It has been a busy year for Felix Bikpo, CEO of the African Guarantee Fund (AGF).
The institution he heads has recently received an AA- rating from Fitch and he is on his way to trebling the AGF’s equity, which will enable him to expand its activities and leverage its balance sheet to have a meaningful impact on small business lending across the continent. When we met, with Siberian blizzards hitting the European peninsula, Bikpo was as warm and charming as ever.
The softly spoken Ivorian, unlike the UK transport system, was calm and composed. He felt confident that the AGF was at a tipping point and that progress in the last year had positioned it to roll out its services and take it to the next level, from concept to implementation.
The first point that Bikpo makes when we meet him in London, which he was visiting to sign a re-agreement with GuarantCo, a global guarantee fund specialising in infrastructure, is that although his institution was created from public funds it is run very much as a private sector company, with a clear mandate to deliver returns for its shareholders.
He thereby distances himself from past initiatives where good money was thrown after bad and draws attention to the fact that supporting SMEs is a profitable business if looked at the right way. The AGF’s original shareholders were the governments of Spain and Denmark and the African Development Bank.
France’s Agence Française de Développement (AFD) and the Nordic Development Fund have recently come on board and Bikpo says he is in advanced talks with at least five other institutions interested in joining. The AGF was launched in 2012 with a $50m capital base.
Since then, it estimates that it has enabled over $700m of loans to more than 8,000 SMEs. Its equity has doubled to $100m and the objective is for it to reach $500m by 2021.
Bikpo thinks he should get there by 2020, which will enable the AGF to issue up to $1bn of guarantees to the SME sector, and more specifically small businesses. The AGF primarily works with banks across the continent to help them lend to SMEs by providing guarantees on these loans. This guarantee works in two ways: it mitigates some of the risk faced by the banks (financial institutions, or FIs) associated with lending to SMEs, and more importantly it lowers the cost of lending to SMEs.
SMEs face a high cost of capital not only from the interest being paid on the loan but also in terms of the collateral that they need to put forward to access funding. This can slow down a company’s growth because that capital could be put to better use.
By providing guarantees, the AGF enables SMEs to access finance without having to provide 200% of the loan amount in collateral, which is common for this market segment. Because the AGF is now AA- rated, Bikpo says, the cost of the guarantee for the FI is effectively reduced and will also reduce further the collateral that SMEs will have to put forward.
Bikpo also highlights the problems caused by the tenure of loans. Most small businesses fail within five years, but according to Bikpo it’s the system that fails them, not necessarily the business model. Loans to SMEs are generally very short-term.
The AGF’s guarantees allow banks to provide longer-term loans, thus giving these businesses more time to establish themselves. The real work, he says, is in education to ensure that banks are equipped to finance SMEs.
Capacity building is one of the key strategic pillars of the AGF and Bikpo believes that banks need to do more to position themselves to lend to this segment. “You cannot use the same models for SMEs that you do for big companies,” he says. “That’s why we work with our partner FIs to strengthen their systems, the internal processes and risk assessment tools, to give them more comfort to lend to this sector and to lend to it in a manner that is reasoned and that will ensure that the non-performing loan [NPL] ratios are sustainable.”
SMEs are not so risky
Bikpo is adamant that the SMEs’ reputation for being a risky asset class and bad payers is unjustified. He says that the FIs they have worked with all have healthy NPL ratios and that it is the larger loans that have proved more risky.
The threshold they have set the loan books of their partner institutions is an NPL ratio of 3%, something he says they are achieving. And the AGF does that by also carefully choosing the FIs they work with – FIs with strong processes, good credit allocation procedures and good people, although he does also see it as the AGF’s remit to work with partners to strengthen these factors.
He seems embarrassed as an Ivorian that it is often the Francophone countries that lag behind when it comes to supporting SME financing and believes that government has a role to play, pointing to what is happening in Egypt, where government has taken a decision to get banks to put 20% of their portfolio to SME financing. He says AGF is working with the banks in Egypt to implement this by building the capacity to lend to SMEs and also by providing guarantees to help de-risk this asset class.
However, setting such a benchmark requires the necessary framework and mechanisms to be in place. In other words, government also needs to support the FIs by upgrading the legal system and dealing with other constraints that may be holding the banks back.
Working for a DFI, Bikpo is the consummate diplomat and careful with his words. Questioned on whether there should be caps on lending rates to SMEs – as there was in Kenya when government passed a bill to cap rates to 4% above the benchmark rate – he refrains from criticising such policies.
However, he points out that the bill has not had the desired effect in Kenya, and that SME lending did not grow as a result. If anything, banks will generally retreat to what they perceive as safer asset classes, the bigger businesses. As it happens the Kenyan central bank is looking at reviewing this decision to add more flexibility in the market.
When asked about the state of the continent and the uptick in its growth outlook, Bikpo urges caution. The last time we saw sustained economic growth driven largely by high commodity prices, he says, it did not translate into greater economic diversification. And the lack of economic diversification is directly linked to the lack of support and attention that has been given to the SME sector, he is quick to add.
And financing is just one of the constraints that SMEs face. The high cost of doing business because of a lack of power or good quality roads make a country harder to succeed in. This is why the deal Bikpo was in town to sign with GuarantCo was of particular interest. GuarantCo, part of emerging market infrastructure investors the PIDG group, specialises in providing instruments to de-risk infrastructure.
This $74m re-insurance agreement is to be used by AGF and GuarantCo to provide guarantees to FIs lending to SMEs in the infrastructure sector, for both larger and smaller transactions. AGF will be able to support SMEs being subcontracted to support the infrastructure projects that are taking place across the continent. “Not only will these SMEs benefit,” Bikpo says, “but they will be contributing to enhancing the business climate through better infrastructure.”
“My job,” he concludes, “is not to help banks finance the Coca-Colas or the Nestlés, but encourage and help the banks to finance the future Coca-Colas and Nestlés of Africa.” We can all drink to that. n