Financing SMEs in collaboration with the Jordan Loan

Guarantee Corporation (JLGC)

The Housing Bank for Trade and Finance’s experience

Amman, Jordan24-25/11/2014

90% of business firms worldwide are classified as SMEs, contributing significantly towards achieving comprehensive development in both the economic and social spheres.

It has a major role in increasing the production capacity of the economy as it increases the efficiency of resource usage.

It is labour intensive employing more labour for small capital.

It is an effective tool to combat poverty and unemployment as it employs between 50-60% of labour worldwide.

It helps in re-distributing and balancing income throughout various regions and governorates at national level.

Why the increasing interest in SMEs?

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There is great interest in SMEs in Jordan due to their major impact on the Jordanian economy. They:Generally labour-intensive; therefore suitable for Jordan which suffers from limited financial resources and high unemployment. Help in providing the local market with certain goods and services that cannot be easily produced through large enterprises because of low demand. Contribute to some degree in expanding exports and therefore support both the trade balance and balance of payments.Are geographically distributed assisting in localizing employment and residential development.Use local raw materials and technologies to a large degree.Compliment Large Enterprises. Help in developing craft skills. Constitute 90-95% of the total number of established business firms. Employ around 75% of private-sector employees.

The importance of SMEs in the Jordanian Economy

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Potentially Strong and Promising Market: SMEs contribute more than 90% of business firms in the developed and emerging countries alike.

Stable consumer base: Some studies have shown that over half of SME firms have not changed the banks which they deal with.

E-Banking: SME owners are more IT savvy than the general public. Therefore they become more desirable to banks that aim to expand e-banking.

Special Investment Services: In general SME owners are wealthier than the general public. Therefore they are targeted by banks for their personal investment services.

Unfulfilled Financial Needs: A majority of SMEs complain that their financial needs are not met yet.

Why Banks are interested in SMEs?

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SMEs are Generally Exposed to Greater Risks

Generally speaking, research studies and Banks’ own experiences show that SMEs are more exposed to risk than Corporate Enterprises, particularly newly established SMEs.

Newly established enterprises are most exposed to failure when they face any challenge or sudden changes. Thus Banks deal with these enterprises with caution especially in volatile sectors.

There are many causes of SME failure including: managerial weaknesses, concentration of management and authorities in a single individual (one man show), marketing weaknesses, inability to keep pace with industrial developments, weak competitiveness and limited technical capabilities.

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Why are Banks Reluctant to Finance SMEs?

Weaknesses in the financial structure of SMEs. Intermittent (non-systematic) accounting

records. High volatility in SME performance. High Administrative costs of lending to small

enterprises compared to medium and large enterprises.

Lack of sound or realistic feasibility studies. Some SMEs are recently established and incur

greater risks. Lack of necessary data about these enterprises. Lack of Practical Experience of SME owners. In general financing requested is too small. Unwillingness or inability of some SMEs to

provide collateral.

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Inability/Unwillingness to Provide Sufficient Collateral

While Banks generally base their decisions to extend credit on the ability of enterprises to generate enough cash flow to cover their expenses, repay obligations and provide profits to owners, banks still prefer to obtain collateral or proper guarantee schemes.

Through analyzing credit-applications, banks could find that there is a need to enhance the credit transaction through acquiring collateral or guarantees in order to comply with credit-lending standards and principles.

Banks often find that some SME owners are unwilling to provide the collateral despite being able to, others are unable to.

Most of the time banks aim to help their customers who do not have the ability to provide collateral –to overcome this challenge the Loan Guarantee Corporations comes in.

About ten years ago HBTF established a special department specializing in servicing SMEs due to the Bank’s belief that this type of enterprise must be handled differently from large enterprises and retail customers.

Lately HBTF separated Small from Medium Enterprise Financing. Medium Enterprise Financing remained in the Corporate Sector where Small Enterprise Financing became part of the Retail Sector.

HBTF appointed Specialized Credit Officers for small enterprise financing at a number of branches which witness intense demand for this type of financing.

SME FinancingThe Housing Bank for Trade and Finance

(HBTF)

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Small Enterprises

The firm is not a public shareholding, insurance or financial brokerage company.

Its total assets do not exceed JD 500,000 Annual Total Sales do not exceed JD 1 million Total direct credit facilities do not exceed JD

100,000 and indirect credit facilities do not exceed JD 150,000 with total exposure in the Jordanian Banking sector not exceeding JD 250,000. Medium

Enterprises

Definitions of Small and Medium Enterprises at HBTF

Its total assets do not exceed JD 3 Million Annual Total Sales do not exceed JD 3 million Total exposure in the Jordanian Banking sector does

not exceed JD 2 million. The legal identity of the borrower must not be a

public shareholding, insurance or financial brokerage company.

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SME Financing Indicators at the Housing Bank

SME financing balance at the end of 2013 was JD 286 million, which is about 10% of the Bank’s credit portfolio.

Some retail financing is actually used to finance Small firms and crafts-workshops, thus it can be said that SME financing actually reaches 20% of the total credit portfolio.

As part of programizing SMEs products, the Bank launched in 2012 the ‘Business Loan’ which offers several financing options for the trade and business sectors, as well as craftsmen and entrepreneurs.

During 2013 the ‘Business Vehicles Product’ was launched to provide adequate financing for SMEs, professionals and craftsmen so as to enable them to purchase and renew various kinds of vehicles (trucks, pickups, vans and buses).

to be continued…

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SME Financing Indicators at the Housing Bank

During 2013 the Bank signed a loan agreement with the Central Bank of Jordan in the amount of JD 7 million. Consequently, the Bank will provide direct lending or, through Micro-Finance Institutions (MFIS) to relend this amount to SMEs.

To facilitate SME financing, HBTF has signed agreements with several Arab and International institutions such as : The Arab Trade Financing Program, OPIC, Saudi Fund for Development, Ex-Im Bank (USA) , KEXIM (Korea) and EBRD.

HBTF further reinforced its relations with the Jordan Loan Guarantee Corporation (JLGC) to increase the volume of transactions and outstanding ceilings with the JLGC in order to expand the Bank’s financing activities to SMEs.

… continued

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The Relationship between the Housing Bank and the Jordan Loan Guarantee Corporation

The Jordanian Loan Guarantee Corporation (JLGC) was established in 1994

The Housing Bank for Trade and Finance participated in the establishment of JLGC. The Bank is a shareholder and represented on the board of directors.

The Housing Bank has signed numerous agreements with the JLGC.

HBTF’s philosophy in dealing with the JLGC is built on the principle of risk-sharing and Not On risk-shifting. Therefore HBTF exerts maximum efforts possible to evaluate credit-transactions before extending it to the JLGC.

In case of client default the Bank exerts all efforts possible to recover

HBTF was the largest client of the JLGC during the period between 1995 – 1999 with a business volume of JD 10.3 million. Of this, the guaranteed portion was JD 7.3 million, or about 70% of business volume.

to be continued…

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The Relationship between HBTF and JLGC

During the period from 2000 – end of August 2014, business volume between the JLGC and HBTF totaled JD 44.9 million of which the guaranteed portion of this is JD 31.3 million or around 70% of total business distributed as follows:

Reference Size of Business (Million JD)

Guaranteed Portion (Million JD)

Productive Loans Program 22.1 15.4

Business Loans Program 22.8 15.9

Total 44.9 31.3

These loans were channeled to serve different sectors and entrepreneurs in all governorates.

to be continued…

… continued

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The HBTF’s guaranteed portion balance by the JLGC by the end of 2013 was JD 10 million which equaled to 16.5% of the total guaranteed JLGC credit portfolio.

2013 saw noticeable activity, as the number of guaranteed loans for the Housing Bank totaled 304 loans forming about 38.5% of total number of loans guaranteed by the JLGC. The total value of these loans was JD 6.1 million forming about 30.4% of the amount guaranteed by JLGC for the year 2013.

This noticeable increase in the bank’s activity of with JLGC id due to launching ‘Business Loan’ product. This product was designed in cooperation with JLGC.

The Relationship between HBTF and JLGC

… continued

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The JLGC is distinguished by its ability to complete transactions and respond to HBTF promptly. This is due to the continuous cooperation between the two institutions to improve the communication process.

The fees that the JLGC charges are generally acceptable compared to risk incurred.

The JLGC showed great flexibility in negotiating new guarantee programs.

The JLGC has a good database that functions as a search engine on clients’ default history.

Acknowledgement & Recognition

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Possibility of modifying fee rates to take into consideration volume of transactions conducted.

Possibility of guaranteeing 100% of the loan’s value within certain pre-agreed condition in exchange for raising the fee rate.

Possibility of an interlinked network between JLGC and the Banks so as to simplify work procedures.

Suggestions to develop the relationship with JLGC

THANK YOU

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