Kenya-based financial institution Umati Capital wants to replicate its agri-focused lending model across the continent. Founded three years ago, it provides working capital to traders, processors, farmers and cooperatives in the agribusiness value chain.
Ivan Mbowa, co-founder and CEO of Umati, sees several trends in Kenya also manifesting in other African countries: formalisation of produce trading, such as through supermarkets; increased volumes of agricultural commodities exported outside the continent; and growth in intra-African trade. These, coupled with the size of Africa’s agriculture sector and the literally hundreds of millions of people that rely on it – presents an untapped market for Umati.
“One of Africa’s strengths will always be the fact that we have… food and non-food based commodities. By just focusing on the agribusiness supply chain we could become one of the largest non-traditional financiers of small businesses in Africa,” says Mbowa.
“I don’t think we will run out of opportunity here. The issue is whether we address the opportunity faster – and still stay relevant – as banks wake up.”
Lending without collateral
Using mobile and web-based applications, Umati collects and analyses data to determine credit-worthiness. Enterprises apply to borrow against their invoices – up to 80% of the outstanding invoice. Some buyers (such as processers or supermarkets) also form partnerships with Umati so their suppliers can receive loans with the agreement that the buyer will pay in 120 days. The financing is done without the requirement of physical collateral.
“In Kenya we have seen some banks enter partnerships with supermarkets to finance suppliers. But if you are selling to a trader in France who does not have a relationship with any local financier – then you face financing challenges unless they have collateral. We are able to analyse the risk, then take a position, without taking physical collateral.”
Umati provides financing facilities ranging from Ksh.1m (about USD$10,000) to Ksh.50m (about $500,000). It charges an interest of between 1.6% to 2.5% per 30 days.
“The majority of our customers are SMEs. We have customers who do shipments of about €3,000 (about $3,400) a week. They are not big, they probably rent a warehouse at the airport, and have just about five staff members,” says Mbowa. “The dire situation is when one is unable to secure their supply chain. It’s a matter of if you can’t pay your producers today, will they still supply you tomorrow? There are some well-known large supermarkets who take even 100 days to pay, yet your producers (such as farmers) expect to be paid in 14 to 30 days.”
However, payment defaults remain a risk for Umati.
“Commercial disputes is the single biggest risk that we face. A buyer could have accepted order 50 then have issues with order 51 and 52, and decide they will not make payments for all three orders until the dispute is resolved,” Mbowa explains.
“Fraud is also an issue. A trader in Kenya could ship goods abroad and the buyer there simply doesn’t pay. There is also the risk of a trader colluding with the employees of the buyer to create a ‘fresh air’ invoice (fraudulent), so you pay 80% of a fictitious amount which they split and they disappear.
“So the risks really lie around the human element and documentation, but we try to manage our risks.”
Mbowa, who previously worked at Citigroup co-founded the business with Munyutu Waigi, a tech entrepreneur who was one of the founders of Kenyan e-commerce site Rupu. Initially, the two used capital raised from Mbowa’s savings, and money Waigi made from disposing his shares in the e-commerce business.
Umati has since attracted funding from foreign investors as well as some local backers.
“The risk appetite of institutional investors for early stage financial services businesses is still very low. There are also misconceptions about the true risks in agriculture, which affects the appetite of investors. If I was to say I am [running] a real estate fund, I would have investors lined up out the door. But when you talk about financial services going into agribusiness value chains – you find that the risk appetite is somewhat limited largely due to misconceptions.”
Interestingly, local individual investors Umati has attracted are not the super-rich.
“We also made the misconception early on that we needed to get these big investors. The individuals who have supported us are mostly upper-middle class, looking for better returns than what the banks offer. Some of our earliest investors took real risk – one investor parked a quarter of their savings in this investment. This is significant for them, it’s not that they have money to throw around.”
But Mbowa says it’s becoming easier to attract investors and customers than it was two to three years ago.
“No matter how good a product you have, still in Africa it is your reputation that counts.
“It is significantly easier for us to find suppliers today than it was just nine months ago. There is this dividend that you reap depending on how long you have been in the market.”
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