Interview with Coy Buckley, CEO of EFTA
EFTA is the first company in Tanzania which is seeking to employ financial leasing to boost employment levels in the country and to bring business growth opportunities to the so called missing middle.
Would you agree with the assertion that the poor have been hitherto stocked with micro credit whilst the SME sector has been starved?
Yes. I would say that micro credit has its place. It does a lot in terms of providing access to small loans for inputs, for education and overcoming small gaps. It’s also used for consumer credit but I would say the tougher and the bigger aspect of using finance for development is really finding a way to access pre-finance for SMEs. For us, equipment leasing is a very natural way to do that, for a variety of reasons.
So the EFTA's lending model is very innovative. The business is able to use the capital equipment whilst they are paying off their loan thereby side stepping the need for collateral and we understand that only 5-6% of your loans by value end in repossession. How have you managed to achieve such a low NPL (non-performing loan) ratio?
There is a lot of relationship building we have during the course of the loan. It’s important not only to help them succeed but to build those bonds that help to make the loan more successful.
In the SME sector in Tanzania, approximately 80% of the businesses are informal. This means they don’t have formal accounts and they don’t usually have sufficient collateral to take a loan. This lack of formality can be a significant barrier to obtain finance to help the business grow. An equipment lease is a way for us to access these small businesses when customers do not have sufficient collateral, as the equipment serves as the security. We’ve not only developed a financing lease that has helped us overcome the collateral barrier, but also a method of assessing the credit-worthiness of a business that doesn’t require formal accounts. Generally, formal accounts would help us to understand the amount of an SME’s leverage, the turnover and the amount of cash they have in the bank but if companies don’t have this we have to find other ways to access this information. We use a variety of methods that make sense for an informal customer such as talking to their suppliers, talking to their key customers, looking at their order books, getting high quality references and having a gauge for the amount of turnover the business has and the amount of turnover that is needed to service the loan. It’s a unique approach and we spend a lot of time getting it right. Another tool is the Credit Reference Bureau which is credit risk tool introduced a few years ago by the Central Bank. In a modern economy, this would be quite standard. You would know what someone’s credit score is and you could lend to them or not. But in Tanzania, with relatively low transparency into the credit market, the Credit Reference Bureau is gradually increasing the visibility of customers with poor credit histories. They’re telling us: "this is a serial defaulter", which means we need to stay away. Or "this person is unbanked", so we have to do a bit more work around their credit worthiness, but we know they don’t have a history of defaulting which just makes it easier. There are a variety of tools that we can use but really, the core things are, taking the time to assess an informal customer, using what is there, not looking for something that is not there and then having a good understanding of the sector. The other part of what we do is to create deep sector knowledge. Our team spends a lot of time looking at sectors where we see there are a large number of transactions to understand the gross margins, the volumes and the key risks. How difficult is it for them to get raw materials? What’s the seasonality of the business? Then we can gauge how this business, for instance a brick business, compares to another brick business. If we see a lot of variations between those two businesses we can say: "something is not quite right". So it sort of gives us a Rosetta stone of a bricks business and we can compare them across and say: "ok this looks like we would expect and therefore the risk is lower". Those are the three primary ways that we look at it.
It’s unusual. You come from an accountancy background so it’s quite like very unorthodox forensic accounting.
Yes. That’s actually true. I initially spent time as an auditor before I went into advisory services and some of those skills we try to translate down to our investment officers. How do you engage the right level of scepticism? What counts as evidence of turnover? What doesn’t count as evidence of turnover or what is better evidence and what is worse evidence. For instance; a receipt book that shows daily sales is of course good evidence for a small business whereas a recommendation from their customers that says, I buy 30 million shillings a month has value but less value than seeing actual documentation. Those are the types of things that we try to pass down and that experience has been quite useful.
So you fill in the blanks.
What is your company’s actual involvement during the life cycle of the loan?
We really try to standardize our products. There is a temptation to try and meet every need and I think that is often a temptation on the continent as well, but there are so many needs that aren’t met you find opportunities and try to fill as many as you can. What we’ve done is restrict ourselves, not only to only leasing; we don’t do working capital but also to a very standardized set of products. It’s typically a three year loan with a two month grace period with no fees upfront which is very useful in this financial market. It makes it very clear to customers what the impact is on their cash flow. Initially customers will sit with them and help them develop a business plan. Some of them giving them insight into their business that they don’t really have in terms of how it looks on paper. Then once the loan is made we see them every three months to see how the business is doing and to gauge the quality of the equipment to make sure there are no worries about their ability to repay. But we also end up being de facto business advisers. If they have challenges in terms of not being able to get their product to market or if they are facing bookkeeping challenges we have courses that can also support them in that. So there is a lot of relationship building we have during the course of the loan. It’s important not only to help them succeed but to build those bonds that help to make the loan more successful.
Since inception in 2003 you have progressed from a fund manager to a full lease financing institution. Would you now look to raise any debt in order to keep growing and how big would you be looking to grow your overall portfolio?
Initially, EFTA started as a fund manager simply because it was a bit more straightforward in terms of not creating an institution. We established a private equity fund with some key investors, impact investors and charitable endowments and we also had support from the G20 through the IFC. In 2011 we won the G20 SME finance challenge award which brought along support from the G20 and also support from the IFC and the Dutch Development Bank. Another key partner has been Cordaid, which is a Dutch Catholic NGO. That structure was useful. Then, as the landscape in Tanzania changed as leasing regulations were codified, we transitioned to a leasing company which means that we now have a plain vanilla capital structure. We have equity from outside NGO in the U.K called AgDevCo and now we are raising additional debt. Among those are Lundin foundation, Cordaid and also FMO again in order to try and build up our institution. Over the next three to five years I expect that we will have a portfolio of around $40 million and we will need to raise a substantial amount of debt to fund that growth. So on $40 million, we will need to raise approximately $30 million.
You now have a very extensive footprint in and around Tanzania. Are you at a stage where you are looking to expand your business model to other countries in the region and if so, will you be looking for further outside finance to help achieve this?
We are now starting to explore expansion in East Africa. We are trying to keep to our geographic presence contained and not immediately expanding to West Africa. There are two countries we are looking at as potentials and I think what we have seen over the past five years, especially in Tanzania, is that the model works. There is a tremendous amount of demand and we have been able to work out the way to really make this leasing model work, so we see Uganda and Kenya as being very opportune in terms of places for us to grow and we will be looking for additional equity and additional debt to fund that growth.
Small and medium enterprises, SMEs, all over the world often grumble about access to finance. Why do you think the problem is so acute in developing regions?
I think a lot of it is because banks don’t want to take the time and the risk, frankly, to deal with rather informal businesses. I think a lot of businesses see banks helping either the wealthy, those who can already afford a house, but they don’t want to have the tax credits or providing a lot of micro credit that typically isn’t needed to the extent that it is being offered. So a lot of people see it being not helpful or only benefitting those who can already access finance or have the cash to do it themselves. I think what we have been able to do is create an institution that is very clear and very transparent on how we operate. The rules of the game are well defined. There are no hidden fees so a customer doesn’t come in expecting one set of cost associated with their loan and finding out at the end that it was totally different from that, usually much more expensive and we give people a very fast turnaround in terms of understanding; I come for a loan, I go to your seminar and if I am responsive I will get an answer in two weeks. It won’t be six months or a year later which is often the case. I think it’s a variety of reasons, in terms of who is getting the finance, who isn't getting it and how people are actually administering that finance and working with customers.
So this comes back to the missing middle aspect.
I think so. I don’t think there are many people complaining that they can’t get micro credit. I think that 80% of businesses in Tanzania are informal and the vast majority of those are small business owners and those are the ones that need capital, typically finance for equipment and working capital and it’s not out there.
What is the scale of your loans in terms of how it’s segmented?
It roughly starts with $10 000 and goes as high as about $80 000.
What do they typically buy? Earth moving equipment and farm and agricultural equipment?
We have a kind of agnostic approach. We didn’t go in with a specific idea of what we want to finance. Basically when a customer came to us, if we could find a good supplier and the business plan worked we would find a way to finance it. We have seen it being concentrated around various sectors and there is big push for construction right now in Tanzania so there is lots of demand for high quality cement bricks. You also see a lot of demand for agro processing equipment like oil expellers, maize millers and tractors. There is also big demand for high quality printing services (billboard printing and signage) as marketing is beginning to grow. A lot of that was being outsourced to Nairobi which is expensive and logistics were more complex. Now you see more and more companies bringing that in-house and small businesses popping up that do high quality printing with the support of a Konica or Bizhub high quality colour printer. Greenhouses are growing as well. A lot of people are trying to support the hotels, safari businesses and also the local market with high quality or off season produce and we are seeing a lot of demands for greenhouses.
Around two third of SME's in developing countries often cannot borrow as much as they would like. How big would you put the credit gap being for small businesses in Tanzania?
I don’t actually know that number. If you look at the latest Finscope survey, in the agricultural realm 60% to 70% of businesses are rural and of those at least 40% or 50% are not getting enough finance or any finance at all so that’s a huge portion of the economy in terms of actual numbers. I think the economist article said that it was a trillion dollar SME gap across Africa, so I would imagine there’s a billion at least.
How would you categorize the institutions in Tanzania, from registries to collateral and commercial courts?
There is an assets registry. In terms of repossession of equipment, as you move further away from Dar es Salaam, the courts are less efficient. Obviously in Dar es Salaam there is better proximity to the Bank of Tanzania and better proximity to the TRA so I think practice tends to be a bit better but so far we have not had any issues with repossession. Typically what we do is the customers realise after we have notified them formally three or four times that they are in default. We don’t go after their house. We don’t do anything else that gets at their personal assets. We just say; look, we did our best and then take the equipment back. That is the way we typically manage it. That is all within the financial leasing act and associated regulations and all legal, but typically we have good relationships with our customers.
How crucial is it in Tanzania for big companies to nurture their SME suppliers? In terms of creating linkages in the value chain into SMEs instead of buying from abroad.
I think it’s really important. There is a lot of pressure on the currency right now because of the current account deficit so we are importing too much. Maybe with the gas line and the helium discovery we will find that it begins to pull the other way but in terms of trying to process more and trying to create your own ketchup, tomato sauce, avocado oil and all these types of things here and exporting it, that is critical to the economy and critical for a stable currency. What we do is to try and find linkages between customers, suppliers and agribusinesses. We don’t see ourselves as creating those value chains but as being an important middleman to make connections that need to happen. You do see a lot of things happening already in terms of sugar, you see that Magufuli is trying to reduce the amount of imported sugar that is dumped in Tanzania which will then cause some short term pain but over time should lift up the local sugar industry which I think is an overall positive. We are trying to be there by helping them with cane loaders and trucks and things like that. We are aware of what is happening in the economy and we want to plug ourselves in and make people aware of what we are doing because in 90% of cases those small farmers and even the processors need equipment and they need high quality equipment. One of the best things that we can do is to provide a stable of very high quality equipment providers such as John Deere, New Hollands and Baltons. These are companies that have good products, that we have vetted and that the customers have confidence in. You see a lot of pressure on small businesses to be low on cost so they will go on Alibaba and see a cheap Chinese machine and think; that’s the one I want but a lot of them have been burned by that. Our process is to make sure that we are properly vetting, that we are advising customers on where to go and what works and what doesn’t. Ultimately it’s their choice but we are there to help.
So you have preferred suppliers that you use.
Yes. We have about 90 suppliers now that we’ve vetted. We have checked their formality, their ability to provide a warranty and servicing. It’s a mix of blue chip suppliers like John Deere with local suppliers. You have to be able to work with both.
How formidable do you think the SMEs can be as key drivers of growth in changing Tanzania?
First of all, it’s what is there. The SMEs are the businesses that are there. I believe being able to help those businesses grow is key. There is nothing special or magical about an SME but there are just so many of them. So if you help them to develop and grow then you develop middle class and if you grow middle class you see things begin to change and develop. For me, the frequency and number of the small businesses are there and the ability for that to fee into a vibrant middle class in Tanzania is fundamental.