Collateral, a common concept in formal economies like the United States and Canada, is a huge barrier for small and medium-sized enterprises (SMEs) in Mozambique. While financially educated loan applicants in the country understand that lacking collateral is an issue, less experienced businesses have often never heard of the term. Lacking assets to qualify as collateral makes a loan application too risky to be approved by a bank, however, it does not mean that Mozambican SMEs must be excluded from the formal credit system. It simply necessitates a credit guarantee from a third party provider, which will assume the risk in case the business is unable to repay the loan.
In early 2014, Building Markets brokered a partnership with the Thembani International Guarantee Fund, an NGO whose mission is to provide SMEs access to formal credit, enabling them to expand their business. Thembani is now an integral player in Building Markets’ credit advisory and loan facilitation process, as it provides guarantees to SMEs that are unable to offer their own forms of collateral, but are otherwise strong candidates for a business loan.
Many banks understand the significance of SMEs in the regional economy and are interested in targeting these businesses as clients, but the disparity between the two groups has acted as a barrier to success. To address these demand and supply side issues, Building Markets brought key financial stakeholders together for an event on December 10, 2015 at the Polana Hotel in Maputo, Mozambique to discuss this issue. This provided an opportunity for bank representatives to meet with staff from Building Markets and Thembani to learn about the credit guarantees offered by this partnership. Seven banks attended, all of which are banks within Building Markets’ current network.
Building Markets’ Country Director, Stan Chikakuda, and Global Affairs Canada’s Team Leader, François-Philippe Dubé, opened the event with a summary of Building Markets’ program and methodology. Thembani’s CEO, Phindile Spies, then provided the banks with an overview of how the Thembani guarantee works and a history of the NGO. His goal was to explain how banks can move forward efficiently with loan applications based on the approval of these guarantees.
These events also provide an opportunity for Building Markets and Thembani to learn from banks about why some SME credit applications are not being approved. In addition to assisting SMEs with applying for loans, the Access to Finance program is helping SMEs become more credit ready by learning about formal credit and by creating documents, such as business plans, that can better communicate their fiscal needs to banks. With more input from financial lending institutions about the reasons why loan applications are not approved, Building Markets can ensure their clients are better prepared.
So far, the Building Markets and Thembani partnership has provided $1.15 million USD in guarantees that have led to $3.26 million USD in loans to SMEs. The most recent loan recipients include a local private school with plans to expand their student capacity, a business with plans to market raw ingredients in-country to lower costs for farmers, and a cement company building a larger factory to handle the increased demand from buyers. To date, Building Markets has assisted SMEs in submitting fifty loan applications.