Downscaling with commercial banks in Africa: opportunities and challenges

  • Edvardas BUMSTEINAS, EIB
  • Marie-Laure GARNIER, AFD / ProParco 
  • Saugata BANDYOPADHYAY, CRDB Bank Tanzania


Edvardas BUMSTEINAS emphasized the renewed interest in the topic of this session, referring to the diverse panel of speakers and a relatively large number of participants.

André OERTEL started by presenting some lessons from experience with downscaling of commercial banks in Africa. While differentiating between Horus' definitions of Microfinance (< USD $10,000) and SME finance (> USD $10,000), Oertel put the focus on the provision of credits to enterprises. Access to finance will determine the eventual success (or not) of downscaling, next to risk management. He referred to microfinance as retail business, but with very specific organisation and cost structures, while SME finance as less standardised, more segmented and having more financing models. He distinguished between two models of downscaling: ‘do-it-yourself' and via equity link. For the ‘do-it-yourself' approach, Oertel reviewed the main findings of a recent evaluation of EDFI (the Association of European Development Finance Institutions) lending programmes concerning the effectiveness of EDFI support to SME development in Africa (through a small sample of six banks in Ghana, Kenya, Uganda, Tanzania and Zambia). The objective of the EDFI programme was mostly increasing the volume of loans to SMEs, not necessarily downscaling. Determining factors in downscaling were: banks that invested in SMEs most likely continued to do so after receiving EDFI support; a link was also observed between ‘business environment' and ‘increased capacity in SME banking'; and, a positive link between ‘quality of banking sector' and ‘outreach'. Advantages and disadvantages of this type of downscaling were reviewed, also making clear that it is often difficult to get the complete information on the true contribution of external support programmes to SMEs. Downscaling through the equity link can be considered as a more privileged partnership model, e.g. as deployed by Société Générale with Advans Group in a number of West African countries. Determining factors for success are the shared business vision and the regulatory framework. The approach is more oriented to treat it as a real business, and the impacts are more diverse: local knowledge, professional inputs, shared infrastructure, and access to local finance (at market conditions). Oertel concluded that the ‘do-it-yourself' model is more suitable for SME finance rather than microfinance (hence limited downscaling perspective), while the equity link is serving the purpose of helping MFIs in their upscaling efforts.

The CRDB Bank Tanzania, represented by Saugata BANDYOPADHYAY, worked mainly in rural areas when it transformed into a commercial Bank (50% private, and 50% institutional shareholding). The motivation for the management to downscale is financial inclusion. While mobile banking disrupted much of traditional banking in the recent past (as from 2007), there is now more financial knowledge in the informal sector. This can be used for new developments, as demonstrated by the CRDB's Agent Banking, which took off in 2012, offering a low-cost financial access opportunity. In 2013, financial inclusion reached 74% due to lower transaction costs, while the non-bank formal sector grew from 5% to 44% in Tanzania. As a result, the bank realised a very strong growth in transaction values, a key driving factor being the low interest rate policy (next to guarantee schemes). Bandyopadhyay explained CRDB's model as a value chain model for downscaling to the field level based on a graduation process of its clients. Education and capacity building at the final beneficiary level is required to help clients move up. It also became clear that this model cannot be used for microfinance operations, for which purpose CRDB established a separate microfinance subsidiary (with an Islamic banking part, and also working with the Financial Sector Deepening Trust). After mentioning a number of demand and supply side bottlenecks in the microfinance sector, Bandyopadhyay talked about the Micro SME finance sector, for which CRDB developed a specialised SME department. He subsequently compared CRDB's microfinance and SME finance schemes, the low interest rates (14-20% for microfinance loans, 18-20% for SMEs, 20-24% for Micro SMEs) showing their ambition to create financing opportunities while removing barriers. By building capacities with SACCOs (incl. an incubator programme), they hope to achieve even more impressive results in five years from now.

Marie-Laure GARNIER presented AFD - the French governmental financial development institution. AFD has a public sector approach, funding difficult frontier projects. The aim is to make the best use of money by demonstrating to banks that lending to SMEs on a commercial basis is feasible. AFD and ProParco assist local banks and finance actors with downscaling to finance SMEs, through technical assistance and capacity building; hence the need for blended finance. AFD got a small grant from the French Government to pilot with the Société Générale de Banque au Sénégal. This was meant as a credit line for the bakery sector, credits being based on cash-flow analysis rather than on basis of assets or collateral. A second example presented by Garnier is the credit line (EUR 30 million) and technical assistance which was provided to the National Bank of Egypt. A third example concerned the blending of finance and technical assistance in the case of Garanties Ariz, as a means to guide the downscaling of banks and the upscaling of MFIs. Guarantees can be provided for up to 75% of the loan amount for MFIs, and up to 50% for SMEs. Garnier concluded by mentioning the support they are providing to public APEX institutions, in order for local banks to provide loans and technical assistance to SMEs.


Bumsteinas started the discussion by highlighting the cross-cutting issue of capacity building throughout the presented approaches, asking for feedback from the audience. An EIB representative then asked about the importance of the guarantee scheme as a catalyst, to which Bandyopadhyay replied that it certainly helps in product structuring, though they are not relaying this to customers. It means that if something goes wrong, it can be mitigated, nevertheless they also provide support to prevent such mishaps. The low interest rate for SMEs (question from the University of Lorraine) can be explained by the support of Danida and the 50% shareholding by small investors. As a result, there is not much institutional pressure for high interest rates. They are rather understanding, demonstrated by the fact that profits are brought back into operations. In addition, they have a very low-cost structure and cost-efficient operations.

In response to another question from the University of Lorraine, Garnier provided additional information about the work done by AFD in assisting development banks in French speaking countries. She also referred to the cases of Egypt and Nigeria presented earlier to explain how AFD improved the liquidity of local banks, also aided by the technical assistance in line with the AFD's role as a public developmental agency. Oertel provided some final recommendations for follow-up. He made an observation that banks with an inclusive (social) vision are found to be quite successful from a financial and operational point of view. His main conclusion was that choosing the right partners and developing new models is key in reaching critical mass and promoting downscaling. Bumsteinas concluded by saying that banks which are downscaling usually have a social mission, and that their commitment to financial inclusion brings significant additional benefits to their country and people.