Operationalization of MSME Credit Guarantee Fund in Djibouti: Interview with Mr. Malik Garad, Head of Banking Supervision

MSMEs in Djibouti have very limited access to bank financing. It is estimated that only 5% of formal enterprises receive bank financing. While banks in Djibouti are very liquid, with a low level of non-performing loans, banks are often unwilling to lend to MSMEs for several reasons, including a low risk appetite and insufficient collateral.  The Central Bank of Djibouti realizes the importance of MSMEs to job creation and economic growth, and in 2014, reached out to the World Bank and FIRST Initiative for technical assistance to design a Partial Credit Guarantee Fund.

A PCG Fund provides third-party credit risk mitigation to lenders with the objective of 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 loans made to MSMEs.

The project, titled “Operationalization of MSME Credit Guarantee Fund”, included consultations and interviews with commercial banks, other lending institutions, donors, and various stakeholders to establish demand for the PCG Fund and develop incentives for their participation. In addition, the team conducted a market analysis to identify existing financial services available to Djiboutian entrepreneurs, determine the financial products available across sectors, and establish how partial credit guarantees might help to mitigate and remove some of the barriers to access.  

This past October 2015, the World Bank team provided drafts for the legal, regulatory, and oversight frameworks, as well as several operational rules and guidelines, which are currently under review. The next steps include issuance of a government decree, establishment of the PCG as a legal entity, and coordination of funding to sustain the fund over a five-year horizon. The Impact Story shares more details.

For more insights into this project, watch this interview with Mr. 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. (Interview Date: April 16, 2015)

Q1: Could you please share with us the challenges of closing the financing gaps for SMEs in Djibouti?

The challenges for MSME financing in Djibouti are many. Notably, the first challenge one faces concerns low access to bank financing for MSMEs, considering that today only 5% of SMEs receive funding from the banking sector.

The second challenge for the development of SMEs concerns the place of women. In terms of funding today, although women are very dynamic in every sector of the economy, they do not benefit from funding offered by the banking sector.

So, it is indeed important that at this level, the banks as well as microfinance institutions can support development by dedicating funding to women; particularly, through a number of specific instruments which could be implemented.

Q2: What role would the Partial Credit Guarantee Scheme play in helping SMEs access required capital for growth?

The role of the credit guarantee scheme for the financing of SMEs, we think it will enable, especially young graduates coming out of university, to be able to qualify for greater access to bank credit, which contains many of the obstacles they face today.

So 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.

Q3: How would you assess the partnership with FIRST?

The partnership with FIRST Initiative is a structural partnership for the Republic of Djibouti, which has helped to meet a number of challenges that the country had been facing.

Among these difficulties, there is the modernization of the financial infrastructure that is necessary today after the effort to consolidate the financial sector.

So, the modernization of [Djibouti’s] financial infrastructure will include the development of payment systems, as well as credit information systems, with the objective to facilitate access to financial services and increase access to finance for the entire population, but particularly for SMEs.

Q4: How would you assess the quality and timeliness of the TA provided?

Regarding the quality of the assistance provided by FIRST, it is characterized by high efficiency in measures. This technical assistance has really allowed to develop the appropriate responses to the challenges the Republic of Djibouti was facing.

Regarding speed, we must say that this project actually got a rapid response to the extent that very little time elapsed between the time we actually initiated the project and the time when this project was accepted at FIRST and the expert teams were deployed.