Comments included a proposal for how financing of small businesses in Rwanda and Africa can be improved from Fadzayi Musanhu, director of Market Intelligence Africa (MIA) in London.
Poole’s book argues that, in contrast to the promise of a thriving small business sector funded by microcredits, Rwanda’s economy remains dominated by informal traders struggling to make ends meet. There is no basis for the idea that most Rwandans, or people in any other poor country, are disposed to become entrepreneurs, he argues.
The dangers of pushing expensive loans at people who are unlikely to succeed in small business and may in fact use the credit simply to meet day-to-day household needs, can be reduced by blended finance, says Musanhu, who works with small and medium-sized enterprises (SMEs) in Rwanda.
Would you like it blended?
Blended finance seeks to reduce the risk of potential investments through grants, loan guarantees and interest-rate subsidies. These are provided by development funders such as the World Bank’s International Finance Corporation.
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This concessional financing can be combined with technical advice and assistance to SMEs before they seek private-sector loans.
Technical backing includes help with creating corporate governance structures, sales and marketing support, and advice on accessing foreign markets.
Kenya, Uganda and Tanzania have been the largest recipients of blended finance in Africa, according to a paper from MIA in January.
Rwanda “ticks all the boxes” as an African investment destination due to political stability and a business-friendly environment, Musanhu says.
- But, she argues, the country’s SME sector has yet to mature. “Rwandan small businesses need patient capital and technical assistance.”
- Microcredit lenders should work with concessional finance lenders to provide that support, she says.
The fact is that too many people in poor countries are pushed towards entrepreneurship is a result of unemployment, says Musanhu, who comes from Zimbabwe. Blended finance can help small businesses achieve scale and so increase opportunities for employment, she says. “If there is a genuine entrepreneur, they will tick the boxes.”
For those SMEs that fail, Musanhu says, they would pay annual interest rates of about 5% to 10%, compared with the much higher rates often charged by private-sector microcredit lenders.
For many investments, ticket sizes in Rwanda are generally small relative to other African markets, Musanhu notes. Yet expensive due diligence processes are still needed, so investors can be tempted to look instead for larger investments in bigger national markets.
That approach, she argues, risks overlooking Rwanda’s potential as a gateway to larger East African markets.
- Rwandan businesses need more equity finance as opposed to debt, Musanshu says. She cites Blue Orchard, part of the Schroders Group – which has made blended-finance investments in countries including Kenya – as an example which can be followed.
- The aim is that the amount of concessional finance given to a business will be reduced over time to increase the level of private-sector funding.
- Musanhu says that it is too early to tell if this transition will work as planned.
- “Businesses cannot rely on concessional financing indefinitely,” she says. “If a business can’t walk on its own after five years, maybe it’s not really doable.”
The jury is still out on whether Rwandan SMEs can make the transition from concessional to private-sector financing.
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