DJIBOUTI: Innovative MSME Finance Shows Promise
Only 5% of formal businesses in Djibouti receive bank financing, according to estimates.
Banks in Djibouti are fairly liquid, but they are often unwilling to lend to micro, small and medium size enterprises (MSMEs) because of low appetite for risk and insufficient collateral.
However, MSMEs are important for job creation and economic growth. To improve their access to finance, Djibouti’s Central Bank and the Ministry of Economy and Finance reached out to the World Bank and FIRST Initiative for technical assistance to design a Partial Credit Guarantee Fund (PCG Fund) as part of a broader initiative to lay the foundation for private sector growth.
“Through this scheme, the young promising heads of innovative projects can actually approach local bank officials, as well as at microfinance institutions, in order to apply for the funding which their projects require,” explains Malik Garad, former Deputy Governor and Head of Banking Supervision, Central Bank of Djibouti.
A PCG Fund provides third-party credit risk mitigation to lenders while increasing access to credit for MSMEs. In case of default, the fund mitigates risk by absorbing a portion of the lender’s losses on the made loans.
The project, titled “Operationalization of MSME Credit Guarantee Fund,” included consultations and interviews with commercial banks, other lending institutions, donors and stakeholders to establish demand for the PCG Fund and develop incentives for their participation.
The World Bank team conducted a market analysis to identify existing financial services available to Djiboutian entrepreneurs, determine financial products available across sectors, and establish how partial credit guarantees might help to mitigate and remove some of the barriers to access. It also provided drafts for the legal, regulatory, and oversight frameworks, as well as several operational rules and guidelines.
Earlier this month, Djibouti’s Council of Ministers, chaired by the President of the Republic, approved the decree establishing the fund and launching the next steps for its operationalization, which include incorporating the PCG fund as a legal entity and coordinating funding to sustain its operations over the next five years.
“The PCG fund is a timely development in Djibouti as it will encourage lenders to provide more financing to MSMEs. We are hopeful that the fund will accelerate the MSME growth and spur job creation in the country,” says Fadwa Bennani, Senior Financial Specialist, the World Bank Group, who led the project.
This project is one example of the World Bank’s growing portfolio of credit guarantee projects.
The burgeoning demand for this innovative mechanism prompted the World Bank and FIRST Initiative to develop the “Principles for Public Credit Guarantee Schemes for SMEs,” recently published in December.
Watch interview with Malik Garad, the former Deputy Governor and Head of Banking Supervision of the Central Bank of Djibouti, to hear how the Partial Credit Guarantee Scheme hopes to increase access to finance for MSMEs.