Growth by leasing
Tanzanian firm helps businesses access needed equipment
By Mike Strathdee
As printed in The Marketplace – July/August 2018
MOSHI, TANZANIA — One of the challenges facing entrepreneurs in developing countries is the inability to get credit.
In many African nations, purchasing machinery needed to grow a business can be especially difficult.
Tanzanian Banks are very risk averse, requiring 125 per cent collateral for any loans. Tanzanian entrepreneurs and farmers can’t meet that standard.
For the relatively small numbers of businesses and farmers who have sufficient collateral, demonstrating that you own land in a country where plots are often held informally is challenging. Neighbors know where your land begins and ends, but banks want to see papers verifying the claim.
A lack of a well-functioning credit bureau or proper financial records magnifies the problem.
EFTA (stands for Equity for Tanzania Ltd.) is an alternative financing provider working to help this under-served market. EFTA is a national leasing institution focused on small businesses and farmers, “anyone who is excluded from traditional finance,” says Coy Buckley, the firm’s chief executive officer.
“Small business and farmers really struggle to get enough capital to grow,” he said. “EFTA’s leasing model provides a practical, business-oriented solution.”
These small businesses and farmers who are not well served by traditional financial institutions or micro-finance are often referred to as “the missing middle,” enterprises that have capacity to grow and employ others, if only they could get access to the equipment they need.
The firm’s leasing model gets around the hurdles put in place by conventional financial companies by using the financed equipment as collateral. EFTA works with big suppliers such as John Deere, New Holland and others to get the mix of type of equipment that their customers need. That equipment provides the collateral for its loans.
About 95 per cent of businesses EFTA works with do not have audited accounts. That means the company needs to research cash flows and help clients model projections.
Leasing contracts may date back to Babylonian times in 2010 BC, a Sarona Asset Management analysis of EFTA’s business suggests. (MEDA recently made an investment in EFTA. Sarona’s report was prepared as part of that deal.)
Modern leasing contracts were used in the 1700s to finance horse-drawn wagons.
Many countries have tax advantages that make leasing tax advantageous compared to borrowing to obtain the same equipment. Leasing has been slower to develop in Africa “in part due to uncertainty of contract law and the lack of financial leasing laws,” the Sarona report suggests.
EFTA has 65 staff in eight branches around Tanzania. MEDA’s investment in the firm will be used to support its growth and expansion throughout the country, said Buckley, a US native who has worked in Tanzania for seven years.
Half of EFTA’s business book is in agriculture, a sector that makes up 80 per cent of the Tanzanian economy. Manufacturing machines and service-related machines such as medical devices, printers and transportation, including school buses, make up the balance of its leases.
Their business model aims to help farmers and other entrepreneurs increase their capacity and value add through equipment ownership.
Most clients are sole proprietors. Buckley would like to work with co-ops or groups of farmers, but has found it difficult to get a successful model for doing so.
EFTA’s average loan size is $25,000 US dollars. The minimum loan they work with is $10,000 and the maximum would be $200,000.
Prior to the MEDA investment, they were doing 30-40 deals a month.
Clients typically pay for assets over two to three years.
EFTA requires 10 per cent down in some cases, 20 per cent for tractors. They have found a big correlation between down payment and risk of default.
“With any situation in business, you’ve got guys, and ladies, who act in good faith and those who don’t.”
EFTA has taken several steps to guard against losses. They do quarterly inspections of stationary equipment and put GPS trackers on mobile equipment. They are working on a kill switch prototype that would remotely switch off equipment if it goes outside of a digital fence.
Typically, 10 per cent of borrowers will default. “That for us is the right balance of taking risk and having an impact, versus creating a business that is sustainable.”
EFTA achieves a 70 to 75 per cent recovery rate on defaulted loans. A USAID study several years back found that 15 per cent of small business loans supported by the government failed, he noted.
The more EFTA takes steps to tighten down its default rate, the less impact it will have, he said. Less risky customers can get bank loans. ◆