Helping small businesses access finance

 “African businesses need working capital to enable them scale across the world, but in the same vein of pursuing those opportunities and transitioning to a clean economy, we have the opportunity to avoid the unsustainable high tax and high spend social models of the industrialised world which is susceptible to crash, soaring unemployment and suffocation of the spirit of enterprise.”

Those are the words of Wayne Hennessy-Barrett, the founder and chief executive officer of 4G Capital, a finance neobank operating in Kenya and Uganda.

With a net lend of Sh2 billion every month across its 170 and 22 branches in Kenya and Uganda respectively, serving over 120,000 clients every month, Wayne describes his business as having the best problem any business can dream of – more customers than shillings to lend.

It is a journey that began 13 years ago when the former British Army officer came to Kenya as an employee of a South African startup, AFB, a firm pushing pre-paid credit cards, as Head of Loans in Kenya.

His posting to Kenya opened his eyes to the huge opportunity for micro small and medium enterprise (MSME) lending and 18 months later, he led a management buyout of the firm, bootstrapped and took over the company.

Wayne admits that at the beginning, the business was quite challenging largely due to lack of accurate data on the target clients. He had to be patient for the business to take off.

“I did not pay myself for a year. We managed to raise our first few million shillings in investment in 2016 and have been growing at about 70 percent year on year since then,” says the businessman.

He chose to venture into Micro, Small, and Medium Enterprises. (MSME) lending because this segment of entrepreneurs are not well looked after, yet there is a big need for them to have a financing model. They also deserve to grow their businesses on terms that work for them.

“First of all, there is a point of need, and secondly, there is an opportunity because informal economy forms 80 percent of Africa’s GDP and it is growing every year by at least 10 percent, not to mention high population growth,” he explains.

Wayne adds that theirs is to grow small businesses with capital knowledge and providing microfinance digitally, blended with enterprise training and specifically, they provide working capital to mama mbogas and kiosks, enabling them to join the formal economy.

“Ours is not consumer finance but business finance,” he clarifies.

He adds that the mama mbogas and small shops owners are amazing entrepreneurs running capable businesses, but due to little data and few assets that can be used as security, traditional finance models don’t work for them, bearing in mind that it is not the job of the banks to do high risk lending.

“Opportunities are there for people who need help but it is also a great business opportunity to step in support,” adds Wayne.

Pricing risks

A lot of microfinance lenders tend to charge comparatively high interest rates but the entrepreneur says that 4G Capital has to price for the risks and that generally, life is inherently risky especially at low income level, and they lend to the right person, for the right reason with the right amount of money that works for their businesses, enabling them to get 95 – 97 percent collection rate on time because they know their customer portfolio.

“We price the risks and customer margin at no more than a third of their gross margin because when the customer is in more debt at the end of the loan term, it is a fail,” he explains.

Wayne explains that in such a situation, the customer might repay the loan but may end up borrowing to pay another loan elsewhere and that is a disaster, adding that at 4G Capital, they look at the customer’s finances and the price they buy and sell to determine whether they can afford the loan.

“If you look across our different product range, our average interest rates are between 12 to 15 percent on interest component at full term. With risk base pricing, you pay less if you grow your credit history with us.”

Challenging business environment

The entrepreneur points out that access to capital for onward lending to MSMEs is at the top of the list.

“There is lots of capital locally but the question is connecting to the point client needs, restructuring it and turning the opportunity and educating people that risk is inherent but manageable,” he says.

And with traditional banking model being risk averse, Wayne says they have to be smart on how they get the right instruments to help them deliver their mission.

“The other challenge is the macro-environment where the cost of capital has gone enormously high. We need access to capital in local currency to help us move. I don’t want be reliant on dollar or euro debt because we are an African business lending in local currency so we should be funded in local currencies,” he adds.

The CEO's other major pain point is how to get the capital and move it to the local economy at the tempo the business is growing. “Neo banking is new in Kenya but I’m positive amid cyber security risks that we are going in the right direction, we just need a bit of confidence,” he adds.

Forex exposure

Wayne points out that at 4G Capital, they are lucky in a couple of ways in that their business model is very resilient.

“We do short term lending of two or four weeks circle to businesses we know are good for us. It is a capital effective model and with let’s say US$6 or UD$10 million of debt funding, I can lend US$150 quarterly and with high collection rate,” he clarifies.

He points out that this is a great business model though not easy.

“We put the dollar capital in local banks and borrow in local currency against the dollar because banks don’t do unsecured lending," he says, adding that they are looking at issuing a commercial paper and bond issuance at the Nairobi Securities Exchange to raise capital locally.

Having grown the business with such a large loan portfolio, employing over 1,000 people in Kenya and over 200 in Uganda, the businessman says that there is no easy way to run an entreprise as you have to stay in and take all the risks. At 4G Capital, they start and end with the needs of the customer. He says their pricing point is right so the customer is able to pay and get value.

“Secondly, at 4G Capital, we are solving an economic problem, not sentimental problems, and the moral case for profitability is to serve customers tomorrow and meet all our financial obligations,” he emphasises.

“We want to grow a sustainable business, and that means keeping the cost low, have an honest and pure culture, focus on accountability, respect and commitment, growth and excellence,” he concludes.