Ask any up-and-coming export company in West Africa what its greatest challenge is and it will probably say financing – and, in particular, long-term financing to acquire plant and equipment to grow. Development agencies have in the past often taken the availability of financing for granted. They saw the impressive number of banks in country or represented from abroad and assumed that this presence translated into availability of finance. However, a CARE Report from 2011, among others, points out that only about 20% of SMEs in Africa have ever obtained financing from any financial institution.
Moreover, of the remaining 80% who say that they have not obtained financing from an “FI”, only about one-quarter had even applied for financing. This extremely low penetration is due to many factors like: SMEs’ “discomfort” with the formal banking culture, concerns that they do not have collateral which the banks require, perception of high interest rates and the weakness of their own financing structures (including financial statements).
When approaching their mandate to promote SME growth and export activities, donor agencies need to keep in mind that access to finance (A2F) is the driver of export related and, for that matter, all business activities. It deserves to be treated as a “frontline” activity – and not a side activity. Fortunately, the reality that financing drives SME growth and recognition by some banks that SMEs represent good long-term lending opportunities have translated into new financing alternatives across West Africa. An SME banker from a leading pan-African bank recently noted that 60% of his SME portfolio had graduated to the bank’s corporate bank, which serves larger, “mainstream” companies!
But what is meant by “frontline” activity? Simply put, this means that the donor agency pro-actively seeks and arranges financing for its client company. Educating companies and banks about the needs and benefits of SME financing is all well-and-good – but it’s not enough. The task must go from the theoretical to the practical. Agencies need to take the SME companies and FIs by the hand (or by the neck!) and help both prepare for, structure and implement loans.
Timing for such a pro-active approach in West Africa is opportune, as the USAID Trade Hub has recently discovered. Today, the market place has seen the rise of pan-African banks (like EcoBank, United Bank of Africa, Morocco-based Attijariwafa), social impact investors (like, Root Capital, Acumen Fund, Injaro), savings and loan associations (like Opportunity International in Ghana), leasing companies and bilateral and multilateral development finance institutions with SME devoted units (like, African Development Bank, the Netherland’s FMO, etc.). West African countries themselves have also developed and strengthened specialized institutions for channeling “venture capital”, soft loans and technical know-how to SMEs.
The challenge of A2F, therefore, has become not the “availability” of financing but the selection and structuring of the most appropriate forms of financing from a broad array of financing institutions. This financial matchmaking is no easy matter!
One approach is for the SME to “hire” a financing facilitator (also referred to as a “business development services provider). This is an approach that the USAID Trade Hub has vanguarded, on a pilot basis, for some of its clients in West Africa. Under its Performance Based Contract financing scheme, the USAID Trade Hub hired from a group of applicants, three – and this is key – experience financing professions with deep knowledge of their regions’ financial markets. The Trade Hub, with USAID support, has initially defrayed most of the cost of the financial facilitators on a success-fee basis. The intention is that once SME businessmen and businesswomen see the value of the financial facilitators, they will be willing increasingly to pay their fees outright. Initial success will “snowball” into the creation of a Financial Business Development Services “industry” which will serve the interest of companies that seek good lenders and financial institutions that seek good clients. In fact, the beginnings of such an industry now exist, for example, in Macedonia, where CARANA Corp’s (the implementer of the Trade Hub) Macedonia Competitiveness Project has lead to the training and certification of fifteen “Financial Management Consultants”, serving local SMEs. Closer to home, the USAID Trade Hub’s PBC approach has resulted in accessing $20 million in loans and financing services over the past two-and-a-half years.
The challenge and hard work of creating financial facilitation in West Africa have just begun. Its growth has been greatest in the more open and dynamic markets, with Ghana as a good example. However, social impact investors, other financial institutions and export promoting agencies like the Trade Hub are eager to expand their reach in the region. For the SME itself, the best way to start the process of enlisting financial facilitation is to clearly define what its financing need is (for example, a new processing line, storage facilities, raw material) and to assemble even a rudimentary list of what it owns and owes (loans). With this in hand, it may contact the Trade Hub, financial facilitators which may exist in their countries, or financial institutions directly (like the social impact investors) to begin the dialogue on the path to matching borrowing and investing opportunities. The path can be long and arduous, but once the first loan is contracted and repaid, it will with luck turn into a financial highway.