More Than a One Stop Shop for Wholesale Lending

Changing with the market trends, wholesale lender uses a unique model in rolling out innovative products and hence contributing immensely to the growth and sustainability of micro and small enterprises

By George Gichuki

Many households in Kenya depend (either directly or indirectly) on micro and small enterprises (MSMEs). Employing an average of ten people and operating in sectors like agriculture and trade, these enterprises (fondly referred to as Jua Kali in Kiswahili) contribute a big share of the country’s gross domestic product (GDP). Nevertheless, despite the pivotal role they play in the country’s socio- economic development ( especially in creating jobs and providing an avenue for households to market their farm produce among other goods), micro and small enterprises face overwhelming challenges that hinder their growth to the next level.

In the worst case scenario, these challenges ultimately lead to the death of the said enterprises. Indeed, according to a survey that was conducted by the Kenya National Bureau of Statistics in 2017, about 400,000 MSMEs do not celebrate their second birthday, while only a few reach their fifth. Some of the major challenges faced by MSMEs include inadequate capital, limited market access, lack of adequate skills and knowledge on how to run their businesses formally as well as poor infrastructure.

From the interviews that Biashara Leo magazine has conducted in a span of ten years with entrepreneurs in the MSMEs sector, topping the list of these hurdles is inadequate capital for the day to day operation of their businesses (cash flow) and to facilitate growth to the next level. Sadly though, given the informal nature of their businesses, most of the mainstream lenders shun them. For that reason, microfinance institutions (MFIs) have come in handy in financing MSMEs through their flexible lending models. For instance, micro- entrepreneurs form groups which enable them to co-guarantee one another in order to access credit as opposed to offering collaterals (like title deeds) to the lenders. The loans disbursed by MFIs though small enable MSMEs to navigate the turbulent waters of entrepreneurship.

To paint this picture further, MFIs also need huge amount funds for on lending to the small businesses at fair rates. One of the key sources of these funds is wholesale lenders (apex institutions). Indeed, the approach of wholesale lending to financial institutions for onward lending to micro-enterprises has spurred economic growth largely in the MSMEs sector. One of the major wholesale lenders in Kenya is the Micro Enterprises Support Programme Trust (MESPT) which was established way back in 2002 by the European Union and the Government of Kenya. The trust became operational in 2003. It was amended in 2007 to incorporate new partners and subsequently, the Danish Development Co-operation (Danida) came on board.

As a trust, MESPT has always operated with the aim of enabling Kenya to attain her economic goals by supporting and contributing towards the country’s key national development agendas. It is predominantly involved in agriculture value chains development as well as financing of financial intermediaries. In that regard, the trust focuses on serving unique and emerging sectors which require financing and capacity building such as clean and renewable energy for households as well as smart agriculture whose objective is to promote a sustainable green economy in our country.

Unique business model
MESPT’s development approach is based on a three tier (triangular) model that focuses on farmers, small and medium enterprises ( SMEs) as well as financial intermediaries – all intertwined . At the apex of this model is the producer group, at the bottom left we have the off takers/marketers , while at the bottom right is the financing component. “ The underlying objective of this unique model is to create linkages through products and services which enable beneficiaries to access capital, increase agricultural productivity and access markets,” says Mr. Raphael Kuria, the head of credit and business development.

The trust has endeavoured to make this model sustainable so much so that in the event of its exit, the enterprises are able to continue with their operations in a profitable way. In all sides of the triangle there are service providers offering inputs, agro products, animal husbandry and art, hence making the model sustainable.

Product offering
Through its financial intermediaries, MESPT is currently offering three major products: the general loan, value chain loan and green financing loan. The general loan goes to the enterprises while the value chain one is lent to the players in various agricultural value chains ranging from the farm all the way to the market. The green financing loan on the other hand is for green technology solutions including renewable energy, waste management, solar energy, biogas and water management ( drip irrigation kits). The facility enables farmers to access capital for the installation of green technology solutions.

The end result has been enhanced financial inclusion for micro enterprises since they are able to access capital, create jobs and earn their livelihoods. “For general and green technology loans, we have devised a mechanism which enables us to know who has borrowed, the type of product they have borrowed and the households that have been reached,” says Mr. Kuria. “Consequently, we are able to access the impact of these loans,” he adds.

The trust is focusing on growing its portfolio sustainably in order to reach more players at the marketplace. In essence, as a trust, MESPT is not commercially driven. “ Our objective is to alleviate the plight of small enterprises by offering them innovative and affordable solutions, as opposed to making profits,” says Mr. Kuria. Working with MESPT as a financial partner of choice goes beyond giving out of a loan facility. “We encourage and partner with the financial partners to take up capacity building on a need basis in their bid to upscale their businesses to a higher level,” he emphasizes.

A faithful servant
According to Mr. Kuria, the growth of MESPT over the years can mainly be attributed to the fact that it has remained faithful to its mission of promoting economic growth, employment creation and poverty alleviation by offering financial and capacity building support to small enterprises. “We have had very good support especially from our major partner and donor, Danida, mainly because we have delivered on our promise,” says Mr. Kuria. “Going forward, we are confident of strengthening our market leadership position as an apex institution that is engaged in financing value chain development and green growth,” he adds. MESPT is also looking forward to growing its financial muscle and portfolio by raising funds locally and internationally.

In order to reach the rural areas where most of the MSMEs are based, MESPT has regional offices in Eastern, Coast, Rift Valley and Central regions. The objective of these offices is to promote the organization’s programmes and interventions in the respective regions and to be well positioned among the target market.
Since one of its core objectives is to enhance financial inclusion, MESPT does not lend directly to individual borrowers. That is clearly spelt out in its trust deed. On the contrary, it does so through financial intermediaries by offering them very competitive rates. “Lending directly to the enterprises might cause market distortion which will be contrary to our objective of enhancing financial inclusion,” emphasizes Mr. Kuria.

Owing to the fact that MESPT does a thorough due diligence on all the institutions it lends to in order to ensure that they are of a sound financial standing and their corporate governance structure is solid, the default risk is minimal. “Most of our customers honour their debt obligations with us on time and we have therefore been able to build a very cordial working relationship with them,” avers Mr. Kuria.

The potential of wholesale lending in the country remains largely untapped and there are only a few key players in that market segment. As more financial institutions continue to be set up in the country owing largely to the entrepreneurial spirit of Kenyans, MESPT is set to grow its share of the cake in that business because of its friendly terms and innovative product offering. The future of the leading apex institution can therefore only get better.

Huge impact
As a wholesaler in finance, MESPT is currently working with about thirty two financial institutions with a countrywide presence. On average, the loans are accessed by about 20,000 clients per institution. On average then, over 600,000 clients have been reached by MESPT’s funding through the financial intermediaries it has partnered with. As at December 2017, the cumulative value of loans that MESPT had disbursed since its inception was a whopping Kshs. 5.11 billion. This is a clear demonstration that it has had a huge impact on the growth of MSMEs which is largely dependent on the availability of adequate capital. It is also important to note that MESPT’s loan pricing is relatively fair and that is why many financial intermediaries have partnered with it.
Partnerships are a win-win

Partnerships in business come with various benefits ranging from new ideas, tapping experiences, creating opportunities and avenues for improving the existing products. “No one understands the importance of having an ally in form of a strategic partner both locally and internationally like Juhudi Kilimo,” says Mr. Bernard Kivava, CEO, Juhudi Kilimo. “In that respect, we are very glad that MESPT, a microfinance wholesaler is one of our partners,” he adds.

It’s never easy to get a partner who entrusts you with financial resources unless you have a clear and concise investment plan, can be trusted and pass the background checks. Late last year, MESPT extended a loan of Kshs. 100 million to Juhudi Kilimo for a number of projects and programmes. Besides offering a facility to further the operations of Juhudi Kilimo through an increased loan portfolio, MESPT continues to offer other supportive services such as technical assistance in various areas.

MESPT gives Juhudi technical assistance around capacity building, staff training and clean energy insights to accelerate the uptake of the clean energy loans. “Our staff members have gained invaluable skills and knowledge from the training offered by MESPT in a number of areas ranging from designing products that have a positive impact on smallholder farmers, to capacity building on how to navigate the changing landscape in the microfinance sector,” affirms the Juhudi Kilimo CEO.

Juhudi Kilimo looks forward to growing and nurturing the partnership with MESPT. The two institutions have some level of convergence in their mission and vision, and this is what informs the commitment towards the partnership. MESPT has shown commitment in a number of areas including the provision of loans to financial intermediaries for on lending to enterprises, issuance of agriculture value chain loans, credit guarantees for green growth enterprises and capacity building. Such support and partnership from MESPT will help bridge the gap in affordable lending to smallholder farmers in rural areas, encourage agri-business and spur economic development.Mr. Kivava expresses his gratitude to MESPT for the collaboration and looks forward to more engagements for the benefit of the rural smallholder farmers as the institution strives to revolutionize agri-lending.

Micro Enterprise Support Programme Trust (MESPT) is also one of the biggest partners of BIMAS. MESPT was one of the first institutions that BIMAS borrowed from way back in 2011. When the credit only microfinance institution approached MESPT for support, it not only got a loan facility, but also a training package for its staff in corporate governance and financial management.

Of critical importance, BIMAS was able to interconnect all its branches through that support hence facilitating real time data sharing. Over the years, MESPT has provided capacity building to the BIMAS staff and board members in different areas especially in corporate governance. “Without this partnership BIMAS could not have become one of the leading and most profitable credit only microfinance institutions in Kenya,” says Dr. Patrick Gathondu, the executive director of BIMAS. “From a very humble beginning, we now have an asset base of Kshs. 1 billion, thanks to this partnership,” he adds.