RECOMMENDATION 2: WBG management should refine its SME approaches to enhance relevance and additionality by shifting benefits from better-served firms and markets to frontier states (those with underdeveloped financial systems, especially low income and FCS countries), frontier regions and underserved segments.
A key indicator of whether such a shift is occurring would be the evolution of the distribution of the TSME portfolio as well as the composition of beneficiary institutions and firms.
WBG relevance is greater when it operates at or near the frontier, especially in low income and FCS countries or regions where SMEs are not served and in countries where the financial sector has not yet developed to serve SMEs. For example, the current portfolio commitment value is relatively concentrated in upper middle income countries, so careful attention is needed to relevance and additionality, to assure resources are being used to fully realize their benefit for addressing market failures and making markets and services more equitably available to smaller enterprises, thus maximizing poverty alleviation and shared prosperity. Sequencing can be important to build basic system capacities and legal frameworks in low capacity countries to ensure a reasonable opportunity for success of targeted investments.
Management agrees with the thrust of this recommendation, notably of enhancing the relevance of WBG interventions when it operates in frontier, and especially FCS markets, but with caveats outlined below.
The WBG is increasing its focus on frontier segments and markets, for example women-led enterprises, smaller firms, and underserved markets. Over half (40 out of 73) of WB targeted SME projects are already in IDA countries, as well as 156 of 349 TSME IFC projects. The report does not appear to have conducted sufficient analysis on these trends to underpin this recommendation. It is important to note that there are also frontier markets and underserved segments in Middle-Income Countries.
For IBRD/IDA, as highlighted in the text, systemic programs of support can be more appropriate than standalone targeted SME activities in some low-income and fragile and conflict state contexts, given the need to first put in place a basic enabling environment (legal, regulatory, institutional, policy), and the relative prominence of micro and informal enterprises. Additionally, as noted in the IEG report, informal and microenterprises employ more workers than SMEs in low income countries. Thus, approach in lower income and FCS countries will continue to comprise targeted interventions as part of a broader set of support activities.
IFC will continue to emphasize frontier geographies and segments in its targeted SME work through, for example, (i) its products targeting women, climate, and agribusiness SMEs (ii) its blended finance programs (iii) its increased focus on FCS and (iv) its increased focus on financial technology and innovation. In addition, the Financial Institution Group's new focus on Partners in Development is designed to work more intensely with clients that are aligned with IFC in their interest and ability to have development impact and where IFC can have strong additionality.
MIGA will continue to focus on frontier markets and FCS for targeting SMEs as part of its internal review of SIP.
Also in FY13, MIGA launched the multi-country Conflict Affected and Fragile Economies Facility (CAFEF) to further expand MIGA operations in FCS, which has the potential to increase MIGA support for SMEs in FCS. MIGA has developed a Business Development (BD) strategy for FCS, which will be rolled out over the next few years with the help of CAFEF.
Action 2A [WB]: Analyze proposition of SME work that includes frontier regions and segments and ensure strategy is aligned with recommendation to further expand benefits to those markets
Indicator: Percent of F&M SME projects in frontier regions and underserved SME segments
Baseline: SME lending operations are predominantly in IBRD countries â currently 80 percent.
Target: World Bank lending to Frontier Economies and underserved SME segments will be based upon a proper strategic review and Action Plan for SME finance (currently under preparation) â which will prioritize target countries and underserved segments. This will need to be calibrated with the fact that some MICs have a strong need for SME finance support â and may well continue to dominate into the future.
Timeline: Action Plan with country prioritization by FY17.
With regard to the target -- World Bank lending to Frontier Economies and underserved SME segments will be based upon a proper strategic review and Action Plan for SME finance (currently under preparation) - which will prioritize target countries and underserved segments -- IEG finds the Action Plan for SME Finance, and in particular, its identification of country needs and overall priorities, innovative approaches and potential targets -- to largely reflect the committed activity. As the committed action states that lending will be based on the Action Plan, further monitoring will be required to confirm implementation. Presumably there would be a documentable movement of the portfolio towards frontier countries and segments under the plan.
This activity has been finalized as the Action Plan for SME Finance (attached) with country prioritization was prepared and established the following work priorities till 2020:
Set Targets: Targets were established around closing the financing gap, generating employment, supporting women, youth and post conflict countries with SME activities lending operations Advisory Services, etc.
- Align Policies and procedures: the SME Financing pricing policies between the World Bank and the IFC are coordinated through the SME working Group activities common ground rules and processes for working with FIG, F&M regions, coordination mechanisms with SME Forum, Trade and Competitiveness, the JOBS CCSA, etc.
- Learn through Innovation: Expand the innovation space around new SME financing approaches (this was accomplished through the SME Launchpad program).
T&C developed the new engagement strategy in FCVs which articulates T&C value proposition in FCS Expanding T&C FCS operations, with IDA focus support operational performance in FCS develop and share knowledge (see the attached T&C Engagement strategy presentation).
The new IFC Advisory strategy 3.0 strengthened the focus on FCV and IDA countries in the following ways:
- The Creating Markets Advisory Window (CMAW) provides flexible resource to rapidly deploy advisory, enabling IFC to pro-actively engage developing opportunities to build bankable projects with high impact potential and helping operationalize IDA Private Sector Window
- To efficiently manage resources and mobilize needed expertise to industry teams, expand mandate of CASA/FCS Africa team to cover all PSW eligible countries in SSA. Look to extend model globally.
IEG is encouraged by the joint approach and DRC pilot. The presentation on the action plan clearly indicates a focus on underserved segments, and targets IDA countries in its 2020 goals. It is not clear from the management update what progress there is towards official approval of the Action Plan for SME Finance or whether it is on track for such approval and early implementation in FY17.
Responding to this recommendation, the Bank has taken a proactive approach to engage in FCS countries. One of the country pilots being implemented out the 4 SME Pilots is in DRC.
This project is being implemented by a joint T&C and F&M team and aims to design capacity building program for women owned SMEs. The pilot is undertaking an enterprise mapping, selection of value chains and financial partners as well as identifying financial products and services. Lessons learnt from the IFC's led Pakistan Women X are being taken into account in the pilot recommendations. The team is looking at an integrated and comprehensive support to be provided to women entrepreneurs, including capacity building (managerial and technical), access to finance solutions, access to markets, mentoring and professional networks, in collaboration with existing partners.
Additionally, the Finance and Markets GP has reached out to SME Ventures in the IFC to strengthen the coordination of work on Fragile and Conflict and "Frontier" countries. The initial meetings have translated into improvements. Currently a trust fund proposal is being prepared for an African wide work around SME finance venture, which would, in part, target FCS. Additional efforts, include a project in a post conflict region in the Philippines with a focus on agriculture finance and the preparation for a project in lagging regions in Tunisia.
IEG seeks to verify the status of the "Action Plan" -- is this the formal strategy of the F&M GP? IEG has seen a "Quick Lesson" summarizing the Action Plan, suggesting it is a learning product, of unclear formal status. The lesson note says the action plan declares an intention to "establish firm targets for women, youth, post conflict targets." It expresses a target to "double the number of loans to IDA" by 2020. If verified as formal objectives aligned with analysis, this would reflect substantial progress on the action.
The Finance and Markets GP has reached out to SME Ventures in the IFC to strengthen the coordination of work on Fragile and Conflict and "Frontier" countries. The initial meetings have translated into improvements. A SME Finance Action Plan was issued in July 2015. This Action Plan prioritizes 24 countries of focus -- including several IDA countries and fragile countries. The F&M Action Plan has adopted IFC's benchmark of targeting 25 percent of World Bank loan recipients as women as well as targets for SME lending operations in IDA countries.
Additional Information: See Attachments