This article first appeared in my column with the Business Daily on July 10, 2016
As an independent economist and consultant I have the opportunity to do interesting research and analytical work in the country, region and continent. Recently, I have been interviewing numerous individuals and organisations on what constraints negatively inform the economic development of the country. One issue I seem to bump into regularly is the financing of businesses in the country. I always hear about how access to finance is an issue for most businesses, particularly SMEs.
The general complaint is that the conditions of financing, particularly the onerously high interest rates, negatively inform access to finance from SMEs- and I agree. In order to meet the demands of current interest rates, a business has to be ridiculously profitable from the second they get the loan in order to service the loan. As a result, SMEs across the country often resort to financing from mainstream channels as a last resort. SMEs will often start with raising funds from friends, family and informal financial channels such as merry-go-rounds, and only if these fall short will they resort to loans, and only if they qualify.
So given this state of affairs, one must ask: Are there alternative sources of finance for SMEs, particularly sources of finance that are more patient? And the answer is yes. Getting finance from equity sources ought to be seriously considered as the business profit schedule can be more realistic and there is no pressure to meet periodic and generally inflexible debt payments. Yet, there seems to an articulated reluctance in the Kenyan context to engage in equity financing.
For example, I was talking to someone who understands the equity space in Kenya and the USA. In the USA, private equity funds are sought after by businesses for financing. In Kenya however, the situation is different and it is not uncommon for equity players to have to take the initiative and actively look for projects that could qualify for their financing. Whereas demand chases supply in certain parts of the world, it appears that supply has to stimulate demand when it comes to equity financing in Kenya. I continue to hear players in the equity (and other) financing spaces complain that there is more money than there are bankable projects. Thus the irony seems to be that there is money looking for homes in Kenya but there does not seem to be a sufficient number of viable projects to absorb the money- unless investors aggressively seek out these projects.
So naturally my question is why? Why aren’t Kenyans positioning their businesses to better leverage equity financing? Equity tends to be more patient than debt, and given the fact that business in Africa can be unpredictable, why isn’t such patient financing more attractive to Kenyans? The resounding answer I got is control. Kenyan businesses seem to be especially reluctant to take on equity financing because they will have to cede a certain amount of control over their business to ‘others’. This predisposition is particularly strong in family businesses in Kenya, some of which are big players in the Kenyan business context. Rather than cede control to external investors in equity deals, many businesses would rather just maintain control and contend with the debt market. It seems as though many Kenyans would rather get a loan from a bank or just let their business bumble along at its current size, than cede board positions and crucial management decisions to ‘outsiders’.
Other factors that seem to discourage the uptake of equity is that debt is easier to access and firms are not put under great scrutiny as tend to be the case with equity deals. Further, there seems to be a lack of understanding of equity financing and how it can be leveraged for firm growth.
In some ways this is a shame because although I understand the predilection for maintaining control, if Kenyan businesses are hesitant to take on equity, this reluctance may be negatively informing the ability of businesses to expand and grow. We can all think of businesses, massive businesses, which have benefitted from equity financing around the world. So rather than associating equity with ceding control or being intimidated by the lack of understanding on this type of financing, perhaps Kenyan businesses should take a deeper dive into how equity can be of benefit to their businesses. After all, a diversified financing strategy can only be a good thing.
Anzetse Were is a development economist; firstname.lastname@example.org