By the Nguriza Nshore team
Feed the Future Nguriza Nshore is applying systemic lenses and tactics to shift the orientation of the financial services market system in Rwanda. Nguriza Nshore is focusing on two major shifts in the financial services market system. The first is shifting the orientation of the banking and microfinance service providers toward the SME segment. This shift requires banks and micro-finance service providers to shift their operations and product offerings to accommodate the specific needs of SMEs and the SME segment. The second is shifting the overall balance of enterprise finance away from banks and microfinance service providers and toward private capital that can more effectively serve the growth capital needs of Rwandan entrepreneurs.
While most financial services projects focus only on bank or loan-based financing for SMEs, Feed the Future Rwanda Nguriza Nshore (Nguriza Nshore), a project funded by the United States Agency for International Development (USAID), is putting equal weight on other types of financial services. In particular, Nguriza Nshore is supporting the emergence of more robust private capital options. Private capital is when an organization or investor, such as angel investors, investment funds, impact investors, etc., use their private capital to invest in selected SMEs/firms. While traditional lending organizations make a margin from the difference between the cost of lending (including the cost of the funds lent) and the interest and fees charged to the borrowing SMEs, private capital investors tend to make revenue or a return through a share of the benefits in firm performance. Typically, this occurs through the value of the firm increasing over time, of which the investor owns a portion (i.e., shares in the firm/SME or equity).
In Rwanda, as in many developing countries, the perceptions, cultural norms and mechanisms that allow for private capital to emerge are nascent, making such investments rare. As a result, very few Rwandan SMEs or corporations access private capital financing beyond informal friends and family networks. At the same time, systemic shifts in support of private capital such as high levels of liquidity, high growth rates, shifting norms around ownership, etc. are emerging quickly. The pace and process of change in favor of private capital has been uncertain at times, which is why Nguriza Nshore is working to catalyze the emergence of private capital that is inclusive, fair, and merit based.
Nguriza Nshore is supporting initial transactions that can form an attractive demonstration to both SMEs and investors alike. Given that both SMEs and investors are limited in their understanding of risks and potential benefits of private capital in a Rwandan SME context, Nguriza Nshore has had to actively engage on both sides. For example, most SMEs in Rwanda are driven by short-term demands for cash including personal/family demands, which as a result encourage SMEs to act in ways that can limit their growth and value to an investor. Therefore, a vital issue is to help SMEs realize that they often need to restructure for longer-term growth. This encompasses many aspects of their business — customer orientation, brand value, alliances, data management, decision-making, etc., — but most important is how they manage their human capital. Finding and supporting SMEs that are hungry for growth and demonstrate an openness to partner with investors to achieve more than they can on their own, is of utmost importance to an SME becoming investment-ready.
While finding SMEs with the right mindset is essential, it is not sufficient. Additionally, there are many technical and practice performance improvements required for an SME to become investment-ready. Nguriza Nshore seeks to build the ability of local market actors to deliver needed technical assistance, but as the overall ecosystems are still evolving, Nguriza Nshore often has to step in to fill technical assistance gaps and generate a flow of viable transactions.
Dedicated technical assistance in areas that prepare SMEs to be investment-ready are crucial. Most SMEs are in critical need of improving business management, building a sustainable business model and ensuring value creation. Nguriza Nshore works with several business transaction advisors, who normally have a pipeline of business opportunities looking for financing. Once the businesses are registered with transaction advisors, and an assessment of their investment readiness or lack thereof is established, Nguriza Nshore comes in to provide the necessary technical support to close the deal. It should be noted that it is only those businesses that are judged to be close to concluding the deal that are facilitated and enabled to be investment-ready, as it is critical to catalyzing systemic change that early investments are successful and provide an attractive demonstration, building momentum for more SMEs, investors and technical advisors to enter the private capital market.
The MSDHub Blog Series is authored by respected implementers and donors of market systems projects globally.