African Guarantee Fund: A Guarantee for African Growth

Africa has become home to the world’s most innovative and enterprising people. The development of Small and Medium-Sized Enterprises (SMEs) is one of the principal solutions to the growth challenges faced by African countries.

SME financing however, is perceived by many financial sector players in Africa as a risky activity, given that the enterprises quite often, fail to come up with the collateral levels required to secure credit facilities.

It is against this backdrop, that the African Guarantee Fund for Small and Medium-Sized Enterprises (AGF), a pan-African provider of financial guarantees was officially launched in 2012 to capacitate small and medium sized enterprises, and enable them play their role as engine drivers of the continent’s economic growth. Strengthening Africa’s SMEs is critical for development as it is through this that African countries become more competitive at a global level.

African Guarantee Fund is a link that enables banks and other lending institutions to scale up their SME financing through the provision of partial financial guarantees and capacity development assistance. AGF is the first African institution wholly dedicated to mobilizing private resources for SME development across Africa and has over the past 6 years, led the guarantee market in Africa by issuing guarantee products to financial institutions, making available more than USD 1.5 Billion of financing for SMEs.

The guarantee fund focuses on two lines of activities: It’s guarantee facility assists financial institutions by partially covering the risks associated with SME funding; and its capacity development facility enables financial institutions to strengthen their systems, processes and assessment tools in order to execute their SME growth strategies with ease. Three types of guarantee products offered by AGF: Loan Guarantee, Bank Fund Raising Guarantee and Equity Guarantee.

With climate change being a key area of focus globally, AGF in partnership with the Nordic Development Fund launched a Green Guarantee Facility to contribute towards COP21 goals and objectives. The Green Guarantee Facility supports sustainable private-sector led economic growth in Africa, through efficient utilization of untapped clean energy resources and other climate-resilient development initiatives. Green financing brings direct benefits in terms sustainable employment, poverty reduction and gender-inclusive financing opportunities.

AGF is an able partner in the delivery of green growth solutions in Africa, for initiatives originating from both within and outside the continent.

The organisation’s overall objective is to reduce the SME financing gap currently estimated at more than USD 155 billion. Within 6 years, AGF has issued financial guarantees to a tune of more than USD 800 million. This has enabled its Partner Financial Institutions (PFIs) to issue loans estimated at over USD 1 billion to SMEs across Africa.

Through these loans about 20,000 SMEs have been supported, in turn creating more than 100,000 jobs.

In the long term, AGF intends to raise USD 400m over the next five years using a Blended Finance mechanism to add on to its current USD 100m capital base. AGF’s strategy has been built on implementing its operational model, leveraging high quality technical expertise and putting in place a strong governance framework. Currently, the guarantee fund is owned by the Danish International Development Agency, Spanish Agency for International Cooperation and Development, African Development Bank, French Development Agency, Nordic Development Fund and the Investment Fund for Developing Countries.

Last year, AGF was assigned and AA- rating by Fitch Ratings making it the first guarantee fund in Africa to obtain such a strong rating. This rating not only reflects AGF’s financially strong owners and very strong capital position, but also a proven business model as a provider of local currency guarantees for SMEs in Africa and low investment risk.

AGF remains confident that properly funded SMEs will indeed drive Africa’s growth.