According to World Bank, there is great interest globally on the role of small and medium size (SME) enterprises in employment creation, income generation and economic development. They represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies.
In Kenya, according to KAM (Kenya Association of Manufacturers), MSMEs (Micro and Small Medium Enterprises) contribute approximately 40% of the GDP with the majority falling in the informal sector. MSMEs constitute 7.41 million, with only 1.56 million licensed whereas 5.85 million are unlicensed. However, access to finance is a major hurdle to SME growth in emerging markets and developing countries. According to World Bank, The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending.
This growing financing gap for MSMEs can be partially dealt with through alternative financing sources from Chamas (savings groups). In Kenya, Chamas are estimated to be 300,000 in number, managing a total of Kshs 300 billion approximately USD3.4 billion. The known investments for Chamas include; transportation sector (taxis, Matatus and buses), Real estate (land and rental houses units), Agriculture sector and financial Sector products like stocks, bonds and treasury bills.
Chamas traditionally started with a goal of improving member’s welfare through payments of medical bills, school fees, food, clothing and shelter. They then advanced to disbursing loans to members to fund their small start-ups and finally proceeded to members investing their contributions by purchasing land, buying properties and investing in stocks, bonds and treasury bills. This was aimed at creating members wealth.
The average age of the members is a determining factor when evaluating risk appetite for investment to venture in. A Chama with members comprising of a youthful age (18-35) will most probably invest in riskier investments as compared to middle age individuals (45-65) who mostly likely will prefer investing in less risky and more stable investment opportunities.
Startup Investments Patterns in East Africa
According to a report by Village Capital on breaking the pattern 72% of the start-up investment in East Africa 2015-2016 went to just 3 companies. Reason being investors find these start-ups too risky because of the systematic challenges in the East African markets. Of the 3 companies that that got funding had a founder who comes from US and Europe or who attended prestigious universities. Challenges cited by the report on the investor biasness included;
- Human capital trap: companies can’t raise money without the right team but can’t afford the right team without raising money.
- Business model constraints: Investors want to see proof of a profitable business model, but building a business in East Africa means moving the markets from analog to a digital economy.
- Capital trap: most companies struggle to attract the capital they need to prove traction. On the other hand, investors want to see proof of traction hence a chicken and egg situation.
- The pattern recognition problem: where investors fall back to look if the founder attended a prestigious university or accelerator program and also relying on networks.
Another challenge is the local rich investors prefer investing in real estate as opposed to investing in early stage and growth stage companies. This has left a huge gap for most promising business unable to attract funding they need from investors.
A VC Model for Chamas
Venture capital (VC) plays an important role in the financing of young firms seeking to grow rapidly. This model of financing is characterized by the following features.
- Venture capitalists intervene very actively in the management of the firms that they fund: they use their experience, contacts, and reputation in order to provide advice to the entrepreneurs, especially with regard to issues such as the selection of qualified personnel or the dealing with suppliers and customers.
- The infusion of capital occurs in stages, involving matching investment decisions based on information that arrives over time.
- It relies on equity-like and convertible securities instead of the senior secured debt that characterizes most bank finance.
Chamas being multi-million shillings investments are playing an increasingly visible and crucial role in the economy and as such we opine that a modern investment model needs to be adopted to help Chama’s tap into the venture capital market to fill the start-ups’ funding gap in Kenya and Africa at large.
This will create a significant impact in the economy through supporting high growth businesses that develop innovative solutions to our social-economic challenges; and create decent jobs while at it. To achieve these milestones Chamas will need to tap into the startups funding market segment by hiring trusted investment fund managers to undertake the investment mandate on their behalf. This will not only help the Chamas to efficiently manage their investment risks; but also maximize wealth creation for their members, by letting investment professionals’ structure diversified funds across growth stages, sectors & regions.
Author: Edwin Opiyo