Business Case for a New SME Financing Fund in DRC
SME’s in DRC struggle to find financing. In fact, 92% of SME’s rely on internal financing according to the World Bank enterprise survey in 2013. This is much higher than the Sub Sahara average of 74%. Financing is needed by SME’s to grow their business and to invest in working capital and assets needed for value creation. Relying on internal financing slows down this growth considerably.
This creates a big problem for the DRC economy, as SME’s are responsible for the bulk of job creation and, as a result, economic growth, stability and prosperity.
Reasons cited by entrepreneurs as well as commercial banks for this failure to secure loans are:
- SME’s don’t have enough collateral
- Entrepreneurs do not understand the procedures for applying and do not have the documentation and systems in place to successfully apply
- There is a mutual lack of trust
- The terms offered by banks do not meet the requirements of entrepreneurs, especially if they need to invest in assets (short tenure and no grace period)
There are very few alternatives available for SME’s, especially those looking for USD 100k1m: FPI, the government development bank seems ineffective; the African Rivers private equity fund of XSML focusses on large (>USD 2m) deals; foreign investment funds are not active in DRC.
More than finance, SME’s are ill prepared to attract and make effective use of financing. Extensive pre- and post-investment technical and managerial support is needed to guarantee returns to investors as well as sustained growth of the SME’s
This funding and support gap can be addressed in 2 ways:
1. Creation of new investment funds, coupled with support structures, that target the lower end of the SME requirement
2. New donor funded programs that target SME development and growth
Given that donor enthusiasm for SME development is low in DRC, we believe that the introduction of new investment funds is the best alternative. Because local fund management talent is not available the fastest way to do this is:
1. New fund managers starting investment holding structures that allow for gradual increase in investment portfolio, giving them time to build a track record
2. Inviting existing investment funds active outside DRC to enter the DRC market Unfortunately, interest of foreign funds in the DRC is low, leading us to the conclusion that the creation of smaller, local investment funds is the best alternative.
Pre- and post-investment support, which is currently not available in DRC, can best be organised in separate entities that are funded by investors active in this field and that will accept lower financial returns