List all the funding sources that are required for the sustainability of this solution
Our solution is funded by private source, which is currently determined as initial equity contribution for the capital requirement from the project initiators, gained from their other businesses in the country, on the level of USD1mln.
We require raising additionally USD5.5mln (for initial CAPEX and OPEX financing as well as educational programs) for solution sustainable development. For this purpose we consider alternative sources, where priority is given to donor organization.
We estimate funding provided by these 2 sources as sufficient for sustainability of the solution. However we also consider alternative opportunities as a last resort in the form of soft loans and partial financing of CAPEX or either a cost of financial services cards on behalf of SMEs by the public bodies (MFIs, Development Bank).
We believe that not only financial funding will help the solution to be sustainable, but also funding of experience and knowledge is necessary. As sources of such a funding we consider international organizations such as IFC, etc.
Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?
We expect that the major portion of CAPEX (60%) that will allow business to function properly (i.e issue financial services cards, build credit scoring database, allow electronic transactions) to be made in the first 2 years of operations.
We will have 3 major sources of revenues – charge for issuing financial cards, providing credit scorings and commissions for transactions through M-Wallet. Those revenues will allow to sustain the business and since the critical mass would be reached (according to our assumptions it will happen after 2 years of operations), business model will start creating revenues, that will be enough to support business activities.
We estimate that on year 3 of operations our solution will have an ability to graduate from dependence on public finance. To reach this goal, we aim to aggressively penetrate the market, not only by creating effective partnerships with MFIs, but also providing educational programs for SME’s (we are planning to spend USD100 thousand per year for educational programs). Also using a mobile biometric stations, which will be moving within the country in order to provide SMEs with a financial cards and increase awareness in the rural areas, will also have a considerable influence. We also believe that partnerships with Federal Micro and Small Enterprises Development Agency as well as labor and other associations on the local levels will be effective tool for penetration of the solution.
Though, all these effort will help to achieve a critical mass of financial cards owners as well as a wide database for credit scoring.
Provision of credit scoring on commercial basis will also help the solution to graduate from dependence on public finance. As solution have significant advantages for MFIs (as decreasing of operating costs, reducing % of defaults, etc.), we expect MFIs to widely use the solution and usage of international experience and consultancy, that will help to create a reliable credit scoring system, will be one more point for it.
Wide usage of M-Wallet by MFIs will also make the solution financially sustainable. As M-Wallet will reduce transactions costs for MFIs we expect considerable number of transactions to be processed. Decreased probability of default (if decision based on credit scoring) would eventually increase the average loan and the total volume of loans in the system. Since those loans will be provided through our M-Wallet, commission’s per transaction basis will create a positive cash flows and help the solution to function without dependency on public finance
Demonstrate how your proposed solution will survive a potential loss of its largest private funding source
The largest private funding source for our project is from its initiators.
In the event of the potential loss of this source (considered to be low) a multi approach strategy has been developed
1. we diversified our sources of funding and in case of loss of the private funding, the funds from donor organizations and other sources (see question 15) will be enough to start operations
2. we have a plan to attract additional investments in case of potential loss of the private funding:
- we’ll propose MFIs to partly finance creation of a database and will start to process data, for which initial investments are minimized. Early interest of MFI’s in such a database was recognized
- as GCS plc., owned by initiators of the project, is a partner of NBE in credit scoring bureau and in order to make bureau fully functioning NBE needs a proper tool for identification of potential borrowers, we’ll offer NBE to partially finance biometric solution and card personalization machine in order to make financial services cards
- as one of the project goals is financial inclusion of the SMEs we will obtain a soft loan in a donor organizations and commercial banks
3. we’ll start operations that will generate positive cash flows in order to invest in a further project development. For instance, we could start with issuing simple ID cards without functions of M-Wallet and make limited investments in biometric stations
4. we also could provide other services which require biometric solution – i.e. for the statistical agency in order to simplify their processes of collecting data
Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation
In order to achieve success and self-sustainability we need to partner with the following entities
1. NBE(National Bank of Ethiopia).
GCS is the supplier for the credit bureau, with this initiative we also need to extend this partnership to be comprehensive
2. FIs(Financial Institutions).
FIs are the links to SMEs
Are there non-financial issues that could threaten the sustainability of your proposed solution?
• Shortage in information that is necessary for building a credit scoring database. The only information that currently is available is limited information on MFI’s level about their customers and their credit history. However this information is not consolidated (even between branches), was collected manually (that could be associated with a number of mistakes) and not available electronically. That makes processes of collecting data cumbersome and increases time for creation a proper database for credit scoring and, therefore, despite investments made in the system, opportunity for collecting revenues could be delayed
• Lack of sufficient skilled manpower (i.e. analysts) for assessment of credit information within the country. However we’re going to attract external consultants with related experience to train employees
• We also consider changes in legislation and micro and macroeconomic situation as potential issues that could threat the project
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 solution aims to scale up through highly growing SME sector itself as well as highly growing sectors where SMEs are active; moreover, as MFIs are our main partners in provision of the solution, the project aims to scale up with growing of MFI sector and expanding geographically with MFI expansion.
SMEs play a critical role in the Ethiopian economy and significantly contribute to the country GDP. Furthermore they are considered by the government as a major driver of the economy that was demonstrated by the extension of government funding provided to MFIs in a form of soft loans totaling USD550mln during 2007/2008 in order to stimulate SME lending. As consequence we expect a high growth in terms of number and size of SMEs in the country, as well as increasing of their sustainability. That will considerably expand potential market for the solution.
As number of SMEs, their size and ability to build a proper credit history depends on the particular sector developments, proposed solution will scale up by focusing both on a highly promising sectors which are on initial stage of development such as manufacturing (45% growth in 2008/2009 compare to previous year in current prices), hotels and restaurants (58% growth in 2008/2009) and sectors in a transformational stage as whole sale and retail trade (15% of the country GDP, 53% growth rate in 2008/2009) and construction (5% of the country GDP, 34% growth rate in 2008/2009)
Solution will scale up geographically as MFIs increase their geographical coverage in the country by opening new branches in the rural areas. During first 2 years we’re going to partner with 4 major MFIs, which have a largest amount of branches in the country and will give us wide reach within the largest regions which covers 50% of Ethiopia’s territory and around 78% of population. It’s estimated that MFIs will expand their branch network at least by 15% every 2 years