SME Financing in Africa – Not for the Faint-Hearted!
I’m a dairy farmer in Africa, and I need $5,000 to buy some cows – no problem! There are scores of micro-finance institutions ready to assist and lend me the money.
I’m a large corporation in Africa, and I need $10 million to build a new fruit juice factory – no problem! Commercial banks, multilateral agencies and international development banks will be jostling each other to structure long-term loans for my project.
But I’m a small or medium-sized enterprise (SME), probably family-owned, and I need $100,000 to $500,000 to buy equipment to process locally-grown cereals and oilseeds for food and feed. No way! Go away! There is no place for me on Africa’s planet finance.
And if I’m a start-up company, don’t even ask. I’m a pariah. I should not have dared to start a company!
This is a caricature – only too true I’m afraid – of the state of project financing in Africa today.
While the grey suits meet in 5 star hotels and make noble pronouncements over cocktails by the poolside about helping and building the agri-processing industry, the reality of small-scale food and feed processors is quite different.
In Kenya, interest rates are in the 24-28% range, and commercial banks require collateral between 110-150%. No, that’s not a typo. It means if I want to borrow $100,000, I need to deposit up to $150,000 in account at the lending bank, or property titles or other securities worth that amount.
In Ethiopia, from where I am writing today, the situation is better. The Agricultural Development Bank will finance on a 70:30 ratio, meaning the investor needs to put up 30% and ADB will loan 70%, at around 8% interest. The equipment purchased becomes the collateral. This can be good news for existing companies with a sound track record, but may not work for start-ups.
The commercial banks in Ethiopia need to support the agri-processing industry. After all, Ethiopia’s wealth is its people, its fertile land and ample water supply. Ethiopia should be on its way to becoming one of Africa’s bread baskets. But a recent survey, Banking Sector Review 2011, by Access Capital, an investment company, shows that loans to agriculture constitute on average 1.4% of the total loan book, and loans to the manufacturing sector average only 12% of the total.
There’s clearly a need for some fresh thinking on access to financing. Everyone knows we need to produce more food, but there’s a bottleneck emerging if we use better seed, fertilizers, and boost crop yields, but lack the agro-industries to process these crops into nutritious food and feed. Post-harvest losses, already estimated to be around 30%, will increase – more wasted food.
Let me know your ideas for solutions…please!