We are giving 'bank rejects' a chance to access funding, says BPI's Rutabana

Eric Rutabana is the country manager of Business Partners International (BPI), a private investment firm for mostly small and medium enterprises. In 2005, the first fund outside South Africa was established in Madagascar. A year later, the second fund was established in Kenya, and in 2011, the third fund was established in Rwanda. The New Times’ Kenneth Agutamba and Ben Gasore talked to Rutabana to take stock of the fund’s activities in the country since 2011. Below are excerpts;- You are BPI’s country manager, how big is your fund? We started with $8 million which we are still using. We hope that before end of this year, we should have consolidated our East African operations and raised our fund to $30 million. What has the fund done in Rwanda since its inception in 2011? Since 2011 we have approved funding for about 30 businesses and of them, about 26 have already obtained funding from business partners and in terms of portfolio size that is about $5 million. Yes, we still have about $3 million left in the bank but because of the recycling process of funding, you get to understand that from our first advance in 2012, clients start paying so the effect of that is much bigger than the $8 million we started with. You may find that we have about $5 million available for lending although we have already invested $5 million. What kind of SMEs have you funded and what were their needs? We work with SMEs across the board. There are certain things that we don’t finance such as primary agriculture and underground mining because we believe that the only way to encourage agriculture is by promoting agro-processing which we finance. In terms of funding, other than the two sectors, we focus on financing sectors that have an impact to the economy. First of all, we look at projects that generate employment. We look at things that encourage exports. We look at things that reduce the levels of imports, stuff that can sustain the environment. So you basically fund ‘bank rejects’…projects that can’t find funding from banks? We do such financing because banks are not in a specific position to do it because it is not their mandate, meaning that we are willing to take on more risks compared to banks. We finance viable projects run by capable entrepreneurs that for example don’t have sufficient collateral security or don’t have contributions of entrepreneurs in a business or those which are risky start-up business, but represent huge opportunities of growth. And, in addition to that, we provide technical assistance because we believe businesses are not able to succeed because of unavailability of funding but also in the lack of skills they have in the running of the business. So technical assistance comes in as a parallel facility to help these SMEs we work with to make better businesses and technical assistance is deployed in making sure that the operating processes of these businesses improve. Should banks consider BPI as a rival? Well, it depends on how you look at it. Actually we regard banks as our intermediaries because they should refer businesses that they are not able to finance to us. But if a client with a bankable project comes to us for technical assistance, we cannot say go away because they need those value adding services that are not in the banks. How do you structure your financing? We have different ways that we use ti structure the deals to match two things: the cash-flow of the business and two; make the deal acceptable to us. For example, if you do not have security and you go to the bank, you will not get money. But for us we say that we can give you money but at a cost. In that regard, because we are not intending to make the business fail, we will still apply interest rates that you can find in the bank like 17 per cent per annum. Our base rate is actually 16 per cent. So we would still apply our 16.5 per cent interest rate, but we take an equity stake in the business, so we become minority shareholders of the business. What’s your role as a minority shareholder? We become very close to the business and follow up on all the operations. In that position, it allows us to identify gaps which we take care of by providing technical assistance. So we fix all the loopholes in the business including skills gap, marketing gaps and product gaps and any other thing that may need improvement. You are supposed to take on ‘bank rejects’ yet your rejection rate is high, why is that? There are 30 businesses whose loans we approved represent about 10 per cent of all the applications that we receive; that means we reject about 90 per cent of the businesses that come to us. The rejection criterion is very simple. Two things: we check whether the business is viable. If it is then we finance, and, secondly, the entrepreneur because we believe that if you lose money, you lose it because you are working with a bad entrepreneur. Rutabana during the interview with this paper in his office in Kigali last week. (John Mbanda) Do you fund ideas? No we don’t fund ideas. We fund products because at the idea stage, you are basically doing research and an idea can only be funded if that idea has turned into a product. You worked with banks before your current job at BPI, why, in your experience, do we have very high interest rates? There are two things that banks say lead to them charging high rates. One is the cost of deposits. Banks lend money which they get from clients in form of deposits and most of these deposits are renumenarated and attract interest. So you find that if a bank is borrowing at say nine percent, it adds its margin to cover the operating costs and profit. So that roughly makes up for six to seven percent. So if you are borrowing at eight percent, you should be lending at between 15 and 16 per cent. But that is not the whole story because banks lose big money in form of non-performing loans which is the second point. In order for banks to remain profitable and sustainable, they recover what they lose through bad loans by charging high interests on the customers that pay well. In the end, you find that instead of applying a rate of around 15 per cent, they are adding another three or four per cent to cover the bad debtors. Is that a fair thing to do? It’s not fair but they can afford to get away with it because I think our banking is still uncompetitive. The one reason which I think can help is having the switching costs for borrowers reduced so that it is easier for them to move from one bank to another. For example, if I have got a loan at 20 per cent from a bank and have negotiated at 18 per cent from another bank, it should be easy for me to transfer my liability without being fined a penal interest. If that was not there, I believe competition would increase and the rates would come down. From your daily interaction with entrepreneurs, what point are they missing? Some people think that everything can be turned into a business. You find that because one feels he or she can make money out of something, draft a business plan, puts in information that is not correct without deep research done. So when you say no to them, they think that you are being irrational yet it is their own business plan that is making you say no to them. I think there is need to do more research in the idea generation stage in order for them to qualify for funding. Once these businesses have started, let them go alone. If you don’t struggle as an entrepreneur, I can guarantee you will never succeed and that’s the beauty of entrepreneurship. You start realising that you are making big steps through the mistakes you have made. Once you enter a business as a minority shareholder, what are your exit strategies? If we enter a business as an equity holder, we normally look at exits ranging between five and 10 years. And from the outset, we determine our exit strategies which we agree with the entrepreneur. So we determine the value of our shares at the time of exit and give them options should they want us to exit at an early stage. We also make it very simple. If you don’t have money to facilitate our exit, we lend you the money to buy us out and then pay the loan. What is going to change after consolidating into a regional fund? Yes, things are going to change because we will be having an open ended life, so businesses are going to be able to get funding of more than 10 years. Two; the size of the fund is going to increase. Currently, we have $8 million; the east African fund will be more than $30 million which will be deployed in any area where there is opportunity

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We are giving 'bank rejects' a chance to access funding, says BPI's Rutabana