A few weeks ago I accepted an invitation to sit through a members’ meeting of a furniture-making and selling association based in Kigali. While I was impressed by their knowledge and grasp of their core business i.e. carpentry, I was disheartened and saddened by their lack of financial literacy and the extent to which untruths and rumors dictated their day to day financial decisions. From taking loans at exorbitant rates due to poor understanding of the loan market to keeping some of their income in their homes (mattress banking) due to fear of RRA and even worse their lack of knowledge of the role of credit reference bureaus in determining their creditworthiness. The list of poor financial decisions was endless and as a result, these hard-working, entrepreneurial and innovative Rwandans are more or less living in poverty or close to it despite some of them having 30 years in the furniture making the market. This got me thinking. Do financial institutions, therefore, bear a certain responsibility for this state of affairs or does the blame lie elsewhere? Many a time we get forced out of our comfort zones and more often than not, we tend to grow from these experiences. For a long time, financial institutions have seen themselves as simple custodians of public funds and as such we have perfected this role. As the sector transforms and outgrows this role, it’s become vital that we redefine new ways to remain profitable while also contributing to the transformation of our communities. One such role has to be championing the transfer of key financial skills to our SME clientele through seminars, newsletters and even better through leveraging web and mobile technologies. As we grapple and scratch our heads trying to understand why over 80 per cent of SME’s fail in their first three years, surely the answer, or part of it, must lie in the lack of information and financial illiteracy of those running these SME’s. It doesn’t matter how good your product is if you have no understanding of cash flow process or simple bookkeeping then success will probably remain elusive. Given that SME’s are the engine of most African economies hiring 80 per cent of the labor force in some countries, the growth and long term financial wellbeing of SME’s is a responsibility for all of us. The long term growth of financial institutions is entirely and directly linked to the growth of our SME customers and as such, taking part in their skills development and ensuring their survival and growth kills two birds with one stone. Research indicates that only 12 per cent of financial institutions in sub-Saharan Africa see client education as a key initiative for the future and are actively working to embed this in their plans. A World Bank report citing the success in Ethiopia of the Women Entrepreneurship Development Project (WEDP), an International Development Association operation providing loans and business training for growth-oriented women entrepreneurs further confirms the importance of this. “After identifying a persistent ‘missing middle’ financing gap for women entrepreneurs in Ethiopia, WEDP launched as a microfinance institutions’ (MFIs) upscaling operation, helping Ethiopia’s leading MFIs introduce larger, individual-liability loan products tailored to women entrepreneurs. WEDP loans are complemented through the provision of innovative, mindset-oriented business training to women entrepreneurs. As of October 2019, more than 14,000 women entrepreneurs took loans and over 20,000 participated in business training provided by WEDP. 66 per cent of WEDP clients were first-time borrowers. As a result of the project, participating MFIs increased the average loan size by 870 per cent to $11,500, reduced the collateral requirements from an average of 200 per cent of the value of the loan to 125 per cent, and started disbursing $30.2 million of their own funds as WEDP loans. The average WEDP loan has resulted in an increase of over 40 per cent in annual profits and nearly 56 per cent in net employment for Ethiopian women entrepreneurs.” This example is evidence that financing alone is not an answer to what ails SME’s in Rwanda but rather a hybrid product merging financing and knowledge transfer. The millions that financial institutions would spend training and transferring skills to SME’s would pale in comparison to the long term returns that would be generated by an able and informed SME sector. While training isn’t one of the core competencies of banks and other financial institutions, our knowledge of financial trends and best practices is quite frankly unrivalled. Such platforms wouldn’t necessarily be one-way knowledge transfer forums but would also help financial institutions engage more with their SME clientele and serve to inform our product development and analysis processes. As we digitise more of our processes, our human capital must be redeployed to serve other tasks rather than retrenchment. Training and client education is one such task that comes to mind. Branches, as discussed in my previous article, will become advisory and education centers rather than transactional. The chain reaction that would occur as a result of a highly informed and educated clientele is easy to identify and the benefits to financial institutions are obvious. Finally, I would be remiss if I ended this article without wishing you all a Merry Christmas and a Happy New Year. May 2020 be a year of financial growth for you and your families. Remember, a country is simply a collection of families and the stronger yours and mine get, the stronger Rwanda becomes. The writer is the Strategy and Business Analytics Manager at BPR part of Atlas Mara, with over 10 years of experience in Financial Audit, Consultancy and Banking. The views expressed in this article are personal and do not necessarily represent those of his employers or The New Times.
