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.
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.