Global Policy Forum

by Henri E. Cauvin

N. Justin Chinyanta saw the outlines of an opportunity almost a decade ago. Africa's markets were opening up in a big way, and capitalists were looking to cash in. The big ones, especially from overseas, would find their own way, but the little, local ones could not go it alone. They would need financing and advice. So Mr. Chinyanta, a young Zambian banker, and a few of his colleagues at Citibank founded their own financial services firm, which would come to be called Loita Capital Partners International, to help small and midsize businesses get their start. While trends in Africa's financial sector are hard to track, the demand for the services of niche firms -- like Loita, based just north of here; Business Partners Ltd., another South African company; and the African Banking Corporation, in neighboring Zimbabwe -- appears to be growing.

Smaller businesses, from snack shops and roadside filling stations to coastal fishing vessels and tobacco-exporting ventures, are particularly important to the region because they are efficient at creating jobs, say African development groups like Business South Africa. With one in four workers unemployed even in South Africa, the region's biggest, strongest economy, the people who are willing to finance small businesses are an increasingly important element in Africa's economic development.

"The country is extremely dependent on unlocking the value of the emerging entrepreneur," said Michael Mendelowitz, chief executive of Theta Investments, a unit of African Bank Investments Ltd. of South Africa that provides financing and management advice to a range of small businesses, with an increasing focus on fledgling building contractors. "If we don't get that model right, given the levels of unemployment and the lack of growth in the formal sector, we're going to have systemic employment problems in this country."

On the whole, Africa remains an impoverished place of vast potential and enormous obstacles. In most countries, economies are simply not growing fast enough to face the social ills, like hunger, illiteracy and AIDS, that have built up over decades. Even where economic growth has been more encouraging -- as in Mozambique, where the economy grew 7.5 percent in 1999 and even 1.6 percent last year despite devastating floods, and Uganda, which grew 7.4 percent in 1999 and 4.7 percent in 2000, according to the World Bank -- the problems are too entrenched to heal in just a few years. That is particularly true as the global economy slumps. Last year, as growth began to slow, foreign direct investment in Africa fell for the first time in several years.

What firms like Loita have to offer, Mr. Chinyanta said, are years of experience and contacts in first-world finance coupled with an insider's knowledge of third-world business. The trick, he said, is to provide financing that will yield respectable returns while conforming to "local market sensitivities." In Malawi, for example, Loita helped two tobacco traders, Clive Douglas Le Patourel and Michael John Gange-Harris, start their own company after their previous employer, Intabex Holdings Worldwide, was bought out. With $3 million in financing arranged by Loita, Mr. Le Patourel and Mr. Gange-Harris founded Africaleaf. "It was not secured or guaranteed by anything," Mr. Le Patourel said of the loan, "because quite honestly we weren't in a position to do so." The bet paid off. Africaleaf repaid the loan and now routinely arranges financing through Loita's office in Malawi.

Loita and the others all said they were profitable -- Business Partners, for example, said it netted about $7.5 million last year -- though they all said that the risks were great in a region where entrepreneurs have little business experience, bureaucracy can be stifling and corruption is common. "I think there's room in the market for more people to play, but it's not an easy playing field," said Jo' Schwenke, the managing director of Business Partners, a company that invests $15,000 to $1.5 million each in small and midsize ventures. "You've got to really know what you're doing."

It is a specialized field, and that is why people cannot expect ordinary banks to fill the need. "Banks are in the business of secured lending," he said. "Small and medium enterprises generally don't have collateral, so there is risk and a specialist firm has to handle that."

Business Partners invests more than $40 million in as many as 800 ventures each year through a combination of lending money and buying a minority interest in the business for a short time. That lets Business Partners benefit from the venture's growth while assuring entrepreneurs that their businesses -- from lobster trapping to making mixing bowls for commercial bakeries to running guest houses and lodges -- will belong to them after the debt is repaid.

With no collateral to fall back on, investors scrutinize their risks carefully and actively advise their less-experienced borrowers. Under apartheid, blacks in South Africa, who comprise 78 percent of the population, were effectively banned from owning any legitimate businesses, depriving them of not only the basic banking relationships and credit history that are essential to creating a good business, but of the experiences that are instrumental in conceiving one.

So, for example, the African Contractor Finance Corporation, a unit of Theta Investments, helps emerging contractors see contracts through. "We work with the contractor to ensure that a contract is completed, on spec, in time and on budget," Mr. Mendelowitz, Theta's chief executive, said. "There are guys coming to us with big contracts who haven't had enough training and don't have enough understanding of business processes, and that requires enormous commitment." Over the last year, African Contractor Finance has increased its lending to contractors almost threefold, to about $17.5 million, and Mr. Mendelowitz sees contractor finance as only the first step in a strategy to help finance similar-size businesses in other sectors.

With South Africa accounting for more than 40 percent of sub-Saharan Africa's economy, much of the work of people like Mr. Mendelowitz has been here in the continent's commercial capital. But as the economies of Africa begin to integrate, businesses like Theta Investments are expanding throughout the region. A contractor that Theta has helped before, for example, has just won a contract to help build a cellular phone network in Nigeria, Africa's most populous country. Theta will help him fulfill the contract, Mr. Mendelowitz said.

Many of these homegrown lenders are small -- the African Banking Corporation has about $300 million in assets, said Douglas T. Munatsi, its chief executive -- but say this is an asset in itself. South Africa's big banks, which have been expanding throughout Africa, and certainly bigger international banks like Barclays and HSBC, would not want the small deals he does. Once the investment companies become involved, they often offer smaller clients sophisticated ways of raising capital. Loita, for example, has sold currency-linked bonds denominated in United States dollars for clients in Malawi, Uganda and Zambia, letting them borrow on local markets at a benchmark international interest rate known as Libor, or London interbank offered rate, that helps them cover expenses.

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