Djibouti: Financial Mechanisms for SMEs

The Ministry of Trade and Industry of the Republic of Djibouti applied directly to FIRST for technical assistance (TA) in November 2006 to explore possible ways to strengthen financing mechanisms for Small and Medium Enterprises.

Access to finance for SMEs or Micro-enterprises (MSMEs) is not an area that FIRST seeks to promote or expects to receive TA requests from. This is because SME financing is often well covered by other multi-lateral development banks such as the World Bank Group (IFC and IBRD), EBRD (in its geographical area of operations) and other bi-lateral donors. However, FIRST is flexible and in the particular case of Djibouti, it became evident that no one else was interested in providing the technical assistance requested. This may have been because of the size of the Djibouti economy, population or geography or it may have been because little was known about the SME/MSME sector. FIRST decided to help and spent some time in a careful search for consultants who could easily familiarize themselves with the country, had relevant expertise and could work well with local consultants in the French language.

Background

At the time of the project, Djibouti’s economy was mainly a rent economy as it was based on revenues and rents generated directly and indirectly from the activities of the port, which has a strategic location near to the entrance to the Red Sea. The port provided transport facilities for several landlocked African countries, especially Ethiopia, to fly in their goods for re-export. This earned Djibouti much-needed transit taxes and harbour fees.

While the operations and size of the SME sector was not very well documented, there were an estimated 10,000 SMEs according to an ACEP-Développement report[1]. According to the Ministry of Trade and Industry, SMEs and micro-entrepreneurs constituted the most dynamic entities of the informal sector and played an important and growing role in the Djiboutian economy. The sector employed as many people as the formal sector. Between 1991 and 2000, it created three times more jobs than the formal private sector. This sector has played a crucial role in buffering the effects of a rising poverty crisis and was progressively becoming a way to complement the revenues of an increasingly poor population.

The project

The consultants deployed various techniques to analyze the SME sector and its needs: desk research, questionnaires to SMEs and analysis of responses, field trips to Djibouti to interview Government, banks, SMEs, NGOs. The consultants identified gaps in the funding of SMEs caused by a variety of factors and proposed possible solutions for filling those gaps in an Action Plan.

The Action Plan made four sets of recommendations:

  • Establish a leasing company
  • Establish partial Government guarantee structure in order to overcome the banks’ collateral hurdle
  • Improve local expertise in project appraisal and credit analysis
  • Rationalize the micro-finance network

Lessons Learned

FIRST may occasionally fill gaps even in otherwise well-covered parts of the financial sector and so, whilst FIRST’s strategy may not be to promote such projects, its flexibility can from time to time add value even in un-expected areas of technical assistance.

Reports

FIRST will not be promoting a roll out to other countries facing similar unmet demands for assistance – but nonetheless there may be some other small countries that have similar problems that can learn from the approach used in Djibouti.

  •  The Action Plan is disseminated. It provides a good overview of the SME sector and issues facing its financing, and proposes some solutions that could work in Djibouti.



[1]ACEP-Développement (2002): “Note présentation et argumentaire projet financement

micro-entreprises”.