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African lender serves medium-sized firms known as “the missing middle”

Access to finance is a challenge for many of the clients MEDA works within developing countries.

Some of MEDA’s efforts to bridge this financing gap involve investing in organizations that specialize in lending to small and medium-sized businesses. One such company is Business Partners International (BPI). MEDA has invested in BPI through MEDA’s Risk Capital Fund.

BPI is a specialized risk finance company, set up in 1981 to provide support to small and medium-sized businesses. It provides customized financial solutions, mentorship and technical training.

Started in South Africa, the firm now operates in Kenya, Uganda, Rwanda, Malawi, Zambia and Namibia.

BPI has grown to an investment portfolio of over $230 million. It has over 2,000 active investments on its books across seven countries. The firm makes between 350 and 750 new investments annually, totalling about $100 million.

Over the past 39 years, BPI has invested over $1.6 billion USD, created job opportunities of over 788,000, and financed 77,000 small and medium enterprises.

BPI doesn’t just make loans, said Sally Gitonga, who served as the organization's Kenya country manager for 14 years. “Entrepreneurs need more than just money, so for us, we don’t provide just the money,” she said. “We want to be able to provide entrepreneurs with other services.”

“Their challenges are not just access to finance. There’s a lot more than that. There’s a lot of hand-holding required.”

(Not long after making a presentation to a visiting MEDA group which forms the basis of this story, Gitonga left BPI. She now works for the Africa Enterprise Challenge Fund, an impact investing development institution based in Nairobi. — ED)

Examples of businesses that BPI has invested in include a Nairobi medical clinic and Equator Apparels Company. Prior to receiving an investment from BPI, Equator lacked sufficient working capital and struggled to fill new orders. Some of the major clients for the corporate uniforms and protective clothing it produces are institutions that do not remit payment for goods shipped in a timely fashion.

BPI’s Kenyan office invests across the entire country, providing both loans and technical assistance funding. It will invest in all sectors except residential real estate, non-governmental organizations or primary agriculture. BPI does work in value-added, secondary agribusinesses.

The company works with formally registered businesses that comply with all regulatory requirements. Investments range between $50,000 and $1 million USD. The average deal is between $300,000 and $400,000 USD.

22 nairobi garment firm shot three SD photo 1BPI’s assistance provides working capital for Equator Apparels, a Nairobi clothing firm. photo by Sid Dueck

The small and medium enterprise (SME) space is a difficult one to be in, Gitonga said. “As much as we know there are many financial service providers who say they are in the SME space, it’s not very many who are in it and doing it well.”

Micro-businesses are well taken care of by various lenders, as are large businesses.

So-called lifestyle businesses, started by brothers or husbands and wives to pay their school fees, mortgages and support their lifestyles, are high risk, she said. Not attractive to the banks, and often not qualifying to be in the micro space, these ventures struggle to find capital.

“This is why it’s called the missing middle, because they are not very attractive to players in the market.”

Many players shy away from the missing middle due to the SMEs lack of collateral (pledgeable assets). “Even when it comes to realizing the security (where assets were pledged as security and the borrower defaults on a loan), the court process does take a while.”

Appraisal costs are also high because SMEs are not sophisticated. This complicates and lengthens the due diligence process. “Sometimes you get financials that are not that refined because they are also audited by an SME firm.”

SMES also lack sophisticated human resources, raising the cost of investing in them. Limited upside also discourages many investors.

BPI offers term loans for five years, during which time the client only has to service the interest component. Many competitors offer only 24-month to three-year terms.

An unusual perk that BPI provides to clients is a secondary loan. This is a technical assistance loan provided interest-free to each client. Subordinated to the main loan, this is provided purely for enhancing business processes, technical or capacity- building areas that the business requires. A client can access an additional amount up to 30 per cent of the main loan that they have taken, at any point during the term of the loan.

This helps businesses save on their working capital. “That’s something we strongly believe in offering to them.”

A three-year study of BPI’s clients found that those who took technical assistance increased employment by 26 percent. Their sales increased by 32 percent and profits grew by 76 percent.

Only eight percent of clients who took technical assistance defaulted on their loan. Twenty-two percent of clients who did not take techni- cal assistance defaulted. “That just shows you how aligned the technical assistance is to any commercial loan that you give.”

BPI does not insist on 100 per cent collateral, instead focusing on business viability. “We will just take whatever security or collateral that they have, then we price for the risk.”

The organization has also developed an efficient structure to conduct appraisals and due diligence. BPI makes its investments as a mix of debt and equity to provide it with adequate upside.

Sector-specific knowledge is a key strength that differentiates BPI in the market, Gitonga said.

Evaluating potential investees and processing their application takes four to six weeks on average, plus another month or two to get the money to the company.

Product structures are aligned to the cashflow of each business. “Each business is different; each business generates different volumes and has different cash cycles.”
In Kenya, BPI has approved 185 investments totalling $42 million USD.

Women-owned businesses make up about 25 percent of BPI’s Kenyan portfolio, lower than its 30 per cent average across all operations. “Women are more risk-averse, but they are better payers. That’s the irony.”

Investments in Kenyan firms have maintained 6,000 jobs and created about 1,800 new jobs, she said.

Recently, the United States Agency for International Development (USAID)’s INVEST program agreed to fund a pilot project that will see MEDA working with BPI to open a second chance investment window.

This fund will be used to make investments in women-led businesses that unsuccessfully applied for BPI investment. After receiving technical assistance tailored to their business needs, they will reapply for a second chance.