Quasi equity is a financing model where a category of debt in a needy firm is taken on by another company that has some traits of equity but with flexible repayment options. In
That would mean, if an SME with growth potential is struggling to repay a bank loan at market interest rates of, say 18 per cent, it could apply for quasi equity and if it meets the requirements set by BDF, an agreement would be entered that would see BDF taking over the SME's bank loan (debt buying) in the process relieving the struggling SME.
However, the SME would remain with the obligation of repaying BDF albeit in more flexible conditions and lower rates compared to commercial banks.
But most of the target SMEs are newly formed start-ups with no old loans and in that case, BDF will be buying equity and assume some kind of silent shareholder role whose investment is only aimed at helping the SME to start and hopefully break even. There are over 80 such businesses with more expected to apply.
"Under the arrangement with the SME," Kanyambo explains, "the charges on BDF's equity portion would be based on its annual percentage sales, a portion of which would be regularly paid out to the Fund as agreed between the parties up to a certain period of time."
Sanjeev does not also look at BDF's new scheme as a threat or a rival to commercial banks but rather a welcome alternative that would reduce the overwhelming demand for credit from the private sector.
"Definitely a good compliment to banks, I don't see it as a rivaling force at all," assures the banker.
Already in its ninth month since its inception last year, over Rwf330 million has been invested in 16 SMEs.
"We intend to grow the Fund to at least
In a recent interview with a
But Delphine Mushashi, a business banking expert, cautions that not every SME adds value to the private sector and argues that although the initiative is commendable, its managers need to choose SMEs in critical sectors that can guarantee high returns on investment and potential to create more jobs.
"Those in my opinion would be SMEs in the industry and agro-processing sectors because their job creation potential is higher," she opines.
To get it right, BDF is consulting
"It's important to note that BDF is not opening a fund to finance projects rejected by banks but rather a scheme that seeks to finance projects that are good but unable to secure funding from banks," he clarifies.
For instance, most commercial banks want projects whose loan repayment period is almost instant, they don't want long term projects where they have to wait to get their loans repaid, its projects like those that BDF's Quasi Equity targets.
How or when does BDF exit?
Annan explains that BDF's exit plan would vary depending on the agreements signed with different projects.
"BDF would have several exit options at its disposal, including profit sharing model and money multiplier depending on what is most convenient for the business," he explains.
A profit sharing model would, for instance, see BDF receive a certain percentage of a firm's profits for a certain period of time under a self-liquidation arrangement.
Meanwhile, in other cases, BDF would choose to have its acquired equity doubled or multiplied using a formula acceptable to both parties; for instance, the Fund could choose to invest Rwf50 million in an SME on the condition it would receive twice the amount when the company breaks even or after a certain period of time.
While majority agree the Hanga Umurimo initiative is a good step in the direction of creating 200, 000 off farm jobs per year, the programme has started registering setbacks with many beneficiaries defaulting on their loans.
Both BDF, and
Given that BDF is managing the Quasi Equity funds on behalf of the government whose intent is to ease financial access to aspiring SMEs, there's need for both parties to work on creating public awareness that the money is not for charity and probably possible punitive measures should be sought for those that are proven to have mismanaged the money.
With just 16 firms funded in nine months and over 80 others in the screening room, it's clear that BDF is playing with caution and that means there's no good money to throw after bad money.
If the scheme grows into the
The government's dream is to have the Rwandan economy driven by the private sector and that means creating an enabling environment that promotes the private sector whose share of investment to GDP stood at a lowly 8.2 per cent as of 2013.
To do that, experts agree there should be more options through which the private sector can access funding. The 2014 Economic Development in Africa Report, authored by the
In June, the
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