Hanga Umurimo can be funded without bank loans

Trade Minister Francois Kanimba’s passion for small and medium enterprises (SMEs) is public knowledge, but he might end 2013 a disappointed man because of the halfhearted stance taken by local commercial banks towards funding Hanga Umurimo (create a job) project proposals. Apparently, only 389 of the 1,653 proposals recommended to banks for funding under Hanga Umurimo had been accepted by financial institutions as of October, 2013. Banks regard many of the proposals as risky and as a result, thousands of Rwandans who had initially been excited by the prospect of owning their own businesses and creating jobs for others are losing hope. Persistent ones will enter 2014 still pacing tiled corridors of commercial banks trying to persuade credit officers that their projects are worth funding. These burgeoning entrepreneurs have already spent a fair amount of Francs on typing and putting together dozens of documents but still get sent back to fetch more. In 2011, when Hanga Umurimo was flagged off, commentators backed it to succeed mainly because successful proposals would be guaranteed by the government hence boosting confidence among banks to release credit. Two years later, the question is whether banks can still be relied upon to give these projects a push so as to help the government create the projected 3.2 million off-farm jobs by 2020. The banks’ tepid reception of the first edition of Hanga umurimo is likely to affect the next edition which was the hope of thousands of other proposals that didn’t succeed in the first round. Yet you can’t hand the entire dirty end of the stick to banks without considering their own reservations. Credit is a business and for banks to stay liquid, they must exercise prudent lending to recoup their investment. Considering that some of the money that banks lend comes from customer deposits who expect a generous interest, banks are expected to invest this money wisely and strictly. Apart from local saving deposits, banks also borrow money from affiliate and non affiliate institutions operating in other markets and they must repay these credit lines with heavy interests. Therefore, while banks may truly want to fund the proposals, their own intricate situation is not to be ignored, if they are to meet tight regulatory standards set by central bank especially to keep bad loans at the very minimum. Options Kanimba says government can only facilitate entrepreneurs to a level where banks may trust them. This might take too long and short term options are therefore needed. There are about three possible medium-term options that the ministry of trade can consider as alternatives source of financing. Given the confidence that the ministry has in these proposals, it can borrow money on behalf of these start-ups from local commercial banks or the Development Bank of Rwanda. With this loan, the government could then buy shares in all these enterprises and work with them to grow and repay the loans. The assumption here is that commercial banks have more trust in the government than individuals-and the government has confidence in these projects to succeed. So, with government as a lead investor in all these start-ups, entrepreneurs can get the money they need and once they are guided to success based on their business models, government may pull out by selling its shares to private investors. The second option is just in case government fails to find the loan proposed above, the trade ministry could borrow from Agaciro Development Fund now at over Rwf20billion. For instance, with Fwf6.4billion from Agaciro, the ministry can buy shares in least 800 proposed SME start-ups with a capital requirement of less than RWF10milion. The strong point here is the assumption that this money is readily available and that many Rwandans would welcome the idea of the government reinvesting the money in the people’s start-ups aimed at creating more jobs. If both ideas still can’t work to save these start-ups then the trade ministry could try Equity Crowd Funding—that is funding of a company by selling small amounts of shares to many investors. It has recently been embraced by policymakers in the United States of America. This idea works on the assumption that these start-ups are worth funding and that there are many Rwandans or non Rwandans out there looking for areas to invest their idle cash. All the trade ministry needs to implement it is to start a website and upload all the proposals for the public to view. Excellent ideas would attract investors and this way, there would be less need for banks and helps spread risks.