Stacked with skilful and ambitious entrepreneurs, small and medium-sized businesses across Africa are desperate to expand and create new jobs. Yet access to finance continues to be a major drag on their development. The African Guarantee Fund works with financial institutions across the continent to help extend much needed finance to the sector. Chief executive Felix Bikpo talks to African Business Magazine about the AGF’s strategy and its priorities over the next five years.
How can the African Guarantee Fund (AGF) help SMEs overcome the challenges that hold them back?
The main problem facing small and medium-sized enterprises (SMEs) remains their restricted access to finance. Through our guarantee facility, the AGF assists financial institutions in covering the risks associated with SME financing and enables them to increase their portfolio in that asset class.
Through its capacity development facility, AGF assists financial institutions to enhance their SME financing capabilities and execute their growth strategies in that sector. These facilities together enable partner financial institutions to bring their SME financing business to the required scale that would not only enable them bring down transaction costs significantly, but also increase returns on investment.
How has the SME sector in Africa improved since AGF began its activities?
Before AGF, if you look at the volume of the financing from the financial sector to SMEs, it was very low. Today we are in almost 40 countries in Africa through almost 100 financial institutions and we notice that the percentage of loans to SMEs has significantly improved. It’s helped us to go from 3000 to 11,000 SMEs having access to financing on the continent.
We want this number to increase year by year. It’s not just about a guarantee, its about giving the financial sector the comfort it needs. You can see success stories in Côte d’Ivoire, Nigeria, Kenya, Mozambique, Ghana, Togo and Mali. A lot of SMEs before could not expand their activity and they can today because of AGF.
Are financial professionals now more optimistic about the concept of SME lending?
If you take out the international banks, who are generally following their large corporate customers to the continent, we have African banks who have no choice but to finance SMEs – these are their Coca-Colas and Nestlés of tomorrow. SMEs are their natural customers.
When you provide the financial institutions with solutions that can help them to secure the perceived risk of SMEs, they are very happy to follow you. They’ve changed their way of thinking and perception of SME risk.
You recently integrated the Guarantee Fund for Private Investments in Africa (GARI) following a $35m acquisition. What does this mean for the future of AGF in West Africa and beyond?
The GARI fund acquisition was done in line with our strategy to expand on the continent. The GARI fund strengthens our portfolio in West Africa, and is part of our strategy of being closer to our customers. Our plan is to have similar acquisitions in other regions of Africa.
We’re looking actively in Central Africa, North Africa and Southern Africa. All of these regions are growing. The strategy for us is pan-African. We are able to provide to GARI our know-how, technology and people, and new ways of bringing the guarantee business to the continent. The integration has been a success, and the process concluded in 15 months.
The products are being streamlined and the strategy has been understood. The financial sector needs a good guarantee fund – when the AGF came in to reinforce GARI the financial institutions were happy to see an institution come in and provide them with the comfort they need for their business. The reaction was extremely good.
How are you helping to boost SME lending in the green financing sector?
Green business is a new business, a new product in the market. There are still low levels of knowledge around it. It’s important to explain to the financial sector the importance of the green business. It’s important to explain that if we get the right networks in place today and help our SMEs develop the best technology and incorporate it into the business, we are boosting the business of tomorrow. We need to explain what it means and how we get SMEs to adopt the technology.
We have a strong capacity-building component that’s been funded by our shareholders to explain to our partners what green financing is and how we can assess the risk. Using green technology can be good business. We want to boost financing and show others it can be done.
Another business sector where SME potential has gone unrealised is agriculture. What is your strategy to boost lending here?
Africa is mainly agricultural, but agricultural transformation is still in the very early stages. When you see primary producers, it’s more informal than formal – they’re out of the financing network. What we are trying to do, and this is a pillar of the next five years, is to really help drive resources to them to transform agriculture locally. At the moment, transformation is largely done by big corporate companies. That’s good, but why don’t we help these companies to use the local SMEs and drive transformation.
Cargill cannot do what an SME can do because of the structural costs. Let’s go that way, let’s help the SMEs, who can in turn help Cargill. Agriculture is our number one priority this year.
How can you help to improve the infrastructure picture for SMEs?
That’s another priority for our five-year plan, alongside agriculture and energy. When people look at infrastructure they generally think of big companies. These big companies will not be able to operate without good suppliers on the ground, without outsourcing to SMEs on the ground.
Generally big companies outsource part of the job to the SME but they cannot execute because of financing. What we need to do is, if there’s a road from Nigeria to Côte d’Ivoire, we need to look at locally what the skills are, how they can outsource the job locally and build the SMEs and financing.
Then the know-how can stay in the continent and the added value and job creation is immediate. This is what we are trying to work on across all AGF activities – we help to ensure financing and make sure local SMEs are ready to follow.