Loita Capital Partners International Ltd

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• Loita Capital Partners International Ltd
• Challenges of SME Financing
• October 2004

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Definition

• In its analysis of the SME sector, the World Bank
  Group presents the following classification-
• Micro-enterprise - up to 10 employees and total
  assets and turnover of 100K
• Small enterprise - up to 50 employees and total
  assets and turnover of 3M
• Medium Enterprise - up to 300 employees and
  total assets and turnover base of 15M
• Widespread debate about SME definition, as
  emerging economies vary significantly (size,
  resources and levels of development)
• A small business in Turkey might be a big
  business in Bosnia and a small business markets
  in South Africa might be a big business in Rwanda
  or Burundi.
• Realistically SME cap in many Sub-Saharan
  countries is a turnover and asset base of about
  1.5M with most SMEs falling in the turnover and
  asset base range of 75K - 500K.

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Importance of SMEs

• In the majority if not all of emerging economies,
  the SME sector is either the private sector or
  forms a large component of the private sector
• Harold Rosen, Director of WBG SME department and
  former IFCs Director

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Importance of SMEs

• It is an engine of growth through production of
  goods and services. A few examples of business
  lines that SMEs are involved in are
• Fish processing
• Light machinery manufacturing
• Steel doors/windows/gates production
• Micro financing i.e financing health membership
  and insurance subscriptions,
• Household goods (TVs, fridges, sofas, housing
  construction etc)
• Panel beater and motor repair shops
• It creates jobs for our youth who attain
  employment age but miss mainstream jobs. It also
  accommodates retrenched workers.
• It provides technical skills in diverse areas to
  a large portion of the employed workforce.
• It generates income and creates assets

SME sector promotes economic welfare, which is
the principle goal of our governments.
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Financing Requirements

• Is the SME sector self sufficient and has the
  support it continues to receive bearing desired
  results?
• Donor community has over the years pumped million
  of dollars to the SME sector
• Results have been mixed but with more failures
  than successes.
• So where are we going wrong?

However
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Financing Requirements

• Irrespective of whether a business entity is
  large or small, there are some fundamental
  principles that are key to business success-
• Business model Is the firm in an industry or
  environment that is profitable and growing? Can
  it sell its goods and services and generate more
  revenues than what is required to cater for its
  recurrent expenditure and other obligations?
• Financial Management Does the firm have
  financial management expertise?
• Consistency Is the firm consistent in delivery
  quality products and or services?
• Succession Is the firm a one man or family
  shop?. Can it survive if the principal owner is
  indisposed or expires.
• Capital (debt or equity) availability Non
  availability is a major constraint to business.

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Financing Requirements

• Business model
• Let us identify the growth industries in our
  countries and position SMEs to service the ones
  with good potential.
• For example, in West Africa petroleum is
  increasingly being discovered in large
  quantities. SMEs in some countries are being used
  to provide various products and services
  including household goods, construction, housing,
  transportation to petroleum firms and health, and
  financial services to the firms low income
  employees.
• Many of the African countries currently have the
  opportunity to manufacture textiles for the US
  market under the AGOA act. As large enterprises
  move in to set up large enterprises in this
  sector, the SMEs can take the same advantage and
  position themselves to provide services to these
  firms and their employees.
• Other opportunities are presented by FDIs
  involving large companies that are pursuing green
  fields in markets that are not opening up. In
  Tanzania for example the investments of South
  Africa Breweries, Coke and large mining
  corporations in the mid 1990s presented a
  lucrative opportunity for the SMEs.

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Financing Requirements

• Financial Management
• Most companies are now outsourcing their
  financial management services.
• This is an area that poses a significant growth
  obstacle for SMEs and even relatively large
  corporations.
• SMEs should be organized into groups to allow for
  easy and inexpensive management of their accounts
  by reputable audit firms.

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Financing Requirements

• Approach to Financing
• The approach of financing SMEs through grants,
  which are not repayable must be stopped as this
  hinders the objective of commercializing the
  activities of SMEs and undermines their ability
  to achieve self sufficiency.
• SMEs should be encouraged to form cooperative
  societies, investments clubs and merry go round
  schemes that would give the SMEs the critical
  mass to mobilize Training and financial resources
  (seed capital and debt) from members, banks and
  DFI.

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Financing Requirements

• Approach to Financing
• Governments with the help of donors should create
  an enabling environment for growth of
  micro-finance institutions focused on financing
  the SME sector.
• In Kenya, the creation of K-Rep Bank in 1999 has
  contributed to the growth of the SME sector by
  providing the sector with customized credit and
  savings products.
• K-Reps small loans to poor areas in Nairobi has
  assisted shop owners, traders, artisans etc to
  increase sales, generate income for their
  families medical, housing and education needs.
• Other micro-finance institutions in East Africa
  include AARC, which provides health member
  subscription and insurance premium financing to
  employees and MicroKenya which provides several
  types of consumer loans to low income employees
  against payroll deduction structures.

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Conclusion

• No short cut or ways to circumvent the
  fundamental business principles. DFIs,
  consultants and governments have to learn this
  lesson.
• For financial institutions to develop an appetite
  for SME risk, the sector must address pertinent
  credit analysis questions that include the
  following
• Is the business model viable i.e. the SME needs
  to be in a profitable and growing industry.
• Is there sound management and is management
  focused on core business and has a plan for the
  long-term growth of the firm. Is capacity being
  created to achieve this (succession plan)
• Is financial management expertise available
• If credit is availed the SME, does it have a
  detailed and viable plan of deploying the availed
  financial resources to generate acceptable
  returns to service the obligation.
• If the answer is YES then we are surely making
  progress in growing the largest in our economies
  and that is development.
• If the answer is NO then we better start acting
  now to correct the situation.

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Thank You