank. This new product follows the definition of a woman-owned SME is based on the CCG’s directions set for the reform of the Partial and the World Bank’s Enterprise Survey definition which Credit Guarantee (PCG) scheme in 2009. It is asks whether at least one of the owners is female, or whether any of the females are owners. April 2013 · Number 94· 3