A solution for Rwandan entrepreneurs?
The comments included a proposal on how financing for small businesses in Rwanda and Africa can be improved by Fadzayi Musanhu, director of Market Intelligence Africa (MIA) in London.
Poole’s book argues that, contrary to the promise of a thriving micro-credit-financed small business sector, Rwanda’s economy remains dominated by informal traders struggling to make ends meet. There is no basis for the idea that most Rwandans, or residents of any other poor country, are willing to become entrepreneurs, he argues.
The dangers of pushing expensive loans to people who are unlikely to be successful in small businesses, and who may in fact use credit simply to meet daily household needs, can be reduced by blended finance, says Musanhu, who works with small and medium-sized enterprises (SMEs) in Rwanda.
Would you like it to be mixed?
Blended finance seeks to reduce risk of potential investments through grants, loan guarantees and interest rate subsidies. These are provided by development donors such as the World Bank’s International Finance Corporation.
The article continues below
Get Your Free PDF: Top 200 Banks 2019
The race for transformation
Fill out the form and download the highlights of the exclusive ranking of the 200 biggest African banks from last year’s The Africa Report for free. Get your free PDF by filling out the following form
This concessional financing can be combined with technical advice and assistance to SMEs before they seek loans to the private sector.
Technical support includes assistance in the creation of corporate governance structures, sales and marketing support, and advice on accessing foreign markets.
Kenya, Uganda and Tanzania were the biggest beneficiaries of blended finance in Africa, according to an MIA article in January.
Rwanda “ticks all the boxes” as an African investment destination due to political stability and a conducive business environment, Musanhu says.
- But, she argues, the country’s SME sector has yet to mature. “Small Rwandan businesses need patient capital and technical assistance.”
- Microcredit lenders should work with concessional finance lenders to provide this support, she says.
The point is that too many people in poor countries are being pushed into entrepreneurship because of unemployment, says Musanhu, who is from Zimbabwe. Blended finance can help small businesses achieve scale and thereby increase employment opportunities, she says. “If there is a real entrepreneur, they will tick the boxes.”
For failed SMEs, Musanhu says, they would pay annual interest rates of around 5% to 10%, compared to the much higher rates often charged by private sector microcredit lenders.
For many investments, banknotes in Rwanda are generally small compared to other African markets, Musanhu notes. Yet costly due diligence processes are still required, so investors may be tempted to seek larger investments in larger domestic markets instead.
This approach, she argues, risks forgetting Rwanda’s Potential as a Gateway to Larger East African Markets.
- Rwandan businesses need more equity than debt, says Musanshu. She quotes Blue Orchard, part of the Schroders Group – who has made blended finance investments in countries like Kenya – as an example that can be followed.
- The objective is that the amount of concessional financing granted to a company is reduced over time increase the level of private sector funding.
- Musanhu says it’s too early to say if this transition will work as expected.
- “Businesses cannot rely on concessional finance indefinitely,” she says. “If a business can’t do it on its own after five years, it might not really be doable.”
At the end of the line
The jury is still out on whether Rwandan SMEs can move from concessional financing to private sector financing.