Financiers push for tailor-made solutions for 'high-risk' SMEs

Shaka Kariuki, the chief executive of Kuramo Capital, is quick to dispel the claim that small businesses are high-risk to trade with.

He says there is money in the small and medium enterprise sector (SMEs) if only an investor knows how to go around the said risks. It is what his investment firm is doing.

“It is a perception we have out there,” he says. “It is the same perception we have for Africa, and that is why we borrow at high rates.”

He insists the cloud of uncertainties of profitability in the SME sector is fueled by these businesses not being known.

He compares this with the handful of firms listed on the Nairobi Stock Exchange (NSE), while on the periphery, there are more than five million SMEs in the country.

“That (high risk) is not necessarily true. It is because many of them, yes, they need assistance to ensure they have a financial model that is anchorable, but that is where returns come from,” he says.

While participating in a panel discussion on financing SMEs and startups under the Africa Continental Free Trade Area (AfCFTA) held at Strathmore University, Mr Kariuki held the opinion that there are innovative ways to go about financing small businesses.

“For those SMEs that are deemed to be risky, if you can have investors that are able to mitigate that risk, then you stand an opportunity as far as generating excessive risk-adjusted returns,” he said.

Mr Kariuki explains that products such as growth equity, accelerator programmes and warehousing facilities, and blended finance solutions are what can be used to grow SMEs.

Growth equity, for example, being patient capital provided by private equity firms, would fit businesses in the agriculture space, logistics and manufacturing which are key sectors in the AfCFTA.

But to unlock the full benefits of AfCFTA, Mr Kariuki says SMEs need both traditional and alternative financing, a hybrid of sorts.

This includes debt-based financial solutions such as working capital, risk mitigation products, where insurance and guarantee schemes fall and equity-based financing like venture capital.

Private equity is important in this case for the growth capital and scaling established SMEs into regional players. “Private equity brings not just capital but also strategic guidance, operational improvement and governance,” he says.

Under AfCFTA, Mr Kariuki says financial institutions can be enticed to lend more to SMEs, for example, through partnerships with development finance institutions (DFIs) and private equity firms. This would derisk the SMEs.

“By blending concessional and commercial capital, financial institutions can extend credit to more SMEs at lower rates, especially in sectors prioritised by AfCFTA,” he said.

United Bank for Africa (UBA) Kenya Chief Executive Mary Mulili, who was also part of the panel discussion, said financing solutions to SMEs should be aligned to their growth. “SMEs are different,” she said. “The financial requirements of a startup are different from those of a micro, medium or large SME.”

Therefore, a financial solution for a startup may not work for a mid-sized SME. She says it is important to break these businesses down into different categories so that the financial assistance provided does address the real challenges they face.

“For example, a startup will not need a bank loan, probably equity injection, information or training in terms of organising themselves,” she said.

Ms Mulili explained that a startup or emerging SME will probably rely on their M-Pesa statement when seeking out financing because they possibly don’t even bank their cash. And as they grow up the ladder, and become more organised, so will their financial needs change.

“What they want is quick money in, money out,” she said. “It is just understanding and ensuring you (financier) are prescribing the right solution to each category of SME.” 

Mr Kariuki said it is important as well to equip financial institutions with tools to assess and manage the risks associated with financing SMEs.

He said an improved risk management environment is a prerequisite for attracting private investment, including funding from private equity firms and foreign investors.

“The scale and predictability of the AfCFTA market make African SMEs and startups more bankable and attractive to private equity investors seeking regional growth opportunities,” he said.

“Private equity firms like Kuramo Capital are at the forefront of this transformation. By leveraging AfCFTA’s reforms and investing in sectors aligned with the agreement’s priorities, we help SMEs and startups scale regionally, access new markets and attract co-investment.”