Africa Facility for Resilience and MSME Growth

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The project aims to support African early stage growth firms and MSMEs that promote trade in Africa, working through a specialized regional development bank. African Export-Import Bank (Afreximbank) is uniquely positioned for this purpose as the continent’s leading bank for trade and regional integration. Afreximbank is playing a key role in supporting the implementation of the AfCFTA hosting the Pan-African Private Sector Trade and Investment Committee, which serves as an advocacy platform to support its implementation. • A micro small and medium enterprises (MSME) in this case is defined as a small business located in Africa which has a minimum annual turnover of US$100,000 to US$15,000,000, is a cash flow generative business with potential to conduct cross border trade and integrate in value chains.• Early stage innovative firms are defined as young enterprises usually less than 5 years in operation who apply technology and innovations to create new goods and services or improve production and processes targeting internal and external markets.The project contemplates the following components: Component 1: Value chain and trade finance for MSMEs (US$350 million) A. MSME Receivable Financing (US$120 million)This facility is meant to support Afreximbank’s facilitation of its Receivables financing program such as factoring with the intention to reach more MSMEs (Figure 1). The facilities operated under this program will be provided mainly indirectly via financing extended to local commercial and state-owned banks and local DFIs, as well as to Non-Bank Financial Institutions (NBFIs) including Fintechs. Financing is expected to be primarily without recourse to MSMEs.Approved Payables Finance (APF) a.k.a reverse factoring is another instrument identified by Afreximbank as a critical trade finance offering for Africa with significant untapped potential. Reverse factoring is especially useful for MSMEs however, as mentioned above, it has not been used as extensively in Africa especially by African banks and NBFIs due to lack of awareness and understanding of the product. This subcomponent seeks to help Afreximbank develop this product while leveraging its relationships with large corporate clients, and governments to facilitate financing to African SMEs. The use of a digital platform allows immediate visibility of the transaction by all parties and eliminates paper-based processing. Funds under this component will also finance Afreximbank to acquire a white-label software solution that would enable it to offer reverse factoring services directly to MSMEs to help meet the demand, capitalizing on its ability to take risk by leveraging economies of scale and creating a demonstration effect to attract other players to engage in this space in AfricaB. Credit lines to financial intermediaries for MSMEs that promote African trade (US$180 million) Funding under this activity will support Afreximbank’s SME Finance Facility offering COVID-19 relief credit lines to SMEs in fragile and conflict states (FCSs) through eligible PFIs. The COVID-19 pandemic has placed extreme pressure on banks in the region to meet the high demand for credit by MSMEs. With its ability to leverage economies of scale and hence higher scope to assume risk, the Afreximbank will facilitate liquidity to PFIs such as regional and local banks and DFIs, finance and leasing companies, microfinance institutions (MFIs), and NBFIs. The PFIs will on-lend the money to MSMEs in FCSs and challenging markets to conduct trade related activities. Fintechs in the process of developing e-lending solutions will also be eligible to receive loans from PFIs, given the highly conducive nature of mobile money in FCS conditions. A key distinguishing feature of the line of credit to PFIs will be their longer tenor of between 2-4 years, allowing extension of loans to MSMEs for capital investment. C. Bridge Lending Window (BLW) for MSMEs affected by compound shocks (US$50 million)This sub-component will fund a financial resilience tool to cushion African MSMEs involved in trade against compounding shocks. In the event of shocks, the tool will consist of a bridge-lending facility (Bridge Lending Window [BLW]) that will provide short term lending through PFIs to SMEs. Shocks will be detailed in the project operations manual (POM) and are expected to be defined as climate shocks resulting from changes in temperature, precipitation, and their distributions, include droughts, floods, and landslides as well as pandemics. The component is designed to provide immediate liquidity to MSMEs that have been affected by the COVID-19 pandemics and face a natural disaster or a new wave of COVID. Component 2: Early and Growth-Stage SME finance Co-investment Platform (US$50 million)The component will help support the creation and growth of innovative export-oriented African startups and SMEs. This will be done by increasing the supply of patient capital in the form of equity, quasi equity such as venture debt and other convertible or corporate debt instruments (preferably in local currency) to support the financing needs of innovative start-ups and SMEs directly or indirectly through investments in funds. Investments are intended to crowd-in other private capital, estimates calculated by the team indicate the VC fund could leverage at least an additional US$100 million from other investors.The success of the program in attracting other investors will rest on its governance and management capacity. The program will be managed based on commercial industry practice by an appropriately qualified fund manager and team at Afreximbank. The funding selection criteria, and management of the fund will be articulated in the POM.Funding will be sector agnostic and will support climate change where possible. However, the majority of opportunities are expected to be in ICT and the creative industry (media, design, film etc.), supply-chain logistics, products and processes addressing climate change, e-health, e-education, and tech platforms facilitating trade logistics services and finance to micro and small enterprises promoting inclusion such as Fintechs. The VC Fund is expected to do at least one call for proposals for investments that include climate adaptation or mitigation. At least 25 percent of investments will be in firms that support climate adaptation and mitigation as defined in the Common Principles For Climate Finance Tracking (2021). Component 3: Technical Assistance, policy support and project administration (US$15 million)This component will support some of the administrative and training needed for Afreximbank in managing the project, build capacity in MSMEs and FIs, and support Afreximbank’s policy work to promote trade. Activities covered include partnering with successful incubators, accelerators and business development service (BDS) providers across the continent with a focus on IDA-eligible countries to develop the pipeline of SME deals, provide business development support to SMEs and organized clusters, and promote connectivity to markets. The TA activities will include the hiring of a firm(s) to develop and deliver on a capacity building plan based on Afreximbank’s SME Development Program. The capacity building will provide training to banks and NBFIs on MSME trade finance and use of an Africa focused KYC repository developed by Afreximbank as a tech-based solution. The TA will also address training for Afreximbank staff working on MSME implementation and encompass identifying/sourcing deals, preparing the business case/portfolio, screening and reporting on fiduciary environmental and social (E&S), and monitoring and evaluation (M&E) data collection/recording. Funds will also support the development of Afreximbank’s sustainable finance strategy to address climate change which will be rolled out through the TA to all the PFIs.Policy reform: Afreximbank chairs the African Chapter of the global factoring industry assoc