Innovating SME financial solutions for Sub-Saharan Africa
It was common practise for elders in African communities to hold council meetings whenever there were issues of importance to resolve. In Southern Africa, the Zulu and Xhosa people would call such a meeting an Indaba while the East African people would use the Swahili equivalent Baraza. Both terminologies are used today for forums that bring together various stakeholders with the aim of solving a common problem.
It is in the spirit of collaboration that the Capital Markets Authority of Kenya and FSD Africa recently held an Indaba on peer-to-peer (P2P) finance in East Africa. The meeting drew various stakeholders in the sector with representatives from the demand and supply side, development partners as well as regulators from the region. Having worked over the past three years to help Kenyan banks better serve their SME customers, the meeting was of particular interest as peer-to-peer lending offered a viable alternative to bank financing, which a very limited number of small business have access to.
There has, undoubtedly, been a lot of progress across all types of peer-to-peer finance in Kenya. M-Changa is a donation-based P2P platform that leverages on mobile technology to help Kenyans fundraise for a particular cause. Rewards-based platforms raise funds in exchange for current or future goods and services and are popularly used to fund the up-scaling of projects that are at their prototyping stage. Debt-based platforms such as PesaZetu are return-driven; the funders expect to receive interest as well as their initial investment back. Lelapa Fund, a French, equity-based P2P platform, enables Kenyan businesses to source Equity from international investors.
Of all these, the debt-based and equity-based P2P models seem to hold the most potential for unlocking capital for Africa’s growing small enterprises. The challenges identified at the P2P indaba were strikingly similar to those faced by banks in financing small businesses in East Africa. The most significant challenge was investors’ relative inability to effectively quantify the risks associated with lending to small businesses, mostly because of lack of financial data on the businesses.
Therefore, a typical equity P2P fund shortlists 300 to 400 businesses in order to obtain 3 to 5 that are deemed “investment ready”. To help overcome this, the funders have been involved in upskilling businesses to levels they consider fit for investing. This approach has, however, proved both rigorous and expensive for both the lender/investor and the borrower.
There are opportunities for both P2P and bank financing to provide financial solutions to growing smaller enterprises Sub-Saharan Africa. But this needs to be backed by innovating new ways for identifying good investment/lending prospects in an environment characterised by high rates of informality, data scarcity and lack of transparency.
It is imperative to listen to the voice of small businesses if we are to innovate financial solutions that truly speak to their needs without burdening them. This is by no means a small feat, but rather one that requires a collaborative approach; the sort that demands for a Baraza on small business finance in Kenya.