The EBRD provides lending partners with innovative products by responding to changing market conditions and client needs. The strong portfolio of micro and small enterprises (MSE) finance products helps the EBRD retain its position as one of the most successful MSE investors in the region. To maximize the leverage of its funding, the Bank also provides technical assistance which focuses in institution building and creating MSE lending expertise.

A. The Beginning
In April 1999, the EBRD and the European Commission launched the SME Finance Facility for micro, small and medium-sized enterprises operating in the EU Accession countries of central and Eastern Europe. This includes Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic and Slovenia.
The SME Finance Facility channels €846 million (€716 EBRD/€130 EU) to SMEs through loans to local banks, leasing companies and investments in private equity funds.

Loans and leases
Local banks and leasing companies focus on financing SMEs at the lower end of the size spectrum. The average loan/lease to a participating bank or leasing company is between €5 million and €15 million. The financing extended is normally for small enterprises with up to 100 employees (€30,000 to €100,000) and micro enterprises with less than 10 employees (up to € 30,000).
Banks and leasing companies are selected on the basis of their financial strength, branch network, knowledge of their clients and, most importantly, their commitment to engage in sustained SME lending.
The EU grant covers performance fees, which compensates the banks and leasing companies for start-up costs related to SME on lending. The grant also funds technical assistance aimed at:
    - Recruiting and training of bank staff in small loan appraisal, supervision and administration
    - Improving information systems
    - Strengthening management capabilities such as marketing and SME client relationship management.

The equity funds range between €12 and €20 million, and maximum financing per investee is restricted to €1 million for a minority stake. Independent fund managers responsible for raising private capital manage the funds.
The EU contribution is structured to provide incentives to overcome the private sector's reticence about SME investment and to allow the Facility to attract competent fund managers.
The funds use the full range of equity and quasi-equity instruments and normally hold minority positions (10 - 49%). They do, however, secure rights enabling them to exercise corporate governance over the SME portfolio.

B. Current Policy
Strategic priorities
    Provide sustainable finance to micro and small businesses
    Support institution building in commercial banks and non-bank micro finance institutions
    Encourage competition within the financial sector catering to micro and small enterprises
    Regional focus and emphasis on previously underserved markets

The Bank grants senior and subordinated debt to commercial banks and non-bank micro finance institutions for on lending to MSEs. Amounts range from €20 to €200,000.
The Bank purchases ordinary or preference shares in microfinance banks and institutions, or existing commercial banks with a strategic focus on MSE finance.
Technical assistance
Technical assistance focuses on institution building and creating MSE lending expertise.
Such measures are important to ensure that EBRD's partners have the necessary capacity to enter the MSE finance market and to continue providing loans long after Bank assistance and investment have ceased.
This assistance, which is generously supported by EBRD's donor programs, focuses on:
    - Staff training
    - Streamlining of processes and procedures
    - Implementation of best practice borrower analysis

    Integration of MSE lending into the partner banks' mainstream operations

Non-bank micro finance institutions
Non-bank micro finance institutions (MFIs) are a new and important delivery mechanism for the EBRD. The Bank provides leading regulated non-bank MFIs with senior debt for on-lending to micro borrowers. The Bank aims to support these financial intermediaries, particularly in their transformation to deposit-taking entities, and will consider future equity investments.
MSE focused equity funds
EBRD can invest in or alongside the increasing number of funds, which have been created to invest in financial institutions with a strategic commitment to the MSEs in the Bank’s countries of operation.

New initiatives
a. Local currency financing
The Bank is exploring ways to meet the high demand for microfinance in local currency by using standby credit lines and issuing securities, the proceeds of which would be provided to partner institutions for on-lending to MSEs. The Bank has already engaged in local currency financing through programs in Hungary, Kazakhstan and Russia.
b. Micro leasing
It can be difficult for MSE entrepreneurs to obtain asset finance. Products available from MFIs are often short-maturity and those available from leasing companies are often too expensive. Leasing can provide a solution to the problem of lack of collateral faced by smaller businesses in the production sector. The EBRD is looking at how to downscale existing leasing operations to amounts that could benefit MSE clients. Another approach is to help financial intermediaries develop this product.

Risk sharing and securitization
The Bank is exploring risk-sharing products to share the risk of the MSE portfolios of its partners. It is also considering securitising loan portfolios.
- Credit scoring
Credit scoring mechanisms help partners enhance the profitability and sustainability of their lending programs. New initiatives in this domain would build on the experience gained by EBRD in Central and Eastern Europe.


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