Access to Finance

  • The first step to ensuring access to finance for local suppliers is to understand the challenges, needs, and obstacles that affect their ability to access extractive industry procurement contracts.
  • Options to address suppliers’ access to finance include: the direct provision of loans and finance from extractive companies; the development of policies that facilitate financing to suppliers; assisting suppliers to obtain financing from financial institutions; partnerships between financial institutions and extractives companies; and development institutions (either alone or in partnership with extractives companies) providing financing to local suppliers.
  • To determine the most suitable approach to their specific needs, extractive companies and buyers must also consider factors such as market distortion, dependency, and the duplication of institutions or services.
View footnotes

[1] International Finance Cooperation, A guide to getting started in local procurement, (Washington, DC: IFC, 2011), 37

[2] International Finance Cooperation, A guide to getting started, 53

[3] Michael Baxter and Lindsey Allwright, Opportunities to Improve Financial Inclusion in Mozambique: Building on Investments and Economic Activities Associated with the Extractives Sector, (Financial Sector Deepening Moçambique, 2015), 20

[4] Matthew Hill, “Lonmin, IFC sign agreement with Absa to improve BEE suppliers’ access to finance”. Mining Weekly, May 5th, 2008

[5] AngloAmerican. “Leveraging Local Procurement to Drive Shared Value: A presentation to the Africa Mining Network”, (Presentation, February 2015), 24

[6] International Finance Corporation, Small and Medium Enterprises: Stories of Impact - Bridging the Gap Between Small Businesses and Mining Companies to Increase Local Impact in Guinea, (2013), 1

[7] World Bank Group and Kaiser Economic Development Partners, A Practical Guide to Increasing Mining Local Procurement in West Africa, (World Bank Group, Washington, DC, 2015), 45

[8] Michael Baxter and Lindsey Allwright, Opportunities to Improve Financial Inclusion in Mozambique: Building on Investments and Economic Activities Associated with the Extractives Sector, (Financial Sector Deepening Moçambique, 2015), 20

Key Resources

Topic Briefing

To ensure adequate access to finance for local suppliers the first step is to understand their challenges and needs, and obstacles that affect their ability to access extractive industry procurement contracts. The IFC in their Guide on getting started in local procurement, found in the key resources below, highlights two key questions to address:

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  • “How well does the local banking market support SMES? What is the evidence?
  • Is there a level playing field for local and international suppliers when it comes to VAT?”[1]

Several options are available to address local suppliers’ access to finance, including:

  • Extractive companies directly providing loans and finance to local businesses. This could take a variety of forms depending on the needs of suppliers and buyers, ranging from loans to purchase the necessary equipment to meet the buyer’s requirements, to working capital loans, and small loan as part of a capacity development program. Loans could be guaranteed by contracts awarded to the supplier, or standalone loans with a financing fee.[2]For example, Anglo-American Zimele Supply Chain Fund, South Africa provides equity and loan finance of up to R5 million per project (~$500,000 CAD). Evaluation criteria and application processes for the supply chain fund can be found here.
  • Extractives companies developing policies that facilitate financing to suppliers. This includes actions that companies can take to adapt their payment structures to support suppliers (such as pre-payment where suppliers are paid before the good or service is delivered, early payment where suppliers are paid in a shorter pay cycle than the procurement department typically offers) or cash advances where suppliers can be offered a specific dollar amount or a percentage of the contract size in advance. These mechanisms all work to address the issue of suppliers not having enough cash flow to take and deliver on a contract. For example, Newmont Mining Ahafo Linkages Program in Ghana works to identify financing needs by SMEs early and to accelerate company payment processing.[3]
  • Extractive companies assisting suppliers to obtain financing from financial institutions. This can be as simple as an extractives company introducing a supplier to a financial institution or a local, regional, or national entrepreneurial finance provider, or it could involve an extractive company providing a signed contract with a supplier to a bank so that the supplier can get financing such as a loan based on the guaranteed work outlined in the contract. These guarantees can be an effective way to address local businesses’ access to finance barriers, particularly when they span over the medium to long term.
  • Partnerships between financial institutions and extractives companies. These may involve signing a MoU or developing specific financial products. Examples include Lonmin which signed a memorandum of understanding with South Africa's biggest bank, Absa, and the International Finance Corporation (IFC) to give suppliers up to R100 million (approximately $10million CAD)[4]; Anglo Brazil’s, PROMOVA supplier development program which offers options for suppliers to access finance through Banks where Anglo American has a commercial relationship such as invoice discounts or better interest rates[5]; Rio Tinto’s Guinea project partnering with Guinea Alumina Corporation (GAC), IFC and BICIGUI, the local banking affiliate of BNP Paribas, to offer over 100 local SMEs training in business plan development and access to finance.[6]
  • Development institutions either alone, or in partnership with extractives companies, providing financing to local suppliers. Examples include “3FP (a Building Markets program) and IFC that work with various stakeholders in Liberia to improve affordable access to business finance for local suppliers by providing guarantees, advocating for regulatory change around equipment leasing, and supporting development of new business finance products,”[7] and Copperbelt SME Suppliers Development Program in Zambia, which includes an industry committee working to address financing of suppliers by involving banks to co-fund local entrepreneurs and SMEs.[8]

To determine the most suitable approach to their specific needs, extractive companies and buyers must also consider the following factors:

  • Market distortion – does the selected approach have the potential to distort the existing financial markets in the short or long-term?
  • Dependency – does the selected approach create dependency of suppliers, financial markets, governments or other actors on the extractive company in any way (consider short and long-term)? What will happen when the extractive company leaves and no longer is an actor providing, facilitating, or coordinating a specific financial service? If there are certain dependency risks in the short-term, how can they be addressed in the long-term?
  • Duplicating institutions or services – does the selected approach duplicate the service offerings of any existing institutions? If yes, why was this approach selected instead of reinforcing the services of an existing institution?