Loan guarantee funds to the rescue of small firms

In 2015, Soko, a Nairobi-based supply chain company connecting artisans from developing countries directly to brands, retailers, and online customers around the world, received a financial boost after getting a Sh71 million ($700,000) loan.

The cash injection saw the enterprise expand its artisan network to 2,100 suppliers across East Africa.

The loan, provided by the Grassroots Business Fund (GBF), enabled Soko to increase its annual revenue to Sh203 million ($2 million).

Soko, which was founded in 2011, by Catherine Mahugu, Ella Peinovich and Gwendolyn Floyd, had, until then, suffered repeated refusals in seeking loans because of its lack of ‘attractive’ security.

But with the support of the African Guarantee Fund (AGF), Soko managed to get the loan, adding on to Sh71 million ($700,000) obtained from Dubai-based angel investor, Rio Technology Partners, in 2014.

Like all loan guarantee funds (LGFs), AGF, which backed Soko’s GBF loan, runs a scheme to mitigate perceived risks, replacing or reducing the need for other forms of guarantees, and making it possible for SMEs to access loans they would previously have been locked out of.

Credit guarantees provided by LGFs usually cover between 50 and 70 per cent of the value of loans.

The need for such guarantees at a time when SMEs are considered too risky for lending by many banks has seen the LGF sector move into rapid growth, with AGF itself recently announcing an increased funding deal for small and medium-sized enterprises (SMEs) worth Sh7.5 billion ($74 million).

The expanded AGF re-guarantee fund will be offered jointly with GuarantCo, adding to the funding of the continent’s rising businesses. This is over and above the financial guarantees worth Sh70 billion ($690million) that AGF, which now operates in 35 out of Africa’s 54 countries, has issued to date.

This support has allowed 84 partner financial institutions (PFIs) across the continent to issue loans estimated at Sh74 billion ($729 million) to some 7,600 African SMEs, and to increase their loan periods for SMEs from an average of 12 months to 36 months.

Of these supported SMEs, about 30 per cent are owned by women, while 70 per cent are owned or managed by youth.

The credit guaranteed loans have contributed to the creation of 30,000 jobs and the sustenance of 35,000 others, while maintaining the employment of more than twice that number.

Of the guarantees issued by AGF so far, Sh8.1 billion ($80 million) has been awarded to six Kenyan financiers, including the Jamii Bora Bank, Commercial Bank of Africa and the Gulf African Bank.

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SMEs can apply for loans backed by the fund provided they adhere to local and international environmental, social, and health as well as safety standards in their operations.

Currently, just 30 per cent of Africa’s SMEs have a line of medium to long-term credit from a financial institution, with a recent study by the World Bank estimating the funding gap in Africa at Sh14.2 trillion ($140 billion).

The expansion of AGF’s guarantee feed has been unveiled as experts in Sub-Saharan Africa (SSA) assert the importance of financing the development and growth of SMEs in the region so that they are able to adopt efficient production techniques.

“The SME sector within SSA has been referred to as the ‘Missing Middle’ in the context of financial inclusion or access to financial (including banking) services. SMEs are by their nature unable to provide the required collateral that large firms have in obtaining formal banking sector loans and at the same time are too large to benefit from micro-finance loans and forms of financial support,” reported a study titled Financing the growth of SMEs in Africa, published by Science Direct.

Yet SMEs represent 90 per cent of privately-owned African firms and contribute 33 per cent of the continent’s gross domestic product, as well as 70 per cent of its employment.

To push the growth of businesses in this category, AGF targets businesses with valid operating licences and gives funding guarantees for start-ups, scale-ups, modernisation, productivity improvement, production capacity improvement, transfer of ownership, and restructuring.

- African Laughter