The Engine Room

Published:  31 March, 2010

While small enterprises are the lifeblood of African economies, they often struggle for financing. but are things changing?

When Jacqui Sebageni launched Thousand Hills in 2005, the tour company consisted of two people operating out of a small room in the famous Hôtel des Mille Collines in Rwanda’s capital, Kigali. Today, the business, which organises package trips around the country, has 16 employees and its own premises on nearby Rue de l’Akanyaru. “I remember a banker coming to see us, and he caught us sitting two at a desk,” Ms Sebageni laughs.

At that time, she says, the banks in the country were very conservative. Although the sector has matured to begin offering leasing products – Thousand Hills leases its tour vehicles – small- and medium-sized enterprises in Rwanda still struggle to obtain financing. This is far from an old story – institutional weakness in Africa’s banking sector has been a brake on SME growth for many years – but international credit shortages over the past two years have bled into Africa, leaving financial institutions themselves struggling for funding.

However, reforms to the business environment in several countries, particularly Rwanda, and a degree of coalescence by international development financiers and investors around an understanding of the social and economic importance of SME development mean that increasing amounts of time and money are being spent on understanding and addressing the needs of this complex market segment. Together these businesses are more often than not the principal employer in any given country. They compose anywhere from 60 to 80 percent of most African economies, with the variance generally more a matter of definition than of structure. Furthermore, owner-entrepreneurs drive the creation of a middle class, a crucial factor in countries’ movement out of poverty and in their development as markets for international investment.

Earlier iterations of this SME agenda, principally coming from the donor community, explained the issue as a “missing middle” of financing – a gap felt by institutions too large for microfinance and too small for private equity. This is perhaps simplistic. Likewise, to characterise, as some have, the banking sector as disinterested in SMEs is disingenuous. Many have struggled with the appropriate model for capturing the segment’s business, but it is not for wont of trying.

Sanjeev Anand, the managing director of Banque Commercial du Rwanda, explains: “SME has traditionally been the area where the non performing loans and credit write off problems have been. It’s an unsophisticated sector, they don’t produce proper financials. They lack expertise to execute their projects, they lack business acumen. It is a difficult sector to operate in.”

Even so, as Mr Anand says, it is the biggest section of the economy. Outside of a few large corporate entities – mainly local subsidiaries of international businesses – the entire lending market is SME. However, the bank has experienced problems in understanding the risk in the sector. “BCR has underpriced it historically by about 1.5 percent,” he explains. “So on a risk-adjusted basis we were losing about 1.5 percent on our portfolio. Maybe in theory we were making money, but in reality, if you are taking credit losses on a risk-weighted basis, it’s lost.”

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