Tag Archive | african

Making SME finance work in Africa

Last week I presented at the Making Finance Work in Africa conference in Addis Ababa. This was a unique opportunity for the African financial community to come together and discuss ways forward.

Specifically, taking a step back to review what has been achieved the past few years, to outline challenges that remain to be tackled and to identify areas still in need of attention. Also to get a handle on the possible strategies that can be employed in the efforts to address them. If anything, it was made clear that there are no prescriptions and anything but a one size fits all approach. Its about thinking local, taking a careful look at the context and the solutions that might address specific needs.

Thorsten Beck, the author of Financing Africa through the Financial Crisis, put forth the argument that, ‘In the industrialized countries of North America and Western Europe, financial innovation has acquired a bad connotation after the recent crisis, being associated with CDO, CDS and other three-letter abbreviations, which few understand.’ He continued, ‘ However, innovation is more than that and comprises numerous new products, new processes and new organizational forms. Innovation can be an enormously positive force, even in the financial system and especially in Africa. However, in order to reap the benefits of more innovation, a different regulatory approach is needed than currently present in most African countries.’

S. Kal Wajid, the Division Chief of Africa at the IMF, recognized the role of innovation and technology as key components in furthering financial sector development. At the same time he cautioned the attendees to carefully evaluate the risks and to not lost sight of the macro economic agenda. Thorsten agreed but expanded, ‘We can’t lose our focus on the macro economic agenda. At the same time we can look at innovative options for financial sector reform and to consider more activistic approaches.’ He highlighted one opportunity in which banks could share a common payments system that would reduce infrastructure costs, help expedite payments and thereby lower transaction costs. But again, what might serve as a ‘fast gain’ solution for one country could be less relevant for another.

Finding ways to better serve SMEs was also raised as a top priority. Gaiv Tata, the Director of Finance and Private Sector Development at the World Bank, highlighted the issue when he explained that 50% of SMEs in Malawi still rank access to finance as the leading challenge in their ability to realize potential. In Ivory Coast it’s 60% and in Benin the numbers approach 70% of SMEs that identify access to capital as a key constraint. Jason Wendle of Dalberg added, ‘the biggest challenge facing SMEs is collateral. Banks see the SME market as an attractive segment but still have difficulty assessing the risks.’ Leveraging technology, psychoanalytic testing and smart due diligence processes were offered as positive sector developments that combined could start to address this issue.

Still it was clear, Banks don’t necessarily appreciate the business of small scale entrepreneurs. Their products are limited and do not always offer the terms an entrepreneur requires to really grow their business. For example a big order that comes in and the business in need of a fast loan so they can scale production and service the contract. Difficult circumstances arise when the entrepreneur has to still wait months before the financing is organized on often unreasonable terms.

But there is much optimism. SMEs consistently show good returns and finding businesses that can generate a profit is really not the issue. The focus is instead on identifying smart and effective ways that better connect financial services with the entrepreneurs that can really put money to work. It’s connecting the dots that will see more SMEs creating jobs, paying taxes and building the sustainable businesses for the future.

Will increased Private Equity interest in Africa trickle down?

In March, the Carlyle Group launched their first Africa-centric fund. A month later they opened their offices in South Africa and announced plans to expand their team to Nigeria and Zimbabwe. David Rubenstein the co-founder of the Carlyle Group said at a recent conference, ‘I am very bullish on the prospects for Africa. Nothing compares in terms of economic growth as a percentage over the next decade.’ And he is not alone. In June Helios Investment Partners closed Africa’s largest ever buyout fund for $900 million (maximum target investment is $250 million) signaling the growing investor interest for the continent.

These two developments reflect the findings of an April survey from Coller Capital and the Emerging Markets Private Equity Association that showed 38% of limited partners had plans to begin or expand their African investment programs, compared with 15% a year earlier. The Wall Street Journal followed by reporting in July that a record 79 African focused funds were currently making their fundraising rounds. Only a fraction of these efforts are likely to be successful, but clearly there is a growing resource base being put into place for the continent’s most promising endeavors.

But what does all of this mean for African SMEs that could offer so much additional growth and development for so many African countries? What does this mean for the smaller businesses still overlooked by international and local investors? According to Guido Boysen, the CEO of GroFin Africa, ‘The capital needed to drive economic growth in Africa certainly exists, but could be invested in an asset class with a potentially greater impact.’ He argues unlocking the SME segment will remain a challenge until we recognize that many of these entrepreneurs are actually sophisticated business professionals that don’t require as much assistance as sometimes believed. It is also important to recognize that many SMEs out there are actually quite profitable and that there are an increasing number of exit opportunities. He continues, ‘The SME sector is ripe for investment, and the capital exists for this investment to take place.’ Now it is just a matter of closing the gap.

What do you feel needs to happen if we are to get more investor interest for African SMEs?

Time to celebrate African success stories!

What better way to support SME development in the African space than by celebrating the entrepreneurs who have already achieved remarkable success. This is exactly what the Africa Awards program is doing and VC4Africa is pleased to partner and support this effort again this year. Recently I had the chance to connect with Hamish Banks, one of the key champions behind the program, and ask him a few questions about this year’s competition.

Why was the AfricaAwards program created?

The Africa Awards for Entrepreneurship program was created to promote the value of entrepreneurship; as we are all aware, SMEs and the entrepreneurs who lead them are the lifeblood of any economy and major contributors to any nation’s prosperity. In sub-Saharan Africa, over 90% of business operations are conducted through SMEs and they contribute around 50% of GDP.

Simply put, the more we can encourage entrepreneurship, the better off we all are. By focusing attention on the amazing stories of these entrepreneurial leaders and creating a platform to tell their stories we want to set them up as role models for aspiring entrepreneurs; these leaders demonstrate the level of business excellence that helps to negate the more negative stereotypes of business in Africa. When we showcase these leaders and the fact that their businesses are the match of any around the world, we create a picture of Africa as a continent of opportunity and an attractive destination for investment capital.

Furthermore, there is a lesson here for policymakers: it is their responsibility to legislate wise policies that make it easy to establish a new business and to ensure a level playing field for all business that encourages growth, free from bureaucracy and corruption.

Lastly, the Awards will support networks of business people that will benefit from improved collaboration, the sharing of best practice and the realization of fresh opportunities – and while every winner has told us that the prize money of $350,000 is attractive, of course, they also tell us that the networking, connections and prestige from being a winner is even more important to their future business growth.

Can you reflect on last year’s event?

Last year was our third year of the competition and by far the most successful to date: we attracted more than 2,700 entries from all of the 15 participating countries, with our first finalist from Ethiopia. We received entries from 18 different industry sectors with a high number from infrastructure development areas – mechanical and electrical engineering, and construction, for example – reflecting the rapid growth in infrastructure projects across the continent. But we also had strong representation for ICT companies (two of which were winners) and an increasing number of entries from business and professional services. We were disappointed not to see more women-owned businesses among the finalists and this year we are making a concerted effort to reach those groups more effectively. The Gala Awards Banquet in Nairobi was a bigger affair than ever before; hosted by Komla Dumor of the BBC’s Africa Business Report and with a keynote speech by legendary Kenyan entrepreneur Manu Chandaria, we brought together entrepreneurs, business people and policymakers in an inspiring showcase of business talent.

What can you tell us about last year’s winner Craft Silicon?

The Africa Awards is about more than just the numbers and last year’s winner, Kamal Budhabhatti of Craft Silicon is a perfect example. In choosing a winner, we look for business excellence – overall profitability, ROI, innovative strategies for growth and flawless execution – but we also place great emphasis on personal leadership, culture and value. Kamal brings all of that together: within Craft Silicon’s core business of customised software solutions for the financial sector, the company’s management is always thinking ahead and has developed innovative solutions in microfinance and Islamic banking, for example, that are fuelling the company’s global expansion.

Craft Silicon is a model of employee engagement both in outreach to university students and in a wide range of benefits to existing employees – such as flexible working hours – and in pushing staff to higher levels of responsibility than they might expect elsewhere. Kamal and his team also demonstrate a deep understanding of the responsibility they share for supporting the communities they serve – from providing free software to microfinance institutions to the computer – equipped Craft Silicon Foundation Bus which travels to Nairobi’s slums and conducts practical training for young people.

It is this complete package that made Kamal and Craft Silicon stand out: a great business run by great people.

This year you take a pan African approach, why was the scope expanded?

It was always our intention to expand across the continent – we just got there a little sooner than we expected, having started with just five countries in 2007 and fifteen last year. The reality is that entrepreneurs are essentially the same everywhere – not just in Africa – and it doesn’t matter the size of your country or the sector in which you compete, entrepreneurs share a DNA that’s hard-wired into their brains. It’s not unusual to hear of a history of start-up, failure, start-up and success and in a sense this defines many of the entrepreneurs we meet: not only are they inspired and inspiring, but they have a resilience about them. And you’ll find that resilience everywhere from Sierra Leone to South Africa to Sudan.

Once we thought about it, not only was there no reason not to expand to the whole of Africa, it is critically important that we did – we want to make the point that Africa is alive with entrepreneurs everywhere, not just in the more developed places you might expect.

How does a program like this help support entrepreneurship development on the continent?

The Africa Awards is built upon teaching by example. One of the reasons we target businesses which fall outside what would be traditionally regarded as being “small” or “medium-sized” is because the leaders of these bigger businesses (with more than $1MM in revenues) have a track record and personal stories that can serve as a practical example and an inspiration. Our first task is to inform and inspire – we will show what homegrown African entrepreneurs have, and can, achieve. On another level we can provide real practical support by brokering connections between the entrepreneur community and the sources of funding which are so critical (and challenging) for them. For example, this year we will organize a one-day conference on entrepreneurship: CONVERGENCE: AFRICA is the platform that brings together the entrepreneurs, investors, policy-makers and businesspeople who will continue to fuel the continent’s burgeoning growth. This one-day conference is designed to be informative, practical, and above all actionable. In addition to headline speakers who are themselves role models of entrepreneurship, the heart of the conference is a series of six Master Classes, conducted by experts in their fields, covering the topics that matter most to entrepreneurs and investors.

The conference will conclude in an exclusive session designed to match enlightened investors and a selection of the brightest entrepreneurs in a series of rapid-fire presentations – what we call Investor Speed Dating – in which we will invite 15 VC and Private Equity firms from across Africa and overseas to hear back-to-back pitches from pre-qualified potential investee companies.

How do you see VC4Africa and its role in the space?

We share the same goals, of course, and see VC4Africa as an energetic and practical resource for entrepreneurs and investors which complements what we’re doing. There’s always a need for a platform for sharing best practice and a space where entrepreneurs can congregate. Like the Africa Awards, such programs are most successful when they become self-sustaining – which happens when members take ownership and see real value in participating. With over 4,000 members, I think VC4Africa is there already- I would just encourage the members to continue to engage in productive discussion and sharing good ideas and experiences as much as possible: this is a great platform for learning.

A final message for all of those entrepreneurs out there?

There’s not much I can say that hasn’t been said much better by the entrepreneurs themselves, so I’ll just encourage them to check the website at www.AfricaAwards.com and submit an entry. Someone asked me the other day why so many Kenyan firms had been finalists and winners in the past, and the answer is pretty simple – they submitted a lot of entries. We want to see applications from every country in Africa – we know there’s a potential winner in every one of them.

Anything else you feel is important to add?

We’ll have a couple of big announcements about the Awards during the course of the next three months, so watch this space. And we’re always open to suggestions and comments as to how to improve the Awards – please let us know.

Great Hamish….. I look forward to seeing this year’s selection come together and to celebrating Africa’s great success stories!

African ventures to watch in 2011

VC4Africa.biz now has 91 ventures registered from more than 20 African countries and a surprising number of sectors. It is a nice representation of the sheer diversity in opportunities currently found across the continent.

Many of these projects are positioned for serious progress this coming year. For example I am interested to see what happens next with Uganda Medicinal Plants Growers, a venture posted by Teddy Ruge. UMPG is a commercial farming initiative based in Masindi and is designed to assist farmers commercialize their medicinal crops internationally. This is important work considering Uganda’s economy is agriculture based, with agriculture employing over 80% of the population and generating 90% of its export earnings. In Kenya its nice to see social ventures like the Recycling plastics and Empowering Youth. Kenya has a great need for low-cost housing and productive waste management. This recycling company will operate in the interest of the local community employing collectors using bicycle with trailers to bring various grades of plastics to processing units for ecologically-sensitive, efficient sorting, granulating and moulding (under low heat) into panels to be used for cheap housing. Not only is this an innovative approach that addresses a growing need, they are clearly taking the steps to embed the program and design it in a way that makes it socially sustainable and thereby economically viable.

A Nigerian based venture to watch is eHealth. This project supports the management of health facilities in Nigeria to influence health-related funding and policy decisions, and provides doctors with the patient information needed to improve decision-making before, during, and after care. This is not only a support service needed in Nigeria but I can imagine there are needs for their products in other African countries too. But given there are at least 85 listed hospitals in Nigeria there is plenty of work needed to get the company up and running. A venture that caught my attention in Cameroon is Hot Ice. Hot Ice is a fashion company that specializes in supplying affordable African-styled fashion accessories for trendy suburban women. Hot Ice really looks to differentiate its brand and seeks to build a fashion culture that local consumers can identify with.

Finally Agro-Hub, Geofeed, Naijaborn and Hizonotes offer a nice sample of the web and mobile related projects we have in our network. More projects are signing up by the day and clearly 2011 is set to be the year of Entrepreneurship in Africa!

Time to Rethink Development, let entrepreneurs move past ICT4D 2.0

A growing body of work suggests the traditional development approach fails to address the problems of poor countries. The current debate on development cooperation brings into question the very fundamentals on which the sector is grounded. This background is critical to understanding the rise of ICT4D and the role of ICTs in development. In many ways, this new development field stems from the same traditional framework meaning its own purpose, design and practice needs to be reviewed.

In the 1960s economists such as Peter Bauer and Milton Friedman first questioned the effectiveness of development aid. Recent econometric studies now support their view and make the argument that traditional development aid does not impact the speed at which a country develops. On the contrary, development aid can actually be detrimental to its progress (including an unbalanced appreciation of the recipient’s currency known as Dutch Disease). This in turn increases corruption and actually works to stall political, economic and social reform. Authors that contribute recent thinking to this important conversation include the works of Easterly, Sachs and Collier. Each author aims to address a quickly changing environment that most notably includes the rise of new super powers. Specifically, countries like China, India and Brazil that have shown specific interest and influence (political and economic) on Africa. Their interest in the continent works to upset traditional relations (N. America and Europe) and has sparked a new era of competition. This has spurred a new grab for power, influence and resources not seen since the days of European colonialism.

In addition to a fast changing political landscape, increasingly influenced by south-south relations, the continent continues to grapple with ongoing conflict, civil unrest, fundamentalism, gap between rich and poor, food shortages, lack of clean drinking water, the ongoing HIV/Aids epidemic, increasing violence, an energy crisis, ecological crisis, climate change and other economic, social and political challenges. These issues are underlined and exacerbated by the world’s simple inability to eradicate poverty on a large scale.

UN advisor Jeffrey Sachs argues in his book The End of Poverty that there is a need for an even bigger push in investment in local infrastructure. This approach can be described as ‘utopian engineering’ and calls for grand schemes needed to fill ‘large gaps.’ He believes that these challenges need to be tackled head on if they are to be resolved in a short period of time. That infrastructure is the key to getting people involved in a global economy. He argues that the poor need to be helped into the global marketplace at which point their productivity will rise and they can take care of themselves. In a later book Commonwealth: Economics for a Crowded Planet, Sachs takes a broader approach, lessening his emphasis on investment in infrastructure, and dedicating more analysis to climate change, population growth and environmental degradation.

William Easterly takes an opposing view and averts the large-scale ‘top down’ approach of his colleague. He warns against too much planning and believes the deterministic line of attack too often ignores the local context. Instead, he argues for a process of trial and error, an effort to find and search out solutions that can then be replicated and copied. He argues for a ‘bottom up’ approach that responds to demand on a local level. To this extent, planning is only a means to an end. Real development comes from the ‘searchers’ on the ground seeking out local solutions for local problems.

Paul Collier, in his book The Bottom Billion offers a third perspective. He identifies four traps of poverty that includes civil war, abundance of natural resources, landlocked location of countries and poor governance. Collier underpins his book with statistical analysis and offers new and broader thinking about development. He looks wider than conventional aid and makes an appealing argument for more engagement with the private sector. He argues that the bottom billion needs private capital and says, ‘clearly there are brave people within these societies who are struggling to achieve change. It is important to us that these people win their struggle, but the odds are currently stacked against them.’ He goes on to explain the numerous challenges ahead, but introduces a valuable line of thinking that build the case for supporting local entrepreneurs seeking to implement solutions designed for a local context.

Specifically, he recognizes the idea that the pyramid structures and top down approaches used in traditional development are quickly becoming models of the past. Increasingly, people possess the ability to take development into their own hands. It is through economic activity that Paul Collier argues the most progress can be made. He explains, ‘International trade has taken place for several thousand years. However, the most dramatic transformation of the size and composition of trade has been during the past twenty-five years.’ He goes on to say, ‘For the first time in history, developing countries have broken into global markets for goods and services other than just primary commodities.’ It is this most recent development that gives the world’s impoverished an opportunity to make real economic progress.

Collier makes clear that until 1980 the role of developing countries was to export raw materials. He explains that in contrast to popular belief 80 percent of developing countries exports now consist of manufactured goods. At the same time developing countries are increasingly able to export services. He explains, ‘so trade based on primary commodity exporting is likely to generate quite a lot of income inequality. And its scope is inherently limited by the size of the market: as exports grow, prices turn against exporters. By contrast, manufacturers and services offer much better prospects of equitable and rapid development. They use labor rather than land.’ A successful transition into secondary and tertiary sectors remains the key challenge for the continent moving forward.

After several decades of development efforts it is clear that these problems can never be solved by official development assistance. On the contrary, there are an increasing number of reasons to believe that official development aid is one of the key hurdles that inhibits real development on the continent. Specifically, the argument that African governments only answer to foreign aid donors as opposed to their own electorate. The priorities and responsibilities of African governments are warped and influenced by outside actors effectively breaking the relationship between government and citizen in the process.

It is also important to recognize that the problems previously associated with poor countries (rightly or wrongly) are the same problems now faced by countries in the North. Thomas Friedman, in his book ‘Hot, Flat and Crowded’ makes clear that poverty is a global issue and that all countries face growing concerns of population, food security, the energy crisis and global insecurity. This changing landscape questions all assumptions and requires a complete ‘rethinking’ of traditional development at best. This shift is accurately described by the slogan used for the 40th anniversary of the IDS (Institute of Development Studies, Sussex, UK) that reads, ‘Problems are not a monopoly of the South and solutions are not a monopoly of the North.’

These different authors work to effectively question the approach of traditional development aid and illustrate new areas now open to debate. These authors make clear that we need to reach outside of traditional development thinking and look beyond the traditional sector and actors. New language, new theories and new players are required to redefine development for the 21st century. It is important to recognize that now global issues are also at play. In an effort to tackle these challenges a new focus is placed on local entrepreneurs and wealth creation. And as opposed to the top down approach that has failed in the past, a new focus should build from the bottom up. These texts are instrumental in introducing a needed shift in thinking. It is unfortunate its taken nearly 50 years to realize that changes need to be made. Let us hope it wont take another 50 years to reflect on the actions we take today.

The revolution is here and the time is now! Technology drives innovation in Africa

African entrepreneurs are driving a second technological revolution in Africa. Where ICT’s were once imported from abroad and artificially embedded as telecenters a new trend is underway.

Local talent are actively working to deconstruct technology in ways they can rebuild it with a purpose. Designing from within the context and for the context gives it meaning.

A growing network of investors see this potential and are now working to engage the entrepreneurs with the best ideas and in a growing effort to tap this new potential.

The iHub, Nailab, Limbe Labs, Appfrica Labs, Banta Labs, MEST and other incubators on the continent are the front lines in this business. They bring together entrepreneurs in ways that they can effectively incubate new projects and ideas. They also serve as a critical nexus where knowledge, skills and capital come together. Otherwise an effective interface to the outside world, the public and private sectors and government.

Afrilabs brings this emerging network of labs together in the interest to promote these local initiatives, coordinate activities, share lessons learned and promote success stories.

VC4Africa.com is a peer to peer platform for connecting entrepreneurs and investors. The revolution is here and the time is now.


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