A new plan to finance Africa’s SMEs

The African Guarantee Fund (AGF), officially launched in June this year, is a scheme designed to ease access to finance for Africa’s small and medium enterprises (SMEs). How we made it in Africa’s Dinfin Mulupi spoke to Passwell Shapi, capacity development director at the AGF, about what the fund seeks to achieve. Below are excerpts.

Passwell Shapi

What is the AGF and what does it seek to achieve?

The AGF was founded to, among other things, address unemployment among the youth in Africa, which I can describe as a time bomb. The SME sector … has been identified as having a great potential to address this problem.

The sector, however, faces a myriad of challenges, key among them is lack of, or inadequate, access to finance from the formal financial sector. Most entrepreneurs struggle to raise finance for their businesses and use alternative fund raising avenues like borrowing from shylocks. This obviously stifles businesses because if you are borrowing at 10% a month – unless you are dealing in drugs or other illicit activities – such a business will not survive.

SMEs face challenges in accessing finance because they largely lack the collateral which banks ask for. It is for this reason that the African Development Bank (AfDB), the Danish Government (through Danida) and the Spanish Government (through AECID) came together to create AGF with a mission of providing, among other services, financial guarantees to banks on behalf of bankable SMEs. AGF’s guarantee facilities as well as SME banking capacity development assistance will enable banks to significantly scale up their SME lending activities.

Is cash all it takes to build SMEs in Africa?

No. It takes more than just financing to build a sustainable and vibrant SME sector in Africa. In this regard, AGF through its capacity development assistance programme, will be rendering assistance to SMEs to, among other things, strengthen their governance, general managerial, financial managerial and marketing capabilities.

Are African banks truly geared towards funding SMEs?

Indeed they are. It used to be lucrative once upon a time for banks to target transnational firms, but over time you and I will agree that the transnational firms have scaled down their operations in Africa and a number of them are no longer involved in any manufacturing activities at all. The few transnationals remaining in Africa as well as the large local corporates are not only very price sensitive, but also lack loyalty to banking relationships. This type of business for banks today is a non-growth segment and banks aggressively pursuing this sector, risk using their shareholders’ funds to subsidise the true cost of such relationships.

Many banks have today realised that the only way to remain viable and sustainable is by diversifying to SME banking. Admittedly, SME banking has its own challenges such as information asymmetry and lack of, or inadequate, collateral. That’s why institutions such as the AGF come in handy with financial guarantees and capacity development assistance through which banks could devise alternative and suitable credit appraisal techniques for SMEs.

What kind of impact will the AGF have on Africa’s SME sector?

Our partnership with banks will help scale up lending activities to SMEs. As the SMEs benefit and grow, they will create job opportunities and foster economic growth in their countries. This will also solve the problem of youth unemployment in Africa. Whereas foreign investment is increasing in Africa by virtue of the continent having become the next economic frontier, the types of investments we are seeing are of the labour saving technology type and thus with very minimal ability to create jobs. That is why we should encourage our SMEs to benefit from opportunities associated with Africa being the next frontier, through banks leveraging AGF’s facilities in scaling up their operations in the SME space.

Where do you see the fund in five years?

The fund will be acknowledged as a positive change facilitator in enabling the so-called “missing middle” in Africa to have significant access to finance from the formal financial sector. Its impact will be felt across the continent.