In May 2017, I had the honour of being on a fascinating Euromoney panel about expanding the digital financial ecosystem. One of the many topics that we discussed was the dearth of debt financing available for fintechs and start-ups limiting the potential for scale.
The conversation turned to this topic when Daniel Szlapak from Branch, a digital credit provider, shared their experience of trying to get loans from local commercial banks. Despite significant success at raising both debt and equity from global capital markets, Branch was seeking local capital to help manage currency risk and develop sustainable financing strategies. He said that Branch had approached at least 20 banks in Kenya and had been “laughed out of the room.” Without tangible physical assets to use as collateral or three years of profitability, banks were not willing to consider the credit worthiness of this growing but young business.
However, Daniel told the audience of Branch’s intention to approach the commercial paper market to raise local debt and predicted that Branch would close a landmark transaction within the next 3 months. Well, they did it. Branch has just raised KSh200 million (~$2 million) through commercial paper arranged by Nabo Capital. Even though few, if any, of the local investors had heard of Branch, they were convinced by the due diligence, structure and returns of the deal. Perhaps the structuring was the most important. Given that no traditional security was available, Nabo worked with Branch to securitise the loan portfolio through a debenture registered at the Companies Registry. The collateral is also in the process of being registered in the new Movable Security Register. With this structure, loan repayments are used to back the commercial paper.
A similar securitisation process was used in the bank-led loan for M-Kopa Solar in 2012 described in the Stanford Social Innovation Review article, Banking on the Poor, as a way to turn “customer accounts into bankable collateral”. As a part of the deal team when I was with the Bill & Melinda Gates Foundation, I have been disappointed that there have been so few deals to follow this example. That is why I was so interested to learn about Branch’s success in turning its customer accounts into collateral to access local debt. It is also why I have followed the progress of Lendable through its offer of upfront capital for alternative lenders against loan book receivables. Although in Lendable’s case, they are using this structure to connect global capital markets with African entrepreneurs.
Village Capital, has also brought attention to the need for fintechs to access debt in its insightful report, Breaking the Pattern in the chapter titled the “Debt Capital Gap” where they argue that companies are stuck in a situation where they are unable to raise sufficient debt to validate their product and demonstrate profitable business models that can give investors confidence. In the workshop to discuss the findings from the report, every entrepreneur in the room were vigorously in agreement about this gap and the challenges they faced in overcoming it.
So why does this matter?
Despite the incredible gains Kenya has made in increasing access to financial services, much more could be done to deliver financial solutions that really make a difference by increasing economic growth, resilience and investments for the future. At FSD Kenya, our strategy is focusing on creating value through financial inclusion. Disruptive innovations coming out of fintechs are one of the promising paths to seeing more value created through financial solutions. But only if they can access the diverse capital needed to make it happen. Examples like Branch raising domestic commercial paper can help chart a path for others to follow.
The Euromoney Kenya Conference was co-hosted by the Central Bank of Kenya and the Kenya Banker’s Association (KBA) and sponsored by several others. Excellently moderated by Michael Mathika of JM Mantle, the other panelists included the Honourable Joe Mucheru, Cabinet Secretary of the Ministry of Information, Communication and Technology (in a smart three-piece suit paired with disruptive socks to shake things up), Habil Olaka, CEO of KBA, Aaron Fu, Managing Partner for Nest and Daniel Szlapak, Director of Africa for Branch.co.