AGF boosts capital as it looks to back more businesses
What more do banks need to be doing to lend to the real economies and SMEs? Jules Ngankam, group CEO of the African Guarantee Fund, tells Omar Ben Yedder that the local context is often misunderstood. He says the Fund is building its capital base to scale up its offering
The issue of finance is one that often crops up at the African Green Revolution Forum, Africa’s largest agri-focused gathering. The numbers don’t lie: in India some 12% of finance goes to the agricultural sector compared to just 2-3% in Africa. Jules Ngankam, CEO of the African Guarantee Fund, which helps banks increase financing to the underserved sectors including agriculture, argues that this is a largely an issue of informality and the lack of structures within the sector.
“The first challenge is the level of risk. Most of the lenders are not very comfortable with the level of risk that they face in that sector. Informality is the key challenge in Africa. Are these small farmers registered? No. Do they have a cooperative where they are legally registered? No. Which means they are very fragmented. In other countries, like in India, in South America, they have been able to constitute cooperatives and larger groups, making them more accountable and also giving them bigger bargaining power. In Africa, it’s key man risk if you’re lending to a single farmer, so the risk return is not attractive.”
AGF, Ngankam says, is working to help banks better manage this risk as well as show how the SME sector is one that offers delivers on a risk-return perspective.
Nonetheless, he feels that SMEs need to be better skilled in terms of presenting their loan requests. The benchmark today are the fintechs. Fintech startups, he says, are much more sophisticated in terms of their presentation and their financial literacy, with a clear growth plan and valuation of their business.
AGF works by offering guarantees on loans to SMEs and thus sharing the risk associated with a bank’s loan portfolio.
As our Top Banks report demonstrates, both tier one capital and assets have risen consistently in the last decade. However, this increase is not uniform from a regional perspective – in August, the CEMAC region regulator called for banks to strengthen their capital bases. Ngankam remains sanguine.
“I am not worried about the state of the banking sector as a whole and actually this situation – if banks are undercapitalised – works in our favour at AGF. By sharing risk, the bank can transfer some of their liability and as a result they are effectively using AGF to help strengthen and grow their balance sheet.”
The key to lending to SMEs and the underserved is understanding how to manage that risk and keep the non-performing loans level at a reasonable rate, he says. Yet even if many local and regional banks are not that big by global standards, he believes they are well captallised. The banks, he says, must be seen in their local context.
“Internationally, and looking at it from the prism of an international investor, a bank may have a B rating, but in the local context and from a local investor’s perspective it is really a AAA. The international rating will consider metrics and risks that don’t apply to a local investor, for instance the conversion from local currency to hard currency.”
Political uncertainty is his biggest worry; and that can be from a change in government to overnight change in policy with unintended consequences. He acknowledges the impact of an appreciating dollar, but says rising interest rates will have different impacts in different regions.
He contrasts the markets in the CFA zone – where the cost of borrowing has been low given that the currency is pegged to the euro but where there is very little lending to SMEs – with other West or East African markets where the rate can be 25%.
“Some borrowers are taking loans at 2% per day, but for a short period of time, but because these small businesses are actually making margins of 100, 200 or even 300% by buying goods and reselling them within a short time frame, there is a lot more activity despite the higher interest rates.”
AGF builds own capital
During Covid, AGF worked with banks to ensure they supported their clients in the SME sector by increasing their exposure to guarantees, covering more of the risk for the same cost. During this time they also managed to garner more support from their existing shareholders to strengthen their own capital base. AGF started off with a capital of $50m. Today they have a capital base of $250m and they aim to double this by 2025.
One of the reasons for this, Ngankam explains, is that AGF is limited to working with small and medium sized banks. Larger banks such as South Africa’s Standard Bank, Nigeria’s Zenith Bank, and Moroccan or Egyptian banks have requests that are
“Right now we have supported some $4bn worth of SME lending. The gap is over $300bn so this is only 1-1.5% of the total market. We want to get to a point where we can address maybe 50% of the demand in the market”
too big for them to service.
“They come to us with requests for $100m and $200m facilities which we simply can’t service because of our size. If we are to make a dent in this market, we will need to work with them also. Right now we have supported some $4bn worth of SME lending. The gap is over $300bn so this is only 1-1.5% of the total market. We want to get to a point where we can address maybe 50% of the demand in the market. It means that we need to raise more capital.”
Following their proof of concept with SME lending, AGF have been given the mandate to replicate this lending model with an initiative by the G7 countries and the African Development Bank called AFAWA, an initiative to lend to womenled businesses. “We started implementing the AFAWA project and we are ahead of projections. In 2021 the aim was to issue $70m of guarantees and we made $110m. This year the target was $100m and we will end up with $150m of loan guarantees. The demand from banks has exceeded our expectations. This demonstrates the need for this product.”
What about the future? Working with fintechs will be critical he says - they’re offering their first guarantees with various fintechs who offer micro-loans that they will guarantee.
AGF will also be opening a number of regional offices to be closer to the market, with launches in Lagos, Johannesburg and an office in North Africa on the immediate horizon. ■