1. Background

Numerous studies (including the recent State of the SMME Survey published in March 2009) done on the constraints to private sector development in Lesotho have highlighted access to finance as the major inhibiting factor. The studies have gone to show that this problem persist despite the Commercial Bank’s high liquidity. In response to this phenomenon the LNDC developed a broad framework called the Enterprise Development Facility (EDF). The framework embodied the following interventions: the Credit Guarantee Scheme, Equity Participation, Wholesale Financing and Technical Support for private sector. Originally the EDF was designed to be supported by GoL funding. Funds however have not been forthcoming in this regard. From the said interventions the LNDC management made a decision to pilot the Credit Guarantee Scheme. The management took a decision to start with the Credit Guarantee scheme because it was deemed relatively easy to implement and it can reach the widest range of the private sector. If the pilot proves successful the intention is to roll it out later on a full scale.

 2. Purpose

The purpose of these policy guidelines is to set out the basic procedures for executing the LNDC pilot PCG to achieve transparent and timely award of credit guarantees to qualifying projects.

3. Scope

This policy guideline applies to identified, strategic and eligible privates sector projects. Eligible projects will be those that would have been identified by the Corporation as strategic and are in line with the objectives of the facility. Qualifying projects should further demonstrate sound corporate governance structures and practices. In particular the following sub-sectors will be targeted:

• Agro-processing

• Mining (except diamond mining) and quarrying

• Minerals beneficiation (e.g. mineral water bottling)

• Tourism (infrastructure)

• Information technology/ Consumer electronics

• Franchising

• Construction

• Manufacturing

4. Objectives

The objective of the LNDC pilot PCG is to create a sustainable support structure for the development and growth of Basotho majority owned businesses in Lesotho. To achieve this, the PCG aims to:

• Address the limited access to finance by Basotho owned businesses by making it easy for financial institution to lend to them.;

  • Promote the export business;

  • Promote labour intensive and thus employment generating projects;

  • Facilitate transfer of technology and skills;

  • Develop capacity; and

  • Diversify the economy

5. Guidelines

1. LNDC Management will develop a budget based on identified promising and strategic projects to be approved by LNDC Board;
    

2. Eligible projects will be those that would have been identified by the Corporation as strategic and are in line with the objectives of the facility as stated above;
    

3. The facility will finance both the Greenfield and Brownfield projects;
    

4. Eligible projects will have a majority shareholding of Basotho. If the majority shareholder is a Mosotho by naturalization such a person must have been a Mosotho for at least ten years;
    

5. The applicant must submit a bankable business plan directly to the bank. The bank should provide its unqualified approval to LNDC in that regard.
    

6. The Fund will provide the Bank with 50% (fifty percent) Guarantee Coverage in respect of Loans extended by the Bank to the Private Sector Enterprises, regarding short, medium and long term Loans. Qualifying project promoters must demonstrate the ability to provide at least 15% collateral (or as may be required by the bank). The banks shall bear the risk to the tune of 35% of the total collateral required.
    

7. Qualifying projects must demonstrate ability to reach 60% debt to equity ratio within their first two years of operation.
    

8. Eligible projects that are approved by the bank will qualify for a 50% guarantee on the final loss. The remaining 50% of the loss will be shared between the promoter and the bank.
    

9. Where appropriate, an existing entity applying for funding must submit audited financial statement for the last 3 years (or for the number of years in business if less than 3 years), if the latest statement is more than 6 months old, the most recent management accounts must also be submitted;
    

10. The loan amount to be guaranteed shall be above M200,000 (Two hundred thousand maloti) and shall not exceed M 5 000 000 (five million maloti).
     

11. Loans may be utilized for the purchase of plant and machinery and/or for operating costs / working capital, as well as the purchase of equity stakes in other companies;
     

12. Guarantee fees ranging between 1% to 3% would be charged annually payable in advance on outstanding balance, thus a debit order in favor of LNDC for annual guarantee fee payments must be presented;

6. Review

The policy guidelines will be reviewed every two years or when there is a need.

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