(Ecofin Agency) - While Small-Scale Businesses (SSBs) or businesses in the so-called "informal sector" represent a significant share of value creation and employment in Sub-Saharan African economies, they struggle to access funding for various reasons. FinAfrique Partners, a pan-African consulting firm focusing in the banking, finance, and insurance sectors, has been cooking up solutions to this dilemma. Fabrice Kom Tchuente and Ronan Tchiebeb, respectively Executive Director and Partner Expert, explain their innovative solution: Inclusive Bonds.

Ecofin Agency: Who are the so-called small-scale businesses (SSB) and informal sector players in Sub-Saharan Africa today? 

Ronan Tchiebeb: In Sub-Saharan Africa, SSBs represent a significant part of the economy and play a more than crucial role in job creation and service provision. To provide some context, they account for nearly 90% of jobs in the region, compared to 53% in Latin America and 68% in the Asia-Pacific region. In terms of GDP contribution, they represent over 50% in Sub-Saharan Africa, compared to 30% in Latin America and 18% for so-called transition countries.

"They account for nearly 90% of jobs in the region, compared to 53% in Latin America and 68% in Asia-Pacific"

In terms of composition, these are formalised entities, employing 1 to 10 staff members (as declared), sometimes grouped within a family or community unit, and centred around the manager, who is often one of the parents (in the case of a family business). These entities are very prevalent in rural areas, where they usually serve as intermediaries for larger companies.

"In terms of GDP contribution, they represent over 50% in Sub-Saharan Africa, compared to 30% in Latin America and 18% for so-called transition countries."

Due to their flexibility and organisational simplicity, they are found in various sectors, ranging from retail trade and crafts to agricultural activities. They also possess the necessary flexibility to evolve their business models over time or reposition themselves in different sectors according to supply and demand, which enables them to maintain a wide range of skills throughout their existence.

Ecofin Agency: What are the primary formal and informal sources of funding available for SSBs and the informal sector in Africa?

Ronan Tchiebeb: African businesses within the SSB and informal sector universe structurally have poor access to traditional, so-called formal funding sources. This is notably explained by almost prohibitive requirements, such as the guarantees demanded by banks, as well as funding procedures that are sometimes complex and lengthy. The lack of accounting oversight also makes the financial management of these entities opaque, consequently excluding them from potential support from financial institutions. Other reasons, such as the lack of assets to leverage or the inability of these players to develop business plans, also hinder risk-taking by financiers. Conversely, businesses in this sphere have turned to alternative avenues, such as community savings, the most popular form of which is the tontine.

"Businesses in this sphere have managed to turn to alternative avenues such as community savings, the most popular form of which is the tontine."

In Cameroon, for example, according to data from the Ministry of Finance, more than half of economically active individuals prefer tontines to traditional banks. The same story is repeated in Togo, where tontines accounted for around 50% of the financial system's flows in 2016, valued at nearly USD 300 million, according to the Professional Association of Microfinance Institutions.

Other very local and ancestral practices are also found, such as paid work groups. An example is the Adashe in Niger, a system based on payments between community members, which can be made in kind or cash in return for agricultural or domestic work performed. The main difficulty stems from the limited capacity of these alternative solutions to mobilise significant volumes of capital, as they are disconnected from the global financial circuit. The very local and sometimes particular nature of these alternative routes also prevents them from being deployed on a large scale.

Ecofin Agency: What are the shortcomings of an orthodox risk profile analysis for SSBs and the informal sector?

Ronan Tchiebeb: The practice of finance, like that of any other sector of activity in Africa, relies heavily on a cultural component, which is associated with a value system, such as trust, integrity, and solidarity. These values are notably at the heart of collective savings systems, such as the tontine, or mutual aid systems, like the Adashe. They are also the result of a convergence between social engineering and the pooling of financial and human resources.

The challenge for financial institutions is establishing risk-opportunity analysis models that integrate, on the one hand, traditional valuation criteria, accounting analysis, and project appraisal, while also considering local realities and diverse contexts on the other hand. In other words, in Africa, it is up to financial instruments to align with and serve social systems, not for social systems to adapt to financial techniques.

"In other words, in Africa, it is up to financial instruments to align with and serve social systems, not for social systems to adapt to financial techniques."

This exercise of linking, or coexistence, between a classic analytical (financial) approach and an approach that integrates social and cultural aspects is notably underway within a Working Group set up by FinAfrique Partners as part of the Inclusive Bonds launch project.

Ecofin Agency: How did FinAfrique manage to devise an innovative solution linking the informal sector to capital markets, a highly codified, structured, and regulated industry?

Fabrice Kom Tchuente: As a preamble, the idea for this concept stemmed from a rather factual observation. Every African, rich or poor, owes their survival to the informal sector. 

"As a preamble, the idea for this concept stemmed from a rather factual observation. Every African, rich or poor, owes their survival to the informal sector."

According to an International Monetary Fund report, the informal sector accounts for over 50% of the Gross Domestic Product in most Sub-Saharan African countries. Furthermore, according to the International Labour Organisation, this same sector represents 85% of jobs on the African continent. It therefore becomes paradoxical that this sector, which is the most emblematic of our private sector, is, in terms of funding, the "Great Forgotten" of our economy.

Thus, the objective was to find a formal and alternative funding method that could channel significant funding, under good conditions, towards the informal sector.

Hence the idea that came to us during the peak of lockdown, in May 2020, to write an Opinion Piece describing a concept to finance informal activities via a bond mechanism guaranteed by 3 stakeholders: the State (20%), international Guarantee Funds (50%), and the remaining 30% borne by the final beneficiaries (artisans and traders in the informal sector).

"Hence the idea of a bond mechanism guaranteed by 3 stakeholders: the State (20%), international Guarantee Funds (50%), and the remaining 30% borne by the final beneficiaries (artisans and traders in the informal sector)."

It was therefore quite natural that a Working Group was established, bringing together public administrations (Ministries of Finance, Trade, and SMEs) from Cameroon and Côte d'Ivoire, with institutional, technical, and financial support from the IDRC (International Development Research Centre), UNDP, and UNECA.

The concept has been fully structured thanks to the relentless involvement of this Working Group over the past 4 years, which includes all components of the ecosystem for financing and supporting the informal sector: the State, National and International Guarantee Funds, International Financing and Development Institutions, Inclusive Financing Institutions (SME Banks and Microfinance), Development Agencies, etc.

"One of the main concerns is to ensure a reasonable exit rate for the final beneficiaries."

At each central stage, the Project was presented to the Financial Market Regulators of Central Africa (COSUMAF) and West Africa (AMF-UMOA). The latter, through their respective Presidents, have consistently shown themselves to be very open and constructive towards this new mechanism, while issuing recommendations aimed at guaranteeing both the security of savers and the comfort of the (informal) beneficiaries. One of the main concerns is to ensure a reasonable exit rate for the final beneficiaries.

Ecofin Agency: What added value or innovation does the Inclusive Bonds project bring compared to other existing solutions, such as field support from microfinance institutions?

Fabrice Kom Tchuente: The particularity of this mechanism lies notably at two levels. Firstly, the beneficiary selection process is carried out through groups, including cooperatives, EIGs, CIGs, Incubators, and Professional Associations, which are pre-selected based on criteria such as leadership ethics, operational, and financial governance. The selected groups recommend beneficiaries from among their members. It is these same groups that will then intervene in monitoring repayments and recovery by putting pressure on any members who fall behind.

"The selected groups recommend beneficiaries from among their members. It is these same groups that will then intervene in monitoring repayments and recovery by putting pressure on any members who fall behind."

Financial flows will go directly from the issuer (Microfinance Institution) to the final beneficiaries. However, the groups receive a commission for their intermediary role. They receive the first half when the operation is launched, and the second half will only be paid to them if there are no payment defaults among the members they have recommended.

The second particularity of this mechanism lies in the structuring method, which enables complementary funding to be provided to designated microfinance institutions (MFIs) acting as issuers at very affordable interest rates. Thus, indirectly, informal sector players are granted loans at exit rates that are twice as low as those typically offered by MFIs. Furthermore, these loans are spread over periods of 12 to 24 months, allowing beneficiaries time to make their investments before completing their full repayments.

"The planned size will be 10 billion FCFA for each country, with ACEP as the issuer for Cameroon and Credit Access and Witti Finances as issuers for Côte d'Ivoire."

In terms of characteristics, the planned size will be 10 billion FCFA for each country, with ACEP as the issuer for Cameroon and Credit Access and Witti Finances as issuers for Côte d'Ivoire.

The targeted sectors are cross-border trade and artisanal processing. The Guarantee Funds associated with these operations are the African Guarantee Fund (AGF), the African Solidarity Fund, and the African Guarantee Fund. The two bond issues will be carried out via a Public Offering, listed on the BVMAC (Central Africa) and BRVM (West Africa) stock exchanges.

"Moody's France has just awarded these 2 Inclusive Bond issues the 'Social Bond' label with a sustainability quality score of SQS2, equivalent to the 'Very Good' level."

Finally, we recall that the rating agency Moody's France has just awarded these 2 Inclusive Bond issues the 'Social Bond' label with a sustainability quality score of SQS2, equivalent to the 'Very Good' level. This makes it a relevant financial product for investors with an impact strategy based on sustainable development issues.

Ecofin Agency: How will eligible SSBs concretely benefit from the resources mobilised by the Inclusive Bonds project? 

Fabrice Kom Tchuente: For several months, a team of our consultants travelled across Cameroon and Côte d'Ivoire, meeting with groups and entrepreneurs in the cross-border trade and artisanal processing sectors. In each country, approximately 100 groups were met through site visits (shops and processing plants) and the organisation of Focus Groups. These field immersions were made possible thanks to the support of the Ministries of Trade and Small and Medium Enterprises. Following these meetings, a selection of about forty groups per country was made, and thanks to their recommendations, approximately 1000 projects (for each country) were pre-selected.

The characteristics of each of these projects were transmitted to the issuers (MFIs) so they could finalise the necessary due diligence for their final decision-making. Thus, the selection of projects to be financed is conducted before the fundraising. This enables the validation of an issue size that corresponds to the funding need, allowing funds to be deployed to beneficiaries as soon as the subscription collection ends. The planned issue sizes are 10 billion FCFA for each country, intended for 1000 beneficiaries, representing an average loan of 10 million FCFA per beneficiary.

"The planned issue sizes are 10 billion FCFA for each country, intended for 1000 beneficiaries, representing an average loan of 10 million FCFA per beneficiary."

Again, the objective is not simply to grant them funding, but rather to grant it under affordable conditions, namely, with a structuring model that allows them to repay at an exit rate twice as low as the usual MFI exit rate, and with a loan term averaging between 12 and 24 months, which enables them to make their investment and not just manage their working capital requirements (BFR). And finally, the presence of Guarantee Funds will allow beneficiaries to provide only a partial guarantee (surety), which can be either financial or moral.

Ecofin Agency: What are the next steps for the Inclusive Bonds project?

Fabrice Kom Tchuente: Next steps are the launch of the two bond issues in Cameroon and Côte d'Ivoire, planned for the third quarter of 2024. The FinAfrique Partners teams are currently mobilised to finalise the information documents required by the Regulators. We have also planned Roadshows in the two monetary zones to present this innovative financial product to institutional and retail investors. The experience from these first two pilot operations will be documented in a technical report highlighting the main stages, strengths, and areas for improvement in the project's implementation. This framework document, which will see the contribution and validation of all stakeholders in the working group, will serve as an "Information Notice" for implementing the concept in other countries or regions.

Interview conducted by Idriss Linge.