EFA: equipment-based finance to enable small entrepreneurs to grow

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EFA: equipment-based finance to enable small entrepreneurs to grow

Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

EFA has developed an innovative equipment-based leasing product, tailored to uncollateralized entrepreneurs on the boundary of the SME sector who have the ambition to step up. This is a large market critical to the growth of the SME sector. Public finance is needed to grow this to a scale that will create a demonstration effect for mainstream private investors.

About Project

Solution: What is the proposed solution? Please be specific!

EFA has developed a scalable business in Tanzania that can serve entrepreneurs on the boundary of the SME spectrum who have outgrown microfinance and have the ambition and capability to step up. These entrepreneurs represent a large potential market, but they typically lack collateral and need investment of below $50,000 which is expensive to provide. They therefore face particularly poor access to finance even compared to other SMEs. Unleashing the growth potential in these businesses can have a profound impact on the SME sector as a whole. Our experience to date also suggests this investment range generates particularly pro-poor growth, with a disproportionate impact on employment compared to larger SME investments. There are two aspects of our model that make it possible to server this market. Firstly, we focus on a single machinery-based financial leasing product which provides a collateral substitute. The product structure reduces the risk that the investment is diverted to non-business uses, and the machinery provides more effective collateral than traditional security as it is simpler to repossess. And secondly, we take a commoditized “cookie-cutter” approach that makes it possible to lower transaction costs sufficiently to generate attractive returns. This differentiates us from most SME funds which dedicate substantial resources to each deal and require highly skilled executives, making it hard to reach smaller entrepreneurs and making it relatively harder to scale. This equipment-based approach has long been recognized as a high potential way to reach smaller SMEs, particularly by the IFC who have major leasing activities globally. However, it has not yet been widely applied in East Africa, and the case has not yet been adequately made to attract mainstream private finance.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

EFA has invested $435,000 in over 70 businesses, resulting in 330 sustainable new jobs. We target entrepreneurs that cannot access finance elsewhere, translating immediately into financial access impact. However, we believe job creation is even more important, as many of the jobs created benefit the very poorest. Our focus on these particularly pro-poor investments has delivered almost ten times more jobs per dollar invested than figures for larger SME investors. Some of our customers have added up to 20 new employees, with the largest reaching 40 employees in total. 40% of these jobs are in rural areas. Job quality is critical, since there will be little impact from a job that pays only marginally better than alternatives. Average wages paid are Tsh 1.2 million, almost three times higher than median self-employment income in Tanzania. Around 20% of our customers provide formal contracts for their employees. Around 25% of our customers provide formal training. An example customer is Reverend Kisanga. EFA invested $4,760 in January 2007 in an ice-cream machine to expand his dairy business. This has created 6 new jobs, all currently held by women. He completed payments in June this year, and is now hoping to invest in a cooling tank to improve consistency of his products further. An example employee is Hosea Lukumay, 26, a storekeeper for animal feeds manufacturer Naya Enterprises. Hosea comes from a family of pastoralists near Arusha. He could not afford school fees until he was 11. He left school in 2003 when his sisters became ill. Hosea worked as a house boy in Moshi, but his fortunes were transformed when he started working for Naya in January 2005 on a casual basis. He was promoted earlier this year. This job now supports Hosea's wife and daughter, and his parents and sisters.
About You
Equity for Africa Ltd
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About You
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Your Organization

Equity for Africa Ltd



About Your Organization
Organization Name

Equity for Africa Ltd

Organization Phone

+44 7786 246564

Organization Address

Royal London House, 22-25 Finsbury Square, London EC2A 1DX

Organization Country
Organization Type

Non-profit/NGO/Citizen-sector Organization

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Your solution
Country your work focuses on
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Region(s) your solution focuses on:


Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

Average $55,000, largest customer turnover currently $600,000.

Number of employees in your target firms

Fewer than 5, 5-24.

Average number of employees of your target firm


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

EFA invests $2,000 to $50,000 in machinery for very small and small enterprises who have viable expansion plans but cannot access finance from elsewhere. This can include start-ups where the entrepreneur has compelling experience. Target customers tend to have 2-10 employees at the time of investment, with plans to grow to 5-40 following investment.

What stage is your solution in?

Operating for 1‐5 years

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

This is an opportunity to firmly establish an innovative equipment-based finance product in East Africa that can unlock private finance at scale for small uncollateralized borrowers on the margins of the SME sector.

We have conducted a thorough pilot over the last five years in Tanzania which has shown that it is possible to reach this segment profitably using a machinery-based leasing model. However, this has not been on a scale to catch the attention of mainstream private investors required to roll this model out across East Africa. We believe they will need to see a more established organisation succeeding on a larger scale before this can become genuinely mainstream.

There are two time horizons for attracting private finance to this sector. In the first horizon, public finance can leverage the available sources of private investment to support EFA's scale up. In the current market, early stage investors typically require higher returns than we can offer, even though they can tolerate higher risks than we represent. As well as leading the way for these investors, public finance can take lower-risk debt exposure to engineer the risk-return profile they require. We expect this to leverage private finance on a one to two basis. This will build a sustainable platform for growth within our organization, creating a robust institution that can provide a credible investment option to kick-start mainstream investment in the next phase.

In the second time horizon, this scale-up phase will have created a strong demonstration effect. This will increase the comfort of a broader range of private investors to enter the sector on a much larger scale, both through EFA and through new market entrants. Demonstrating a viable new model in this way is one of the most effective ways of leveraging scarce public resources. This is akin to the role played by public finance in the development of the microfinance industry, where early pioneers took on higher perceived risk to prove a poorly understood model for the private sector, paving the way for previously unimaginable private sector investment levels targeted directly at the very poorest segments of society. This is also similar to the role played by the Shell Foundation in seeding SME fund manager Grofin, taking on the previously unknown risk of SME investments in Africa, which has led to an influx of SME funds for the larger individual SME investments. This time, public investors have the chance to catalyse the development of a sector with exceptional job creation rates which can lift people permanently out of poverty.

What barriers does your proposed solution address?

Asymmetry of information, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, High transaction costs for financial intermediaries to serve SMEs.

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

f), c): EFA is demonstrating a product tailored to the needs of uncollateralized entrepreneurs on the margins of the SME range. The lower end of the SME spectrum is particularly poorly served by traditional institutions and cannot access existing products. World Bank research from 2006 showed that only 3% of small formal manufacturing enterprises (5-19 employees) in Tanzania use bank finance to fund investment compared to 10% of medium-sized ones (20-99 employees) and 36% of large ones. Microsave field research from 2001 identified particularly high demand for leasing between $1,500 and $100,000.

In order to meet the needs of these customers and provide effective access to finance, our product contains a collateral substitute. This overcomes the issue of lack of collateral, which is one of the major barriers for entrepreneurs accessing bank debt. We invest $2,000-$50,000 in machinery, paying the equipment supplier directly and using the machines as security.

Customers repay 150% of the capital invested (in local currency) in 36 equal monthly repayments, with a formal rescheduling procedure for good customers who face temporary disruptions out of their control. This provides a long-term repayment period essential for entrepreneurs growing beyond the micro level. Our rescheduling facility provides the equity-like flexibility necessary to accommodate the unpredictable shocks that SMEs can face in these environments, without the prohibitive resource requirements and exit difficulties associated with equity. The machinery focus also better meets small business needs by protecting the entrepreneur from community pressure to divert the investment away from revenue-generating activities, since the equipment supplier is paid directly for the machine.

d), e): To overcome the barrier of low levels of financial literacy, our investment process starts with a half-day training seminar where customers are given an essential introduction to our product structure. Our product structure uses a fixed premium rather than compound interest, with 150% of capital repaid in 36 equal monthly repayments, which increases transparency for entrepreneurs who rarely understand compound interest. Customers are also given training to complete a basic business plan template which acts as our application form, guiding them step by step through a product by product analysis. After investment, our investment officers are in regular contact with customers, and visit them at their site at least once every three months to see how business is going and provide informal advice.

h), a): This is provided using a focused, standardized model which allows us to reach scale and minimize transaction costs. This depends on nitty-gritty operational focus, for example keeping investments within a manageable range of our physical office and using competent locally trained staff rather than internationally trained executives, local or otherwise. This commoditized approach makes it possible to realize the full potential of this important market to create system-changing impact. In addition it reduces the challenge of information asymmetry, by building institutional knowledge of specific sectors which are popular among small entrepreneurs, making it possible to reduce costs further by simplifying the appraisal process.

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

EFA has successfully shown that it is possible to invest profitably in entrepreneurs at the lower end of the SME spectrum, and has demonstrated the exceptional pro-poor benefits in this sector.

Over a five year period we have thoroughly tested and refined our model with over 70 investments. We have invested $435,000 leading to 330 new jobs, almost ten times more jobs per dollar invested than figures we have seen for larger SME funds. If we are successful in raising $10 million for our next growth phase (which would fund $12 million of investments), we project this to result in 6,000-9,000 jobs over four years, rivaling institutions managing hundreds of millions of dollars. Around 40% of these jobs are in rural locations, and average wages are Tsh 1.2 million compared to median self-employment income of Tsh 360,000. Around 25% of our customers provide formal training for some or all employees.

Although we are not yet at break-even scale, we have built up an extensive evidence base on investment performance and marginal costs to understand the economics of the model. The gross IRR achieved to date is approximately 15% in local currency including our early investments, and we estimate that we can now achieve 20% gross IRR immediately based on the improvements we have made over time. Combined with marginal costs of less than $800 over the life of an investment, this implies we can break even with either a $1 million grant (i.e. zero cost of capital) or with $5 million assets under management based on a 3% management fee.

How many firms do you expect to reach?

Our growth strategy for our scale up phase is to raise $10 million of investment in a private equity fund structure. By recycling early repayments, this will finance $12 million investment in around 400 firms over a three year period at an average investment size of $30,000. This will allow us to grow our current team at a manageable rate.

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

There are two time horizons for attracting private finance. In the first "scale-up" phase, we aim to raise $10 million to be invested over the next three years.

This will create a demonstration effect to catalyse substantial private investment in the second phase in EFA and new market entrants. In the second phase we aim to raise $30-50 million to roll out our model geographically.

What time frame will be required to reach these targets?

We have based our growth strategy on a private equity fund structure with a three year investment period and a four year holding period. The aim of this growth phase is to build a sustainable platform from which to roll out on a much larger scale using mainstream capital. We expect to start developing the next phase towards the end of the three-year investment period and would aim to raise substantial private finance as a result of the public investment during the fifth and sixth year.

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


What would prevent your solution from being a success?

The largest risk to EFA is that we don’t find the right committed, long-term investors.

Our target range of the SME sector has substantial scale potential. In Tanzania alone, there are over 60,000 registered enterprises with 2-19 employees, compared to less than 2,500 with 50 or more employees. Based on the Tanzania Labour Force Survey from 2006, we estimate that in addition, there are over 230,000 informal enterprises with employees who have gone beyond a sole-trader micro-enterprise. The IFC has also conducted extensive research into the asset financing market in Tanzania; a draft 2007 report shared with EFA reported high growth in importation of capital goods, from just under $800 million in 2001 up to almost $1.8 billion in 2007, forecast to grow to over $11 billion by 2015. This research takes as a reasonable estimate that leasing companies could provide 5% of these imports, implying a market size of ~$90 million in 2007 growing to over $500 million by 2015 just for foreign-made equipment alone.

Given this huge potential market size, the real opportunity is creating a sufficient demonstration effect to spur mainstream investor interest, as has been seen in the microfinance market. Building a new sector in this way requires a rare level of commitment from investors willing to help the sector reach critical mass. There have been small leasing successes before, but these have not been compelling and high profile enough to turn the tide and attract large scale funding from the sources that can make a transformational difference.

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

The last five years have been a proof of concept phase for EFA. The next stage is to build scale over the next three years, to reach a sustainable platform from which to roll out. We have considered many funding options in order to reach this, and have selected a private equity fund structure to be invested over three years, followed by a four year repayment period. The minimum scale under this structure to reach sustainability is $5 million, and we are targeting commitments of $10 million to allow us to open a second office and dedicate more resource to the continued operational improvements to underpin our subsequent expansion.

We have selected this structure as the most attractive for investors, providing direct exposure to the investments where the value is generated, and providing cost certainty and a clear exit route. We also believe this caters to the public finance sources required to leverage private investment, as well as to higher risk private investors. We are structuring the fund into a debt and equity tranche; public finance will be particularly helpful for the debt tranche, to create the risk-return profile required by early stage private investors.

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

We believe that following the three year fund investment period described above, we will be sufficiently established to access new forms of private finance which will minimize the need for public finance. This will be because a) the risk perception will be lower, b) we will have reached a more economic scale, and c) we will have the resources to focus on further operational improvements to improve key investment performance metrics.

We envisage that at this stage this will be particularly interesting to the ethical investment industry. This will be a stepping stone to attracting the interest of the mainstream investors to this sector with the vast resources they bring, as has been seen in the microfinance industry.

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

As described above, we aim to fund our next development phase with a private equity fund structure. We expect the fund investors to be fragmented, with no investor holding more than 25% of the fund. Fund investors are also legally tied in. Provided we do not fall below our $5 million break even scale, this should not present a major issue for the next phase. Even below this level it is possible to break even by cutting corners severely, as low as $3 million.

Following this growth phase, we will be dependent on attracting new capital to continue investing. This will be based on the results achieved in the next growth phase.

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

EEFA is tackling a nascent sector with huge potential for scale. We appreciate that building partnerships will be essential to realizing this potential. In particular we will look for partners to take our standardized model into new markets which we cannot yet reach, while being aware of the risk that poor quality actors could actively harm the success of the sector.

It is essential to be plugged into our local communities. We are actively looking for partnerships with local training providers. This also includes finding the right incentives for microfinance institutions to pass on their largest customers to us. Similarly, it will be valuable to create partnerships with larger SME investors to pass on our successful customers.

There is also potential in partnering with development initiatives which work with large numbers of small SMEs with machinery requirements, for example we have seen a number of agricultural sector development initiatives where this could be possible. This can support these initiatives while also helping us to reach scale more quickly in new markets, but it will also be important to avoid excessive exposure to one industry.

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

Like most small organisations, the main risk to our sustainability at the moment is that we are still at a small scale, so that there is a large impact if any individual leaves. Our current push for growth is intended to take us beyond the minimum scale for organizational sustainability, where the loss of individuals can be absorbed.

Another challenge will be poor leasing regulation in some of the markets we would want to expand to. However, there is high scale potential without entering these markets, and we hope that as we achieve success on a noticeable scale it will create the impetus for the countries with less attractive regulation to improve the policy environment.

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 organisation has always had a multi-sector approach. We currently have investments in sectors as diverse as maize milling, ice-cream manufacturing, metal hardware manufacturing and recording studios. This is key to our philosophy, as we believe it is better if the business concepts come from the entrepreneurs responding to market demand rather than being pushed by us.

We also see our focus on a single product as important, especially at this stage of our development. This keeps our costs very low and maintains management focus on our core differentiating offer. We believe our best chance of success is doing one thing well, focusing management efforts on “para-skilling” so we can use competent locally trained officers rather than highly skilled internationally competitive executives, local or otherwise.

The main expansion will be geographic. It makes sense for our low cost model and organizational sustainability to start expanding first from our current office, where there is high unmet demand. However, in this growth phase we hope to open a second office, ideally also in Tanzania in order to minimize the administrative burden but possibly in a second East Africa country if required by investors. Following this we believe the model can be rolled out across East Africa by us and partners, where regulation is adequate for this product.