International Financial Institutions Support SME?
05 April, 2012
International Financial Institutions Support SME?

 

International financial institutions allocate USD 42 million to support small and medium businesses with private equity financing in the Caucasus but criteria fixed for beneficiaries include big rather than petty fry in the targeted region as its situation differs from the developed west. The European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), a member of the World Bank Group), FMO (the Netherlands development bank) and BSTDB (Black Sea Trade and Development Bank) will invest in the Caucasus Growth

Fund that raises USD 42 million to boost private investments in Georgia, Azerbaijan and Armenia. This new fund is backed and managed by Small Enterprise Assistance Funds (SEAF) a global fund manager.

International Financial Institutions (IFIs) are initially providing USD 40 million and SEAF will contribute additional USD 2 million to the SEAF Caucasus Growth Fund, with a target size of USD 70 million.  It will be the first institutional-quality fund dedicated to providing debt and equity capital to small and medium enterprises in three South Caucasian countries.

Through their collaboration, the international financial institutions believe they are supporting private equity investments in the Small and Medium Enterprises (SME) segment, which is a backbone of the Caucasus economies and plays a key role in job creation. The fund will invest across a range of industries, with particular focus on consumer and business services, agribusiness, distribution, energy and retail, which remain underserved by other capital providers.

“This project will bring much-needed resources and knowledge to support the development of prospective businesses,” Paul-Henri Forestier, EBRD Director for Caucasus, Moldova and Belarus said at the Fund presentation event on March 30, 2012 in Tbilisi, Georgia.

“Lack of capital is one of the most serious challenges for small and medium enterprises in the southern Caucasus. Through its investment in the SEAF Caucasus Growth Fund, IFC is helping address an important obstacle to these small and medium enterprises, which represent the backbone of economic diversification and employment,” Tomasz Telma, IFC Director for Europe and Central Asia, said.

“Support towards the development of small and medium enterprises in the Black Sea region is a strategic priority for BSTDB, a regional development institution.  The SEAF Caucasus Fund will facilitate access to affordable capital for competitive private businesses in Armenia, Azerbaijan and Georgia and foster good business practices and knowledge transfer.  The project is also a demonstration of the positive synergies between development partners in promoting sustainable growth and job creation through private sector development in the region” said Andrey Butin, BSTDB Director for Financial Institutions.

Georgian economic analysts approve the IFIs venture as there are no equity funds in Georgia that enter in the enterprise through investments and hope such entrance can improve management skills at companies on the one hand. And on the other hand the Fund will also disburse credits to businesses in case when banks refrain from financing, Tamuna Tsinstadze, a spokesperson of SEAF, said in the interview with Georgian Journal. According to her, the lower benchmark for credit volume will be at least half a million dollars and key criteria for targeted beneficiaries is to have no less than 15 million in national currency and number of employees comprised at least 250. The maximum credit volume is not defined as of yet.

Davit Narmania, Executive Director of Caucasian Institute for Economic and Social Research, thinks the Fund’s activity should cut down interest rates in Georgia as far as local banks generally borrow money at international market from IFIs like EBRD and IFC and the difference between the interest rates is about 10% based on data of Georgian central bank. While International Monetary Fund data say that the difference goes as high as 14%.

“I do not expect that the Fund will cut down interest rates by 10-14% but it can reduced by 7-8% perhaps, that will increase competition and local banks may think of reducing rates too,” Narmania explains. “But the key problem is whether or not the Fund will be demanding guarantees to credits like local banks; they take collaterals that are at least double expensive than the credit itself - this is the most burdensome to business, not interest rates.”

According to Tsintsadze, there are no unificated crediting rules except that determining annual turnover of 15 million and number of employees at 250, otherwise each case will be discussed very scrupulously based on individual details and the Fund crediting as well as investing will be only within reasonable limits.

“We will give credits in case only when banks refrain to finance business but we see reason and potential in it,” she said.

However the criteria set by the Fund for its potential beneficiaries seems torn off Caucasian reality for businesses with 15 million of annual turnover in national currency and employing 250 persons are not big in all the three countries in the region generally, Narmania said, for all the three are quite small markets.

Therefore very likely the much touted Fund will be supporting big rather than SME sector in the region.

Tsintsadze agrees that the 15 million turnover benchmark is pretty big in targeted region but she does not rule out to reduce the figure in future.

“Since the fund idea is taken from America it fixes similar criteria but the project is just developing and probably requirements will change,” she said.

Moreover, Georgia has quite confusing double interpretation of business size that makes it complicated to outline the Fund’s target SME beneficiaries. The law on National Investment Agency of Georgia, reads that enterprises employing maximum 20 people and with the annual turnover of GEL 500 thousand are defined as small, enterprises employing maximum 100 persons and with maximum  turnover of GEL 1.5 million are medium, and above these limits is big business;  On the other hand tax code stipulates  different layout: individual business with up to GEL 30 thousand of annual turnover is micro, over GEL 30 thousand to GEL 100 thousand is small, and above GEL 100 thousand benchmark business is either middle or big - it is up to business and tax officer discretion to decide in fact.

Economic analyst as well as business has been hailing Georgian government for a long time to unify the SME identifications but to no avail. Narmania presumes that government that lobbies big business is not interested to streamline the SME definition for the sector will become competitive afterwards that is not handy to big fishes.  And most probably the big business will enjoy the Fund support as a consequence. However Tsintsadze assures that the Fund will support based not on definitions but on reason and business potential.

“We will support business that will be reasonable and potential,” she said.

 

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