Credit funds, an alternative to bank financing

By Sidoine Viagbo, Executive Head West Africa au Barak Fund Management

While they contribute to a significant share of the wealth and employment created in Africa, small and medium-sized enterprises (SMEs) continue to be the poor cousins of bank finance. However, there are alternatives to traditional credit, such as the solutions offered by credit funds, which are investment vehicles that specialise in providing tailor-made financing and whose flexibility is particularly valuable for companies in the development phase. In particular in the agricultural commodities sector. In this forum, Sidoine Viagbo, Executive Head West Africa at Barak Fund Management, discusses the advantages of this financing formula and the possible synergies with bank credit players.

Created in 2008, Barak Fund Management is a credit fund dedicated to the financing of African VSEs / SMEs, mainly in the agricultural commodities sector. With more than USD 1 billion in assets under management, Barak seeks to generate returns similar to those of equity markets with less volatility and, above all, better risk control. To achieve this, we set up resource-backed loans against the commodity inventories of the companies we finance as collateral.

Alternative financing

In this sense, our strategy is part of an alternative approach to traditional bank financing, which obeys criteria (turnover, total balance sheet, equity, etc.) often perceived as « rigid » by many small entrepreneurial structures, which are still not very formalized. This probably explains why in Africa, 40% of requests for financing in the agricultural sector are rejected by local banking institutions because of their solvency; 16% because of capital constraints; 13% because of the size of the balance sheet; 9% because of a lack of banking credibility; 9% because of their inability to provide foreign currency; 9% because of a lack of financing adapted to their needs; and 4% for various other reasons.
In comparison, the financing formulas offered by credit funds such as ours are often more flexible because they are tailor-made (based on cash flow or sales contracts already signed, for example), on a purely transactional basis. The same applies to time horizons, where, once again, the key word is flexibility: whether short-term (up to one year), medium-term (from one to five years) or long-term (up to seven years), the financing is always secured on existing or future stocks of raw materials.

Synergy

However, these two sources of funding should not be seen as competing with each other. Structured differently, they are first and foremost complementary. The current period, made up of uncertainties born in the wake of the Covid-19 crisis, is in this respect a particularly opportune moment to recall that banks and credit funds would be well advised to work hand in hand, capitalizing on their respective strengths. Unlike banks, credit funds do not have the possibility of obtaining refinancing from central banks. A situation that de facto limits their room for manoeuvre in difficult times, such as the Covid-19 crisis. The ideal solution would therefore be for traditional credit institutions to make up for this relative « withdrawal » of hedge funds by making good use of the liquidity made available to them by central banks to lend more vigorously to VSE/SMEs, which are in dire need of financing today.
Better still, a synergy could be set up with the funds during this crisis, in order to put this new « business model » for financing VSE/SMEs in the agricultural sector on a permanent footing. Banks would de facto benefit from the funds’ experience with this type of clientele (customer knowledge, origination and transaction structuring), which would lead to better risk sharing, with substantial bank participation in transactions. In the end, we would keep our economies afloat and prevent this health crisis from becoming a social pandemic for an agricultural sector that employs more than 60% of the working population and contributes 35% of African GDP.

[1] In finance, a guarantee or collateral is a transferable asset used to cover credit risk in the event that the recipient of financing fails to meet its payment obligations.