“The cultural angle is key” Felix Adahi Bikpo, CEO African Guarantee Fund
Rosemary Moyo, a smallholder outside the Zimbabwean town of Masvingo, knows that for just $300 she could kickstart her farm. “I have it all planned out. I already have the customers,” she says. She would like to build up her chicken breeding, buy two goats for milk, make some upgrades on the barn and purchase some feed. “But the banks are not interested,” she says.
There is a certain amount of wariness among bankers about funding small and medium-sized enterprises (SMEs). This is because SME lending is inherently risky. Globally, most new companies go out of business within three years. And smaller companies are more fragile than their larger counterparts and are quick to take on water in the heavy buffeting of African markets, with the lack of electricity, poor roads and chronic lack of finance.
But Felix Bikpo, the head of the African Guarantee Fund (AGF), does not see another way to go. “We are not reinventing the wheel here. Look at every other region in the world – they started with SMEs. In Africa, 90% of our private sector is SMEs.” Access to finance is a key component in helping build these companies into the job-creating industrial fabric the continent so desperately needs.
There is also a certain amount of wariness surrounding guarantee funds, whose job it is to provide comfort to banks lending to small companies and thus to ‘de-risk’ those loans. In the past, guarantee schemes have not been effective because, for instance, banks accepted the extra cash but still refused to lend. And with a continental institution, it can be hard to stoop to the corporate level to check the lending is still going ahead.
Unsurprisingly, Bikpo is bullish here, too. “The monitoring is the most important. Although the AGF is big, it is structured to take care of small companies. We delegate. But frequently, we check the balance sheets of these partner banks.”
The AGF also helps partner banks – some 120 of them today – to develop skills to manage risk. “And they like that because the SME of today is the Coca-Cola of tomorrow. It’s not philanthropy, it’s a business.” To date, the AGF has guaranteed loans to more than 4,300 SMEs since it launched in 2012 with the backing of some Western aid agencies and the African Development Bank.
Nevertheless, there is still pause for thought. Quarterly reports from 4,300 SMEs would create more than 17,000 reports per year. That is some serious number crunching. “If you want to be efficient in this business, technology and people are key”, says Bikpo. “We have two departments looking at this. We have a very robust risk-management system, with people qualified to do it doing it on a daily basis. In addition, we have a quality and monitoring department, whose job is to check what the banks are doing.”
One of the challenges facing Africa’s smaller companies is what is sometimes called the ‘missing middle’ – a gap in the industrial ecosystem. In a healthy economy, large corporates normally subcontract work to intermediate-level companies. These in turn subcontract to smaller companies.
“We don’t have that in Africa,” says Bikpo, “but we are trying to help the M of SMEs, the medium-sized company, in getting new sources of finance.” The AGF is pushing stock exchanges in East Africa to engage this segment. The Dar es Salaam exchange is piloting, for example, the Enterprise Growth Market to target these sorts of companies. “That then frees up the bank portfolios and allows us to focus on the S’s and work on their skills,” says Bikpo.
Bikpo argues that it is the ability to share skills with SMEs that helps the AGF stand apart from other guarantee funds. “It’s a management issue. So we say to our partner banks: ‘Instead of lending a small company 100, lend them 150. That extra 50 will be for improving management, and we will share that cost. A good chief executive officer, good chief financial officer (CFO), a good system, that will transform a company.”
And the AGF is doing this in innovative ways. For example, in Nigeria the AGF has a trial to offer services to help SMEs become bigger companies. The idea is to have a CFO work for dozens of SMEs, not just one – like a group of farmers who shares a tractor. Bikpo explains: “We have a portfolio of about 30 SMEs, and we are the ones doing all the finance part: talking to the bank, doing the business plan, doing the report – all of that – so that banks have someone to talk with in their language.”
And the early results are good. The SMEs have benefited and started to get access to financing. After a while, says Bikpo, they start to ask to get the AGF-supplied CFO full time, “and we say no, no, we have someone you can hire. Out of the 30, over half hired their own. They saw the value, whereas before they thought they could just hire their brother with no skills to do the job because it would be less expensive.”
For Bikpo, this is the cultural part of SME lending that his organisation excels at. “A lot of these people are illiterate. Many good businessmen have not been to school. They hit a wall. They can make money, but not effectively. They have constraints,” he says. “So to get to that other level, they need people with particular skills – could be a CFO, but it could also be a marketing guy. This businessman can sell his product every day but doesn’t know anything about buying a nice bottle, attractive packaging. ‘Forget about it, it’s too expensive,’ he will say.”
… AND EQUITY
Bikpo points to another place where cultural quirks can blind the eyes of normal bankers. In Niger, there are informal traders and companies who may appear illiterate and unstructured but are nevertheless “handling billions in CFA francs. But they can’t get bank finance. We decided to go to this segment and pulled many of them out of the informal sector.”
Another of these cultural issues concerns banding together to pool equity in projects. Bikpo recalls in his days as a banker being brought hundreds of dossiers of SMEs but not financing more than a handful because they were not well structured. “They would come with 1% equity and ask me to come up with the remaining 99%. When we have an idea, we don’t want to share it. We don’t want to pool resources. That comes from the fact that most businesses here are family businesses.”
Bikpo concludes: “The SME businesses in the Netherlands are not the same as in Niger. That’s why the cultural angle is key. That is why we are having success today. And as we are bankers, we understand the constraints of our partner banks […] so we discuss solutions with them, not ideas.”
From the September 2017 print edition