Financing The future through innovative channels: Breaking the barriers to Financing SMEs in Africa’ by David Lanre Messan
The 21st century is introducing transformational models for financing, utilising technology, the frontline driver of this age in the achievement of its aim. While these models are becoming policies in modern economies, growth markets especially in Africa lag in leapfrogging approaches to participating in this revolution. Positively enough, the question this revolution has put on the lips of finance seekers is not necessarily ‘how do I get funded?’ but ‘when do I get funded?’ As such, financing the future will be tailored to meet all business ideas and needs (even those undeserving of it) with all but a time barrier.
One of such models set to power financing is community, as close knitted, identifiable and authentic groups will have greater access to various forms of funding that will include the well beaten paths of micro financing to technologically driven crowd funding opportunities for consumers and entrepreneurs. The powerful impact of crowd funding can be seen first-hand with creative project fundraiser www.kickstarter.com, to low income lenders www.kiva.org, as these tools enable financing access across borders, regions and continents, creating a global brother keeper community. With crowd funding gaining policy momentum through the USA JOBS act, preparedness for African youth to take advantage of this funding landscape is essential, albeit with obstacles needed to be tackled.
These barriers include extremely low or completely non-existent credit ratings, low management capacities, unpreparedness for funding access, poor financial inclusion strategies, slow implementation in government policy as regards funding etc.
Solution orientation should drive the future of financing African SMEs in order for tangible, scalable long term benefits to be realised, requiring collaborative efforts that consists of a blossomed ecosystem that include financial service providers, businesses, institutions, governments, political leaders, consumers and the third sector. A viable structure such as this is the Harvard Research, Entrepreneurial Finance Lab (EFL) a credit screening and risk evaluation tool that helps issuers unlock capital for SMEs in partnership with Mastercard, improving their credit rating and providing over $200 million for the unbanked in developing markets. Also, the Nigerian government and Mastercard national identification card partnership is driving a prospective future of credible financing.
Private equity has been an effective financing method but largely remains foreign and seemingly far-reaching to most African businesses, as a result of the unawareness of its availability in growth markets. To effectively finance the future, an understanding of the economic and social benefits of private equity for SMEs is key, as it channels significant flows of international capital into Africa as such a regenerative awareness drive by SME service providers, governments and private equity firms are essential. SMEs can therefore position themselves to tap into private equity by standardising their businesses and strategizing these businesses to meet high growth demands by these firms as private equity firms are only likely to invest in high yield markets.
- Technology: The powerful impact of technology can be seen first-hand with crowd funding as it enables access to cash through a pool of funds. E.g creative project fundraiser www.kickstarter.com, to low income lenders www.kiva.org, as these tools enable finance access across borders, regions and continents, creating a global brother keeper community. Youth should create and be made aware of these channels.
- Microfinance: African entrepreneurs should form and work within trust-communities in order to access funding. All African governments and financial services providers could engraft the scale-up of savings-led microfinance solutions as part of an overall strategy for tackling poverty.
- Financial Inclusion: Sustainable financial inclusion programme offered via formal financial structures and partnerships could be enacted through cooperation with private and public stakeholders.
- Policy Drives: African governments should make access to financial education, a primary focus of their work, targeting vulnerable demographies.
- Management know-how should be improved through mandatory government or partner business development trainings for start-ups to enable them better prepare for finance opportunities.
- Adopting Innovations such as Entrepreneurial Finance Lab psychometric testing would lower the demands on SMES to access needed business finance.
- Financial institutions and regulators should welcome innovative approaches in community or demography based savings financial generation by supporting the development of products that boost ratings, help people save and earn at the same time.
- Private Equity: SMEs can therefore position themselves to tap into private equity by standardising their businesses and strategizing these businesses to meet high growth demands by private equity firms as they are only likely to invest in high yield markets.
David Lanre Messan is an Idea Strategist, wrote in from Lagos