This is the fourth in the series of posts detailing the trends and common threads that I’ve learnt through interviewing a wide range of businesses operating in East Africa.
The East Africa Business Podcast is the weekly podcast that I’ve been running for the last six months. Right now we’re on episode 35 with more on the way, and so if you’re interested in hearing new episodes and checking out the archive, then hit Subscribe wherever you get your podcasts.
The post this week is looking at financing.
Financing in general
One of the universal messages I heard from businesses in every country that I went through was that access to capital was expensive and difficult.
In these four episodes with entrepreneurs, I have conversations about ways in which they have sought to solve this problem in various markets and in different ways.
Whilst the idea of “finance” might sound dry compared to other businesses such digital apps, or solar energy, I’m certainly of the opinion that getting this right has the ability to unlock growth in East Africa.
For now though, let’s get going on the lessons learnt.
“Cash flow is a major business constraint”
Interviewing Ivan from Umati Capital I got an insight into the difficulties that come with running a business dependent on cash flow.
Umati Capital is a type of financing company common in developed economies, but still a recent phenomenon in East Africa: invoice financing. The essence of the business is that manufacturers (in Umati’s case food producers) receive a purchase order from a large buyer, typically supermarkets, and will have to wait up to 3 months to receive cash despite having incurred all of the costs already.
This leaves a big hole in their bank account which means they have to sit and wait for the money to arrive before continuing to grow their business.
Ivan eloquently talks through the business environment, the difficulties in doing this type of financing, and the legal considerations of making the business succeed.
You can listen to the full episode here:
“Interest rates can be 10% per month”
In Uganda I spoke with Bakka who also saw an opportunity to improve the financing options for SMEs through discounting invoices.
Patasente’s business model is premised on local consumers being able to buy an invoice of a Ugandan company for less than its value, giving the producer access to cash immediately, and the consumer a healthy return when the invoice is paid.
When we spoke about the types of return possible for the consumer I was surprised at how 5-10% per month was seen as a fairly standard price to pay for access to capital from a bank. As such, even with Patasente’s service costs, a consumer/ lender can earn returns of 3% over a calendar month.
Again we go through the difficult business lending environment as well as the considerations they take when building this type of service in a low-regulation environment.
You can listen to the full episode here:
“Without ownership people struggle to progress”
Another large section of financing in East Africa is asset financing – essentially giving somebody something and having them pay you to use it.
In Uganda, many motorbike taxi drivers were in the situation of being “given” a bike to ride around on, but that it was, and always would be, owned by the owner. With a large portion of their income going on renting the bike, people were caught in a ‘rental poverty trap’.
Michael from Tugende looked at this and saw an opportunity to improve drivers’ livelihoods. Through setting up a business whereby drivers would eventually own the bike they were driving around, Tugende has got hundreds of drivers on the first rung of their ownership ladder.
Paying back and then owning a bike has given them collateral to get further financing to improve their businesses, and raise their incomes.
You can listen to the full episode here:
“Mobile money makes financing easier”
The final lesson taken has been that, especially at the lower end of the market, mobile money has dramatically opened up access to financing capabilities.
Inuka Pap has looked at the historical co-operative lending model that exists in Kenya (and indeed across Africa) and partnered with local communities to bring the benefits of mobile money to their existing operations.
This has improved the speed, reliability and security of money that is dispensed throughout these communities.
The root of a lot of this comes from the majority of the population not having the ability to open a bank account, which we discuss towards the end of the conversation.
You can listen to the full episode here:
Conclusion
The key thing that I take away from interviews with entrepreneurs in the finance industry is just how much room there is to develop.
Looking at the fundamentals, in established economies interest rates hover around 1% per annum whereas by investing in East Africa you’d get 5 times that in a month. Connecting the needs of savers/ investors seeking a return, and businesses wanting capital in itself seems a big opportunity.
This is, of course, dependent on whether the business or individual pays back the money which they have been lent.
This brings in the important aspect to financing in this part of the world being the ability to evaluate how creditworthy a borrower may be without the typical frameworks of risk evaluation, and further, connecting them to people with requisite cash to invest.
The credit evaluation part is tricky as formal records that financing organisations in developed economies rely on such as referencing credit bureaus or past financial statements aren’t available. There’s also limited capital spare capital, and so it can be difficult to persuade those people to put it to use in this way.
Nevertheless, there is an abundance of literature which points to SME financing being the driver of growth developing economies (see here and here for starters).
There is a whole separate story in what role the traditional banking sector will play, or whether young companies mentioned here will take the lead, however we will leave that discussion for another time.
Thanks for reading