Commercial banks get new rival in Business Development Fund quasi equity scheme

Rwanda has added another solution to its cocktail of efforts aimed at increasing funding opportunities for small and medium scale enterprises. The new solution, quasi equity, is seen as a direct response to commercial banks that have in the past been reluctant to finance start-ups.
A young man at work in Gakinjiro. Such small businesses will greatly benefit from CBF.  John Mbanda.
A young man at work in Gakinjiro. Such small businesses will greatly benefit from CBF. John Mbanda.

Rwanda has added another solution to its cocktail of efforts aimed at increasing funding opportunities for small and medium scale enterprises. The new solution, quasi equity, is seen as a direct response to commercial banks that have in the past been reluctant to finance start-ups.

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 Rwanda’s case, the debt buying company would be the Business Development Fund (BDF).

However, Rwanda’s quasi equity scheme has been specifically designed to benefit small and medium enterprises that competed in the Hanga Umurimo programme but failed to get loans from banks due to lack of collateral security or failure to attract the attention of banks.

Janet Kanyambo, BDF’s fund manager, explains that they will be investing in a mix of debt and equity where the debt portion in an SME taken on by BDF would see the company pay a subsidised interest rate, say of 12 per cent for an agreed period of time.

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.”

Exciting development

Anand Sanjeev, Managing Director of I&M Bank Rwanda, agrees it’s an exciting development but also warns BDF to be cautious while choosing businesses to invest in, noting that it would be desirable for the Fund to invest in SMEs with a good amount of equity and potential to grow rather than those overwhelmed by debt.

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.

The Ministry for Trade and Industry provided the initial Rwf1.2bn that helped establish the scheme managed on its behalf by BDF. An additional Rwf2.5bn was approved for the scheme in the 2014/2015 budget of which Rwf1bn has already been received by BDF, according to Kanyambo.

“We intend to grow the Fund to at least $50 million by mid-next year and are encouraging the private sector to invest in the scheme with guarantee for good returns on their investment,” reveals Kanyambo.

In a recent interview with a World Bank economist Yoichiro Ishihara, he emphasised the need to invest in priority sectors to help sustain the country’s economic growth and promote private sector investment.

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 Anthony Annan, the CEO of Ghana based Impact Capital Africa. Annan’s work is to help BDF build a modus operandi for the Quasi Equity scheme to thrive but he points out the need for the public to first understand the core purpose of the initiative.

“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.

Potential risks

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 Ministry of Trade and Industry officials blame this on several factors, including a charity mindset where beneficiaries assume the money they were given belongs to the government and not banks. They then take on a lackadaisical attitude with many diverting the monies into luxury expenditures such as cars.

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.

According to I & M Bank’s Sanjeev, bad loans in the banking sector have slightly gone down from about 7 per cent in 2013 to 6.5 per cent this year but this is still above the Central Bank’s comfort zone of 5 per cent and it’s important that schemes such as Quasi Equity do not exacerbate the situation.

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 $50 million fund that BDF envisions, the country will have a viable alternative to funding local enterprises that fail to get the attention of banks. In the long run, that would see a number of SMEs start small and grow big enough to create the badly needed jobs.

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.

“While Rwanda has posted tremendous growth in the past decade, that growth has been driven by the public sector investment, not a bad thing but it’s desirable that Rwanda increases private sector investment to secure its future growth,” says World Bank economist Ishihara.

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 UN Conference on Trade and Development, indicates that SMEs in Africa are being held back by the high cost of credit as well as banks’ tendency to shun them for the less risky government bonds.

In June, the Monetary Policy Committee (MPC) and Financial Stability Committee (FSC) of the National Bank of Rwanda (BNR) revised downwards the key repo rate from 7 per cent to 6.5 per cent, a move aimed at encouraging banks to release more credit to the private sector.