Small Business: An Engine for Growth in Emerging Markets

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1 losure IN Authorized THIS ISSUE Public Disclosure Authorized Public Disclosure Authorized Public Disclosure OCTOBER DECEMBER Authorized 2008 Outcomes Quarterly IFC Advisory Services Newsletter featuring Business News, Trends and Results from Emerging Economies Small Business: An Engine for Growth in Emerging Markets 1 Small Business: An Engine for Growth in Emerging Markets 2 A Free On-line Resource Improves Business Management and Market Access for Small Business Owners 3 From Good to Great: Azeri Uniform Maker Uses Additional Financing to Become Leader in His Sector 4 Supporting Entrepreneurship in Africa 5 Alternative Financing Instruments Open Doors for Growth of Ukraine Construction Industry 6 Skills Training Recognized as a Key Factor for Growth of Small Businesses in Oman Supporting the development of small and medium enterprises (SMEs) is a key factor to alleviating poverty. This issue of Outcomes highlights some of the ways that IFC works to support small businesses across the globe. We review a selection of approaches we are adopting in the regions we operate, plus meet some of entrepreneurs we have supported. Our work with small businesses continues to accelerate through our advisory services programs and our investments in financial intermediaries that on-lend to, or invest in, SMEs. Our strategy to support SMEs leverages existing relationships with global partners and IFC clients as a way to increase the efficiency and scale of our interactions. This wholesale approach enables us to widen our reach, as well as standardize and replicate interventions across our markets. At the end of FY08, IFC s outstanding portfolio in financial institutions that support micro, medium and small enterprises (MSMEs) was $5.9 billion, which represented around 59% of IFC s global financial markets outstanding 7 SmartLesson: Culture War, and Cotton South Tajikistan Cotton-Lending Project 8 Small Businesses Grow to Be The Local Connection in Global Travel and Tourism portfolio. As of December 2007 IFC MSME banking clients had an estimated 8 million MSME outstanding loans totaling $93.9 billion. We aim to give small businesses more choice while achieving greater impact by employing a complementary mix of interventions that improve i) access to finance; ii) the business environment and iii) access to markets and skills. For example, our linkage programs aim to maximize the development impact of our investments by partnering with corporates in the development of local SMEs and communities, focusing on access to markets and skills. These programs help to improve supply chain efficiencies and mitigate risks associated with large investment projects. To help emerging markets spark sustainable growth in the small business sector, IFC works with a mix of partners and others involved in development, drawing on our advisory and investment experience as well as the expertise found within the World Bank Group.

2 Outcomes: Quarterly IFC Advisory Services Newsletter featuring Business News, Trends and Results from Emerging Economies A Free On-line Resource Improves Business Management and Market Access for Small Business Owners Mr. Mizanur Rahman Khan Geographic Scope of the SME Toolkit as at June 2008: Mr. Mizanur Rahman Khan Jahangir is the owner of a small business in Bangladesh that is engaged in the trade of industrial raw materials. He has been in business for more than 3 years and demand for his products and services has been growing. In order to get financing to grow his business and meet the demand, Mr. Rahman needed to draft a business plan which he would present to potential lenders. Not experienced in writing such plans and pulling together financial records, Mr. Rahman turned to IFC s SME Toolkit. The SME Toolkit ( is a free on-line resource designed to help small business owners in emerging markets learn and implement sustainable business management practices, increase their productivity, efficiency, and capacity, and improve their ability to access capital and new markets. In Mr. Rahman s case, he needed to produce supporting financial records in order to qualify for a term loan from a local bank. Working with an associate at an SME Toolkit knowledge center, Mr. Rahman used the accounting and finance tools to prepare his financial statements. He was then able to successfully apply for a term loan of US$5,000 and an overdraft line of $3,000 for working capital. The SME Toolkit program uses a network of local and regional partners to support the transfer of sustainable business management practices using the Internet, including local, regional, and global Web sites, and CD-ROMs. The Toolkit has four major components: An easy-to-use Web and CD-ROM interface that allows users to search or browse the content they need A comprehensive best-of-breed content targeting small businesses. A content management tool that allows partners to manage the Web site locally A business training curriculum for business development service providers and SMEs. To date, the SME Toolkit has been translated to over 15 languages, with 30 web sites, of which half are in the world s poorest countries. 2 For more information visit

3 OCTOBER DECEMBER 2008 From Good to Great: Azeri Uniform Maker Uses Additional Financing to Become Leader in His Sector Asad Nasrullayev, 43, launched Debet Uniform in Azerbaijan in A mathematician by training, Nasrullayev recalls the early days running his Baku-based uniform and workwear business. When we started, we had just one tailor, he says. But that all had to change when our first big client, Volvo, asked us to put their logo on the uniforms. We didn t have the right technology to do it, and so I went to Turkey myself to learn the skill of silkscreen printing. Things have looked up since then, and over the past 10 years, Nasrullayev has built Debet up from just a handful of employees to more than 100 today expanding from garments to protective equipment and other services. Currently, Debet Uniform is the market leader for uniforms and workwear in Azerbaidjan. Last year, Debet Uniform won a contract to supply workwear and protective equipment to BP and its co-venturers in Azerbaijan. BP had previously received these services from Wenaas Caspian, a branch of Europe s largest workwear manufacturer, and the $6 million, 3-year contract was a success for both Debet and BP s efforts to increase local participation in the oil-and-gas supply chain. However, to meet the requirements of the 3-year contract, which was the company s largest to date, Debet needed additional financing. Nasrullayev turned to the BP Suppliers Finance Facility, which was formed as a partnership of BP, IFC, and the Micro Finance Bank of Azerbaijan (MFBA), to provide financing to small businesses that were suppliers to BP. The Facility issues uncollateralized loans to local companies to help them to fulfill the requirements of a BP contract. The Micro Finance Bank evaluates loans through the Facility based on the anticipated sales and income of the BP contract, rather than on the company s current cash flows and income. This gives small businesses the opportunity to access higher levels of financing than what would be available at a standard bank, or even through a standard loan with the MFBA. Debet received a 3-year loan for $500,000, which allowed the company to purchase the minimum stock requirements to meet the contract. Asked if he could have received financing elsewhere, Nasrullayev shakes his head. I might have been able to obtain an uncollateralized loan from another local bank, but not on the same terms. The credit policies of our banks are directed toward other industries, not production. It s difficult. Nasrullayev would like even more access to funds to build his business. Compared to other factories in Azerbaijan, we are better. But we have yet to reach the international standards that we are aiming for. As for the silk printing skills he learned in Turkey? Well, we now have a fully computerized production line, which means I no longer have to manually do the work myself, he smiles. 3

4 Outcomes: Quarterly IFC Advisory Services Newsletter featuring Business News, Trends and Results from Emerging Economies Supporting Entrepreneurship in Africa SOAPEC Limited was founded in Guinea Bissau in 1992 and in a few short years grew to become a thriving paint and chemicals plant. However, during the civil war which started in 1998, the company lost all its assets, including buildings, equipment, and vehicles. When peace was restored in the West African nation, SOAPEC, like many other firms, needed financing and investment to rebuild what was destroyed. Through the SME Entrepreneurship Development Initiative, IFC has helped SOAPEC carry out a feasibility study and draft a business plan to attract investors for a new plant and operational facilities. The new plant will jump-start earnings and create over 80 more jobs once it begins production. The SME development initiative is one way that IFC, working with the African Development Bank and the governments of Denmark, the Netherlands, and Norway, aims to develop and support entrepreneurs in Africa. A significant number of the initiative s projects are in countries that are recovering from conflict. Working in over 30 countries in Africa, the program has trained nearly 10,000 entrepreneurs assisted more than 2,000 firms raised over $50 million in financing for small and medium enterprises in the region. consultants the goal being to build a sustainable base for providing ongoing support to small and medium enterprises. In Burundi, IFC is providing assistance to strengthen the national association of women entrepreneurs. We have provided advice on the creation of a women s microfinance institution, and conducted skills training for over 100 members. In Madagascar, a project supported by IFC helped 12 of the country s litchi fruit exporters to gain international certification and thus double their annual exports to the European Union. This increase in exports translated into earnings of about $42 million in one year. Another sector-wide project in Kenya is supporting the country s coffee exporters in gaining international certification for their coffee; this will enable them to penetrate the international premium coffee market, where they can fetch up one and half times more for their product. IFC is looking to build on the SME Entrepreneurship Development Initiative model by focusing more on interventions that cut across sectors, particularly those that have high job creation and export development potential. In addition to working with individual firms, the SME Entrepreneurship Development supports small business associations and business development services providers. To date it has worked with 33 business associations in Africa and trained over 460 business 4

5 OCTOBER DECEMBER 2008 Alternative Financing Instruments Open Doors for Growth of Ukraine Construction Industry IFC helps us find the right people, says FinLeasing Group s Director Denis Vasilenko, right In May 2007, Vyachislav Levitski, the director of Odessa-based construction company Indostroi, had just been awarded a large municipal contract for road reconstruction. Although the fast-growing, midsize company had a good credit history and had previously successfully qualified for bank loans, Indostroi was unable to get further bank financing for equipment without additional collateral. To fulfill the large road reconstruction contract, Levitski resorted to renting equipment, which was both unreliable and expensive. He knew that he needed another solution fulfill the contract and achieve growth. With his needs, leasing the equipment would have been a better option than the costly rentals. So why did Levitski, and possibly others in his situation, not consider this option? Even though leasing options are available in Ukraine, market surveys conducted by IFC identified two main impediments to growth of this market access to long-term financing, and lack of knowledge about leasing among entrepreneurs. Although awareness of leasing as an alternative financial instrument was beginning to grow in Ukraine s capital, Kyiv, it was virtually nonexistent in other regions. To address this challenge, IFC designed a public education campaign aimed at increasing awareness of leasing among entrepreneurs the campaign was implemented with the help of partner agencies and included seminars in over 15 regions with journalists and entrepreneurs. At one such seminar in May 2007, Levitski met Denis Vasilenko, director of FinLeasing Group, which has a total leasing portfolio of around $25 million and specializes in construction equipment. After FinLeasing Group s presentation, Levitski approached Vasilenko for advice on financing equipment, and their conversation led to a $650,000 leasing deal for three steamrollers and one asphalt layer. Vasilenko made the observation that banks work with clients; we work with people. IFC helps us find the right people. Unlike banks, leasing companies like FinLeasing Group have a good understanding of their clients business and are therefore in a better position to offer more industry-specific services, particularly when it comes to recommending equipment and suppliers, and can offer financing based on future cash flows, rather than on existing collateral. Leasing is the ideal financial instrument, therefore, for a company like Indostroi, which needs more equipment to increase capacity and revenue. IFC s Public Education Campaign on Leasing: 15 regional seminars throughout Ukraine for entrepreneurs 5,000 unique visitors to project s Web site every month ( 15 issues published of bi-monthly business journal on leasing (circulation 1,000) 22 press clubs for journalists on leasing 200% increase in media coverage of leasing throughout Ukraine. 5

6 Outcomes: Quarterly IFC Advisory Services Newsletter featuring Business News, Trends and Results from Emerging Economies Skills Training Recognized as a Key Factor for Growth of Small Businesses in Oman The issue of small business development has been receiving much attention in Oman of late. Last year, after a directive by His Majesty Sultan Qaboos bin Said, a new office for the development of small and medium enterprises was established within the Ministry of Commerce and Industry. The directorate was tasked with looking at ways to overcome challenges that entrepreneurs face, such as accessing finance and developing good business management skills. The government has received wide support from the private sector for this initiative. One such company is IFC client Bank Muscat, which has been offering free business skills workshops to entrepreneurs. The workshops are offered as part of Bank Muscat s corporate social responsibility programs and cover topics such as accounting and marketing. They are conducted by a professional trainer, Pami Camel Toueg from IFC. Bank Muscat s chief executive, Abdul- Razak Ali Issa, explains that their contribution to small business is not just about social development but is also led by a business imperative, There are opportunities in the SME market in Oman, and so we have expanded our various existing SME schemes and established a separate department to cater to them. We have also launched a suite of SME lending solutions under the brand name of Al Wathbah. The business training workshops that we are running are being conducted through Al Wathbah. The newly created SME department of the bank also offers discretionary lending solutions to medium enterprises. By having a special department focusing on how best to serve small business owners, the bank has also been able to look at ways to relax the lending criteria for small business owners applying for financing. The workshops are being offered in collaboration with IFC s Business Edge program. Business Edge, IFC s management training solution, develops the business skills of individuals and increases the performance of SMEs in emerging markets. It offers courses covering key management topics (through its network of franchised local training firms in China, Vietnam, MENA, Africa, and LAC). Increasingly, Business Edge is used to strengthen the value chain of IFC clients and to support SME business lending operations such as those of Bank Muscat. In frontier and fragile states (such as Haiti, Afghanistan, Yemen), IFC uses Business Edge to build the business skills of individuals, and to support small entrepreneurs in these challenging markets. Mr. AbdulRazak Ali Issa continues, We realize that SMEs require not only financing but also further support and training. By providing opportunities to Omani businesspersons, we aim to help them develop their knowledge and skill base. This will help the developing SME sector play a much bigger role in the growth of the national economy. Business Edge is IFC s comprehensive range of practical and flexible management training products and services, specially designed to improve the performance of small and medium firms. Successfully launched in Vietnam (2002), it has since been rolled out in 10 countries including China (2003), and in several countries in the Middle East (2004). By end of 2007, more than 113,000 paying customers with an overall satisfaction rate of 89% were trained through a network of 264 certified trainers and 50 franchised training firms. In addition, over 330,000 self-study books have been sold. 6

7 OCTOBER DECEMBER 2008 SmartLesson: Culture War, and Cotton South Tajikistan Cotton-Lending Project Cotton is the third largest export, in Tajikistan, after aluminum and electricity. It provides both significant hard currency and employment for nearly 75 percent of the rural population. After the devastating civil war that ended in 1997, the cotton sector was in ruins. Cotton farmers were in need of production financing, cotton gins were in need of processing financing, and cotton traders were in need of trade financing. The financial sector was non-existent, and the government was not equipped to handle these financing needs and so at the time it was not clear if and how the sector would recover. A SmartLesson written by Stephen Wright, Adkham Ergashev, and Rolf Behrndt explains how an IFC project attempted to address this financing void. Below is an extract: Creating a credit culture During Soviet times, state banks did not have international-level policy and procedures regarding lending. It was common practice to write off debts every 5 7 years. These types of practices created a system of dependence. This was not a credit culture with emphasis on efficiency; therefore the climate was already set for the so-called investors a group of private financiers who began to offer financing to cotton farmers mainly as a way of ensuring supply to the cotton gins that they owned or controlled. The Asian Bank of Development estimates that the current indebtedness of Tajik farmers is over US$450 million, with an estimated US$150 million required annually to finance cotton production in Tajikistan. In spite of all the obvious barriers and the devastation that the prolonged civil war caused to Tajikistan s economy, we believed it was possible to create a credit culture where one did not exist and to have a positive impact on the livelihoods of extremely poor itinerant farmers. As in many post-conflict countries, persevering and adapting the approach flexibly to the experience are further keys to success. Here is a lesson learned from implementing the project: Lesson: Properly assessing the context is the first and prerequisite step toward finding a solution.understanding the social context of cotton farmers was necessary for coming up with an alternative method for financing them. In Tajikistan it was crucial to find a way to bypass the investors that had arisen in the post-conflict void of a malfunctioning financial system. There were no other options open to farmers, and therefore most of them began to take cotton production loans from the Investors. When a farmer entered into an agreement with an investor he was also required to buy all inputs, which many times included fuel, from that investor. When it was time to harvest, the cotton farmers were told by the investor which cotton gin to use for processing the seed cotton (raw cotton). What began to develop was a system that locked the farmer into a continual cycle of debt. The farmer fell into debt because his crop was not able to pay off the investor, and therefore debts began to roll over year after year. There are many reasons why farmers were not able to pay off their debt; these included poor yields, drastically inflated input prices and very low reported output by the cotton Women find many opportunities working on Tajikistan s cotton farms. gin, and a very low quality of cotton produced by the gin. In the end, a low-quality, low-yield crop and debt were rolled over to the next year. About the Authors Stephen Wright joined IFC in November 2005 and is currently the Project Manager of the South Tajikistan Cotton Lending Project. Adkham Ergashev joined IFC as the Deputy Project Manager and Deputy General Manager of SugdAgroServ in November Previous experience includes microfinance and supply chain development in agriculture in Uzbekistan. Rolf Behrndt is the Senior Operations Manager for Access to Finance. He joined IFC in August 2006 and is based in Belgrade, Serbia. SmartLessons is an awards program developed by the Knowledge Management Unit of the Partnerships and Advisory Services Operations department to share best practices and lessons learned about IFC advisory services and investment operations across various regions and business lines. The findings, interpretations, and conclusions expressed in this paper are the author s own and do not necessarily reflect the views of the SME Department or IFC. 7

8 Outcomes: Quarterly IFC Advisory Services Newsletter featuring Business News, Trends and Results from Emerging Economies Small Businesses Grow to Be The Local Connection in Global Travel and Tourism OCTOBER DECEMBER 2008 Worldhotel-link.com, the online global hotel network, has expanded into Africa, connecting the region s small and medium sustainable tourism operators to the global travel market. The project gives hundreds of African tour companies and hotels access to a global network that facilitates online bookings for tour sales in developing countries. The majority of tourism service providers in Africa tour operators, guesthouse, and hotel owners are small enterprises that cannot afford to build Web sites or set up Web-payment systems for online sales. The increasing use of the Internet by travelers to research and book their travel means that many such enterprises find themselves at a disadvantage, unable to tap into an increasingly significant market. Worldhotel-link.com (WHL) started as an IFC development project in the Mekong region to connect travel products from the developing world to the global market. The project was eventually spun off by IFC in 2006, and is today a global leader in promoting sustainable tourism and travel. Low-cost solution With its low-cost solution, Worldhotel-link. com will help hundreds of Africa s small tour operators and guesthouse owners to tap into the fast-growing online travel market, which today accounts for 25 percent of total travel bookings. Darron Raw, Director of Swazi Trails, who runs the Swaziland WHL destination site, says, The initial success of the WHL booking portal in Swaziland has been overwhelming. We have responded to more than 100 enquiries in our first three months, 40 percent of which have converted to sales. Through a partial grant, IFC has enabled Worldhotel-link.com to create 16 destination Web sites covering 11 African countries Cape Verde, Gambia, Kenya, Lesotho, Madagascar, Mauritius, Senegal, South Africa, Swaziland, Tanzania, and Zambia. The sites are in turn linked to a global network that facilitates online bookings for small businesses in the tourism sector in developing countries. Using the WHL platform, local, small, and medium travel operators can create individual, customized Web pages to market their facilities and book customers online. Arrive a tourist, leave a local whl.travel whl.travel is a network of travel Web sites catering to independent spirits who are journeying off the beaten track and who are tired of the dumbed-down travel options offered by most online service providers. whl.travel emphasizes responsible travel and keeping things local by focusing on smaller hotels, guesthouses, and tour operators, particularly, but not exclusively, in developing countries and emerging markets. IFC s Advisory Services (AS) have expanded rapidly in scope, geographic coverage and staffing. Currently, nearly one third of the Corporation s staff is engaged in full-time delivery of Advisory Services, with the vast majority based in IFC s regional facilities. IFC Advisory Services and donor partners have provided more than US$ 1 billion in program support to build small enterprises, to accelerate private participation in infrastructure, to improve the business enabling environment, to increase access to finance, and to strengthen environmental and social sustainability. 8 Outcomes IFC 2121 Pennsylvania Ave., N.W. Washington, D.C USA Outcomes is a quarterly newsletter on Advisory Services published by IFC. IFC, a member of the World Bank Group, fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing private capital in local and international financial markets, and providing advisory and risk mitigation services to businesses and governments. IFC s vision is that people should have the opportunity to escape poverty and improve their lives. For more information go to Please send your comments to tmoyo@ifc.org