East African Rural Enterprise Facility: to reach underserved agricultural SMEs

Competition Finalist

This entry has been selected as a finalist in the
The G-20 SME Finance Challenge competition.

The East African Rural Enterprise Facility (EAREF) provides asset financing to agricultural SMEs that have been underserved by existing financial service providers. These rural SMEs are not large enough or do not have sufficient collateral to access asset financing from traditional banks, and are prevented from obtaining equipment to increase productivity, expand operations, or generate revenue.

About You

Organization: Grassroots Business Fund (GBF) Visit websitemore ↓↑ hide↑ hide

About You

First Name

Harold

Last Name

Rosen

Your Organization

Grassroots Business Fund (GBF)

Country

United States, DC, Washington

About Your Organization

Organization Name

Grassroots Business Fund (GBF)

Organization Website

Organization Phone

202-518-6865

Organization Address

1601 Connecticut Ave NW, Suit 501

Organization Country

United States, DC, Washington

Organization Type

Non-profit/NGO/Citizen-sector Organization

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Your solution

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Name Your solution

East African Rural Enterprise Facility: to reach underserved agricultural SMEs

Describe Your Solution

The East African Rural Enterprise Facility (EAREF) provides asset financing to agricultural SMEs that have been underserved by existing financial service providers. These rural SMEs are not large enough or do not have sufficient collateral to access asset financing from traditional banks, and are prevented from obtaining equipment to increase productivity, expand operations, or generate revenue.

Country your work focuses on

Kenya, XX

If multiple countries, please list them here. If your solution targets an entire region, please select it below

First stage focus on Kenya, with expansion opportunities throughout East Africa

Region(s) your solution focuses on:

Africa.

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

500,000

Number of employees in your target firms

50-74.

Average number of employees of your target firm

65

Specify the size, average and range of expected loans or investments in each target firm

Target loan size per SME is $2,000 - $200,000

What stage is your solution in?

Operating for 1‐5 years

Innovation

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What makes your innovative solution unique?

The East African Rural Enterprise Facility (EAREF) is currently leveraging two of GBF’s partners in East Africa to act as hosting intermediaries of the facility. The goal is to expand EAREF to reach a larger number of local partners and deploy a greater amount of innovative financing to an underserved segment of the SME space: rural enterprises unable to secure affordable equipment financing. The first current partner is Juhudi Kilimo, an asset financing institution based in Kenya that has 6 years of experience financing assets for smallholder farmers and rural enterprises such as milk chilling plants. Juhudi’s solution is innovative because it is directly targeted at financing productive assets, and has financial products that are customized to meet the needs of this underserved segment of the market,

The second partner is BrazAfric Enterprises, an agricultural equipment distributor with operations in Kenya, Tanzania, Rwanda, Uganda, and Ethiopia. GBF is currently working with BrazAfric to build an innovative vendor financing program to allow the company to extend financing with the sale of its equipment to under-served, yet creditworthy, customers. Both current partners are targeting agricultural SMEs that have been historically excluded from traditional bank financing.

The solution is innovative because it involves scaling two unique approaches to rural SME asset finance within East Africa: targeting different types of SMEs, all of which are excluded from the existing credit landscape. Juhudi’s loan sizes to rural enterprises ranges from US$5,000 to US$20,000, while BrazAfric intends to target a loan size range of US$25,000 to US$40,000 in the first stage. In East Africa, there have not yet been serious attempts to provide long-term financing for value-added equipment to the agricultural sector – equipment that increases productivity and incomes for low-income populations – due to various challenges discussed below.

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

The facility is already leveraging public and local government-funded institutions that play an important role in facilitating the deployment of this financing to rural agricultural SMEs. For example, BrazAfric is signing a Memorandum of Understanding with a government institution dedicated to the Kenyan coffee industry. This public institution will provide a partial credit guarantee to BrazAfric to catalyze the deployment of vendor financing to cooperatives that do not have the credit histories or collateral to access traditional bank financing. This public institution is also providing valuable industry knowledge, client referrals, and direct extension services to the coffee cooperative SMEs participating in the program.

The K-Rep Development Agency, Juhudi Kilimo’s sole shareholder, has experience in leveraging funds from the Youth Enterprise Development Fund, a government fund purposed with increasing economic opportunities for Kenyan youth (18-35 years). Juhudi plans to leverage this fund, when appropriate, in order to increase its ability to provide asset financing to agri-rural enterprises.

Areas in which public intervention would be highly valuable to further catalyze the deployment of private asset financing to this segment includes changes to legal and regulatory framework to provide greater transparency and clarity in local leasing laws, and other laws governing the recourse available to credit providers in cases of default. Securing this legal infrastructure would mitigate the risks of providing asset financing to this segment of the market, and encourage other private players to participate, increasing access to finance for rural SMEs. The public sector can also participate in standardizing the warranty and service agreements between different agricultural equipment providers and the rural agricultural SMEs. Agreements between equipment providers and SMEs are key to ensure that these SMEs are provided with the right type of training, servicing, and spare parts to ensure that the equipment functions properly throughout its life span and that the SMEs benefit from enhanced processing capacity. Finally, the public sector can also participate in facilitating financial literacy and financial management training to the SMEs to enhance their understanding of the credit markets, their preparedness to take on credit and expansion capital, and the different financial product offerings available. Partners like Juhudi Kilimo and BrazAfric can provide basic training and financial literacy sessions to ensure their clients understand all terms associated with the financing, however public sector can enhance and complement these efforts by undertaking broader financial literacy outreach to all segments of rural SMEs in East Africa.

What barriers does your proposed solution address?

Informality, Lack of collateral, Lack of financial capacity, Unavailability of financial products tailored to SME needs.

If you checked any of these barriers, describe how your solution addresses them

Our proposed solution directly addresses the issues of informality, lack of collateral, lack of financial capacity, and unavailability of financial products tailored to SME needs by making available long-term asset finance to SMEs in East Africa.

Lack of collateral: Lack of adequate collateral is one of the key barriers preventing agricultural SMEs from accessing longer term asset financing. Traditional banks have very stringent collateral requirements, demanding pledged assets with a value of 1.5-2x the value of the loan. Most agricultural SMEs do not have sufficient assets to meet this stringent requirement. EAREF will not require such stringent collateral requirements. Other mechanisms will be used to mitigate the risk of the loan, including direct repayments from the SMEs end buyers or partial credit guarantees from public institutions (see answer to question 7). For example, with the right funding, Juhudi’s strong ties to the dairy industry and innovative financing mechanisms can enable Juhudi to offer asset financing to milk chilling plants that are secured in the value chain by payments from dairy processors, the chilling plants’ buyers. This value chain financing approach adds an additional layer of security to borrowers in Juhudi’s target market that lack the skills, collateral, and capacity to access the existing local funding sources.

Informality: Most agricultural SMEs are very informal enterprises that do not have the skills, business acumen, or corporate governance and infrastructure found in other types of enterprises. Most agricultural SMEs consist of cooperative entities that process and sell products sourced from groups of smallholder farmers, who share in the profits earned by that entity. Cooperatives in East Africa are very informal, and often have relatively weak corporate and governance infrastructures. EAREF will help formalize this sector through technical assistance targeted at improving the business management, reporting systems, and internal controls of these SMEs. They will be further formalized by developing a credit history which can lead to access to larger sources of financing.

Lack of financial capacity: One of the biggest constraints to the growth of SMEs in East Africa is a lack of access to long-term capital. SMEs, especially within the rural agricultural sector, seek long-term financing in order build their financial and business capacity to fund the acquisition of productive equipment for the purposes of value-addition. By providing access to credit and enabling the acquisition of productive assets, the Rural Enterprise Facility not only addresses an underserved market but also sets borrowers (milk chillers, coffee cooperatives, etc) up for success and future growth by increasing their business capacity and improving their ability to take on future funding from other financial service providers. In many cases, these newly acquired assets will be able to serve as collateral for future bank loans.

Unavailability of financial products tailored to SME needs: BrazAfric and other distributors of agricultural equipment, unlike banks, have an incentive to sell equipment and thus, offer a customized financial product that facilitates this sale. Because of its aligned interests and technical knowledge of the equipment sold, the BrazAfric Vendor Finance Program has a direct incentive to serve SMEs and to specifically tailor the financial product to meet their unique needs.

Impact

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Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

The facility intends to leverage Juhudi’s experience in the rural agricultural asset finance space and BrazAfric’s experience in the agricultural equipment space. Juhudi Kilimo has 6 years of experience in the rural agricultural finance space and has 7 branch offices with 19 loan officers, most of whom have been with Juhudi for over 2 years. Juhudi currently has a portfolio of approximately US$1,000,000.

The facility also intends to leverage BrazAfric’s experience within the agricultural equipment space in East Africa. BrazAfric has been operating in East Africa since 1996 and knows the East African coffee sector well. BrazAfric is in its first phase and is currently extending financing to its first group of clients in September 2010. To date, GBF has worked closely with BrazAfric to set up the framework and partnerships necessary to roll out the Vendor Financing Program. BrazAfric is initially focusing its vendor finance program on coffee cooperatives which often lack the access to extended warranties or technical know-how that BrazAfric can provide to its borrowers. The company has the in-house technical expertise to maintain and service the equipment it distributes. This provides the company with a significant advantage as it has incentive to make sure the equipment that it finances actually works and continues to work throughout its useful life.

The Grassroots Business Fund (GBF) will be managing the EAREF. GBF builds and supports high-impact businesses that provide sustainable economic opportunities to millions of people at the base of the economic pyramid (BoP). GBF has six years of experience investing in high-impact businesses. Operating initially as IFC’s Grassroots Business Initiative (GBI) for four years, GBI has invested in over 40 projects that impacted more than 3.4 million people at the BoP, In 2008, GBF spun out from the IFC and since 2008 invested over US$7 million in 26 high-impact businesses providing income generation opportunities to 4.2M people.

GBF has invested in both Juhudi Kilimo and BrazAfric Enterprises and has worked closely with both management teams in order to help build the capacity of their respective businesses. GBF is now seeking to drive the expansion of this rural asset financing initiative by expanding the capital available to local financing institutions such as Juhudi and agricultural equipment providers such as BrazAfric that can provide innovative long-term asset financing to agricultural SMEs in rural communities.

How many firms do you expect to reach?

By working with two experienced and connected local partners, the EAREF intends to provide asset financing to 150 SMEs involved in the agricultural sector in East Africa.

What is the volume of private SME finance you aim to catalyze?

We aim to catalyze US$10 million.

What time frame will be required to reach these targets?

We believe that we can hit the target of over 150 borrowers in the next five years.

Does your solution seek to have an impact on public policy?

No

What would prevent your solution from being a success?

Lack of comprehensive training and capacity building at the SME level would threaten the success of this innovation, since it relies on the ability of the targeted rural agricultural SMEs to successfully repay their loans. In order for this innovation to be successful and scalable, it needs to demonstrate that the provision of asset financing with lower collateral requirements and restrictions than current long-term financing offered by commercial banks can still be commercially viable. It needs to demonstrate that providing asset financing to rural informal agricultural SMEs can be a profit-making endeavor that can attract private sector capital providers. For this to happen, the SMEs need to be trained in basic areas such as financial management, business planning, and good governance to ensure that they have the business capacity to not only repay their loans, but also to manage stronger businesses that can successfully scale and become the backbone of the agricultural sector in East Africa. GBF has already begun engaging several local business consultants to provide this type of capacity building to the SMEs who benefit from the EAREF, and will be co-funding such service provision to a subsegment of the SME client base this year.

Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact

Since 2004, Juhudi has financed approximately 10,000 borrowers for over US$3.5 million. Juhudi has had experience assessing SMEs, leading client relations, and supervising 7 loans to milk chilling plants. All of the loans were kept on the books of K-Rep Development Agency (Juhudi’s sister company), but were administered by Juhudi. The 7 loans total approximately Kshs 19.3 million (~US$241,000) at an average loan size of approximately US$34,000.

One of the financed chilling plants is Lelan Highlands Dairy Limited (LHDL). Lelan was established in 2008 as a conglomeration of 19 cooperatives with a total membership of 4,000 farmers. The plant recently began bulking and chilling in August of 2009. The core business of the Lelan Highland Dairies is bulking and selling of fresh, high-quality chilled milk, with a goal of creating value for its owners and generating income for dairy farmers. The Lelan Highland Dairies has an active membership of farmers who are expected to provide the cooling plant with 9,100 liters of milk per day in 2009. The Lelan chilling plant employs a manager and six staff members within the plant representing Kshs 744,000 per year. The plant will provide a reliable market for over 4,000 smallholder dairy farmers in the Lelean community and increase both the quality and quantity of milk yields. The Lelan chilling plant has the potential to serve well over 10,000 more local dairy farmers.

In addition to the direct impact to SMEs, we believe that the facility has the potential to act as a force for change in the perception of local banks and encourage others to increase their exposure to agricultural SMEs. As SMEs increase their asset base and start to expand and hire more people, rural communities will develop. This has the potential to decrease urbanization and unemployment throughout the region.

Sustainability

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List all the funding sources that are required for the sustainability of this solution

The capital requirements for this facility are US$2 million in grant funding and US$8 million in equity financing, to be deployed over the course of 2 years. Because this solution is a market innovation in East Africa, we believe that patient capital in the form of equity and grants (to build the capacity of the SME borrowers) are necessary to ensuring the success of this facility.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

This solution is currently being funded by GBF and has not yet sourced public financing. For the expansion stage of EAREF, GBF is seeking both public and private financing in order to further catalyze the deployment of capital to underserved agricultural rural SMEs and prove that this solution is commercially viable and scalable. This solution has the capacity to graduate from public financing because it is a solution that is designed to deploy capital to this segment of the SME space in a commercially sustainable fashion. EAREF will build partnerships with local for-profit companies, such as BrazAfric and Juhudi Kilimo, that have financial products designed for the needs of this segment of the SME space but require external financing and support to launch and scale them. The time frame will be to graduate from public financing within the next 2 years, after the vendor financing pilot has been proven and refined and after the first set of customers have successfully repaid their loans (which are expected to have a maturity of 2 years). Within 2 years, EAREF will have data on the progress of the vendor financing program, and additional data on the performance of other asset financing models such as Juhudi. This performance data, and the lessons learned over the next 2 years, will enable EAREF to attract more funding from private sector players, who are not yet willing nor able to take the risks associated with rural agricultural SMEs due to lack of information, since they have minimal credit histories and are still perceived as riskier than traditional commercial bank clients.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The EAREF can survive such potential loss by involving financing from a wide variety of both private and public funding partners. Diversifying the funding base and actively maintaining a pipeline of investors to fund the expansion stage will mitigate the risk of losing the largest private funding source. GBF is currently the sole provider of financing for the vendor financing program, however has already begun engaging other investors in the impact investment space. At least 3 impact investment funds have expressed a strong interest in providing additional funding to the BrazAfric vendor financing program, and any other similar vendor financing programs that GBF would pilot with other agricultural equipment suppliers in East Africa. Furthermore, additional investors have already provided expansion capital to Juhudi Kilimo, and several more are currently doing due diligence on Juhudi to determine how and when to provide them with additional capital to support the growth of their innovative asset financing model for rural SMEs. Finally, EAREF’s goal is to become a self-sustaining solution that funds asset financing models that become profitable. This profit generation will further mitigate the risk of the potential loss of the largest private funding source.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Partnerships with insurance companies, suppliers, and business development service providers are essential to the greater success of the facility’s sustainability. Local insurance companies are important in order to provide reasonably priced asset insurance on the assets to be financed by the two local partners. It is necessary for Juhudi to have strong relationships with suppliers, like BrazAfric, as these suppliers can provide the technical expertise, training, and maintenance for the equipment to be financed. Last, business development and advisory service providers are important to the success of this facility as many of the SMEs that will be financed under the facility will have serious gaps in financial management and human capital that need to be addressed to enable them to grow successfully and become sustainable, viable, well-managed enterprises that can form the basis of a stronger private SME space in East Africa. On this last partnership, GBF intends to tailor this service provision in such a way that it is partially, if not mostly, financed by the SME borrower in order to ensure the sustainability of such service provision and ensure incentive alignment.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

The sustainability of this solution could be threatened by the regulatory environment. Any changes in the local laws or regulations that would threaten the ability of financiers such as Juhudi or BrazAfric from repossessing the assets that are being financed by their loans would threaten the program’s viability and significantly increase the risks of these loans. These loans are currently being backed by the agricultural equipment assets they are financing, therefore it is key that BrazAfric, Juhudi, and other organizations have proper access to this collateral in cases of default, in order to mitigate the financial risks of lending to this segment of the SME space.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

Our proposed solution aims to scale up through expansion to multiple agricultural subsectors and geographic expansion. EAREF is currently focusing on Kenya, exclusively; however we intend to scale this solution to other countries in East Africa, including Tanzania, Rwanda, Uganda, and Ethiopia. Because of the existing regional presence of partners such as BrazAfric in East Africa, we believe that this solution can scale quite rapidly to other countries based on its initial success during the pilot stage.

EAREF will start primarily in the coffee and dairy sectors of Kenya, two of the largest agricultural sectors engaging millions of smallholder farmers. We are also targeting to expand this access to asset financing to agricultural SMEs engaged in other agricultural sectors in East Africa including grain processors, cashew nut processors and fresh fruit processors. We believe this expansion will be facilitated by the exposure our existing partners currently have to other sectors. For instance, BrazAfric not only provides agricultural processing equipment for the coffee sector, but also for the grain sector. Juhudi has also begun expanding its lending activities beyond the dairy sector. By working through capable intermediaries with a local presence, such as BrazAfric and Juhudi, we believe that capable local management teams will be able to make any necessary mid-term adjustments in order to make this solution successful and scalable to other sectors and countries.

206 weeks ago Matt Guttentag said: On October 27, 2010, the judges reviewed entries for the Changemakers G-20 SME Finance Challenge competition and would like to pass on ... about this Competition Entry. - read more >
208 weeks ago Raphael Wanjaria Njararuhi said: This program will be of great assistance to the local SMEs,the Vision 2030 Economic Pillar banks on the empowerment of the SMEs. SMEs ... about this Competition Entry. - read more >
208 weeks ago East African Rural Enterprise Facility: to reach underserved agricultural SMEs has been chosen as a finalist in The G-20 SME Finance Challenge.
216 weeks ago Bahiyah Yasmeen Robinson said: Aside from the strong partnerships that are already formalized, I would think that the key to this endeavor's longterm success is the ... about this Competition Entry. - read more >
216 weeks ago Harold Rosen updated this Competition Entry.
216 weeks ago Harold Rosen submitted this idea.