SME Credit Guarantees – Why do we do this?

Matthew TroniakDirector Asia, Africa, and Middle East, Terradyne Agro Systems (Dec 1, 2014)

SMEs Financing & Loan Guarantees

24th-25th November 2014

Mission Statements of Various Loan Guarantee Organizations

• Improve Access to credit

• Reduce Risk so reduce interest rates

• Lend Longer term

Thus - to assist the development of SMEs to facilitate economic and social development, job creation, and thus political stability.

What is today's Macro Economic Environment for the SMEs?

Are the SMEs “money” restricted or is it really that they are “MARKET” deficient?

Globalization

• Washington Consensus

• United Nations – New International Economic Order.

• Free trade

• Free Flow of capital

• Free Flow of Labor

• Interdependence due to specialization.

• Harmonized legislation, regulation, and “Best Practices”

• Everyone is connected to everyone.

Wake Up calls

1) 2008 the banks – the heart of capitalism – had a heart attack

2) Governments flooded the banks with liquidity to keep them making loans to SMEs and for trade finance. Did they? Credit less and jobless recovery?

3) Trade Finance froze – food prices skyrocketed, oil at USD 147 – then revolutions – Food Security became critical issue.

4) Next wave of collapse - Then nations went bankrupt

5) Lending to Government is no longer a risk free activity – thus there is no longer a compass for the Capital Asset Pricing Model to work with – there is no risk free rate of return.

6) So what are the risks and the returns? Is Dow today real value? Oil?

• De coupling of real economy from financial sector - and stress testing and marking to market assets and liabilities and tightening of bank regulations reducing risk appetites. – stability or volatility?

Globalization, some possible unfortunate consequences?

“Hunger Games” popularity a message?

• Concentration of capital on a global scale accelerates.

• Capital acquires global control over production, exchange, government policies, people’s lives

• Downward pressure on wages• Global demand for goods and services

declines• Solution: borrow money against future income• Pyramid of debt grows to stimulate the global

economy• At a certain point, the pyramid collapses• Press the “Reset Button” and start again?

What is new normal?

SMEs - Meet Your Competition.

Food Security – Agriculture and Agri business Example

The Competition SMEs Face

Meat Processing

Inputs – Seed, Pesticide / Herbicide / Fertilizer

Industry Concentration Ratios

So you want to go from Small Holder Farming to Value

Added Processing?

So Can a Financial / Credit / Loan Guarantee System Help?

In today’s world of international trade and global competition, supply chains compete more so than individual firms - integration and collaboration have become key differentiators of high performing supply chains. • Economic Opportunity !!!

• Banks need to provide integrated supply chain and value chain solutions from market to production.

• Guarantees need to be tailored to each part of each chain. Risk layering.

• Nations – Malaysia Inc. , Japan Inc. Jordan Inc.

• Need your own BIG banks, Big Loan Guarantee operations – Consolidate and acquire.

– New Deal Flow and SMEs

You need to be investing / guaranteeing / developing “Lean and Mean” value / supply chains.

Banks and Loan Guarantee corporations must be expert at the industry in which the SMEs operate. Do not “beggar thy neighbor – prosper your neighbor”. Regional markets may not be optimal choices.

IT / Logistics – Key to economic and financial efficiency – Information Sharing and teamwork – Banks, and Guarantees and Insurance and Equity.

Economic Coordination:

Government, Industry, Donors, Financiers, Loan Guarantee Operations.

Build National Champions – Nokia – Leggo – Samsung - Tata

Need an Integrated Development Approach – along the Agri Value Chain - Loan Guarantees only small part of the solution

Consumer Orientation

Farmer linkages

Action steps

Financial Services

Market Linkage

Research & Extension

Regulatory

Refo

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Infra

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Credit

Delivery

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Innovativ

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Modeling -

Equity

Commodity Trading

Agri Infrastructure Processing & Logistics

Mar

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Str

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Production Handling & Mrktg.

Processing Wholesaler Retailer

Equity – Debt – Risk Mitigation Guarantees - Insurance

Where are the Markets?

Food for thought !A Small Issue? Economic Efficiency but what about Labor?

What was this all about?

• The thesis of my presentation is that the current financial gap is access to finance; and the target of the loan guarantee programs ( aside from financial sector stabilization as occurred in the 2008 crisis or bulk lending such as guarantees to banks to lend to MFIs) is to develop SMEs thereby creating jobs and diversifying the economy.

• Generally it is hoped that value addition and processing will be stimulated not just trading activities. However I point out that the SMEs are expected to face international competition on an equal footing and that this essentially it is like the smallest and the weakest competing with the strongest international competitors.

• I use some examples from Agribusiness and the global corporate concentration in this sector. Thus I will propose that there is a need for any Loan guarantee program that is targeted to this kind of MSME development to have an integrated set of programs and alliances to strengthen the SMEs that are taking the loans that are guaranteed. This includes value chain approaches.

• I then review some of the ways this can be done.

Thank YouMatt Troniak

Terradyne.systems@gmail.com