Creating the Incentives to Support Economic Growth
The African Guarantee Fund has had a busy year. Its mandate is to ensure banks increase lending to SMEs. In a pandemic, the fall-back mode is to preserve cash and take less risk. For AGF, the objective was to ensure that they could provide counter-cyclical assistance to ensure on the contrary more lending to the sector. As part of Talent Agenda’s Conversations with Leaders, we speak to Jules Ngankam, Group CEO, on creating the incentives to support economic growth.
Jules Ngankam officially became Group CEO of the African Guarantee Fund in June 2020 in the midst of the pandemic. Thankfully, he explains, having worked at the Fund for a number of years, he could hit the ground running to act rapidly and work with his teams and clients to work out solutions to ensure banks could provide counter-cyclical support to the SME sector.
On the whole, it seems to have been a challenging but rewarding year or so for Ngankam and the Fund. They have had to double down their efforts, working both with regulators and banks to ensure sufficient support was provided to the SME sector.
Ngankam is complimentary of the regulators. The Central Banks on the whole acted with speed and decisively, reducing constraints to ensure the system didn’t seize up. By allowing the banks a little more leniency, the banks as a result could provide more support to their clients, giving their clients time to restructure their businesses and payment terms, including loan repayment holidays.
The way AGF works is that they will cover part of the loss associated with SME loans. The bank will generally work with the Fund and agree on the loan book that would be supported by the Fund in case of defaults. Ngankam explains that to ensure that banks supported the whole sector, they extended their guarantees to a much wider portfolio thus providing more support and thus providing banks with further reassurance. This effectively created liquidity in the system and the banks could provide more leeway to their SME customers.
What this necessitated, Ngankam recalls, was quick decision-making within the organisation including the board and a lot of communication. They had to interact with all their clients, the retail banks throughout the continent, to explain this new coverage and also to ensure that this facility worked the way it was intended to, that is to support the SME sector, whilst avoiding ‘moral hazard’, that is risk taking that could threaten the whole system. In general, the risk is shared with 50-50 with both AGF and the banks sharing the risk of any default; however to provide confidence they extended this to 60% or even 70% in some cases. What they wanted to avoid is mis-assessing the risk associated with bank loan books which he feels would have had a devastating effect on the real economy. So a lot of work was conducted with the banks themselves to understand the real risk to their loan book, and price it appropriately.
Banks have been responsive
The banks he says have been responsive. One issue has actually been capacity on their side and being able to handle all the requests they have received from banks. They have issued a further $300m worth of facilities for SME lending and covered more than $150m of restructured loans for the SME sector during the Covid-19 period.
The last year and a bit has been a big learning process, for his teams and also for the banks. At the same time, it has acted as a stress test for their own products and initiatives and Ngankam feels that they have passed with flying colours, giving them the confidence to scale what they do and extend their offering to different asset classes.
In 2019, the African Development Bank chose AGF to administer the Affirmative Finance Action for Women in Africa initiative. The idea is to replicate their products that they offer for SMEs for women led businesses. They are targeting $2bn of lending to women led businesses over the next 5 years. To date they have unlocked over $100m.
As they roll out these new products, what have been the main issues; is it one of capacity? Capacity building is an ongoing process, and an ever evolving one. He explains that the needs to train risk officers on new techniques including the use of data and new technologies is continuous and an important part of their work. The gaps he says are mainly to do with information and translating that information into proper risk assessment. And banks also need to fully understand each industry and the financial flows. Even within agriculture you will have different schedules for receipts depending on crops. Too often the loan repayment will not match the receipts schedule which means that the system breaks down. AGF works with the banks to provide the appropriate products for the borrowers, which will enable the borrower to make a better return and as a result reduce his/her chances of default. And they will adjust their products to take on a greater share of the risk in the early stages of the loan, in a manner to nudge the bank to overcome its concerns. Ultimately the main argument is that this makes business sense and it will impact positively on the bottom line. As a result, they have also reduced the premium paid for these new products, reducing the fee by up to 25% and covering more of the losses. This also means that many of the demands, such as collateral etc, are also reduced. And because the risk is shared, the bank’s capital needs are also reduced, meaning it is effective use of their balance sheet, which again makes it more attractive in terms for the bank.
How does he drive innovation within his own institution? He says a lot of it comes from listening to the clients, and he encourages his team to always approach a problem with an open mind as opposed to going to clients with oven-ready solutions. It’s only by understanding the issues the client is facing that they can then provide a solution to overcome the constraints they’re facing. The issues will vary from bank to bank and region to region. It’s this adaptative capacity that makes them stand out, he feels.
Given the size of the challenge in terms of lending, the issue that keeps him awake at night are his own internal resources. The SME financing gap is as much as $300bn, and they have only managed to meet $2bn of this, so less than 1%.
He himself came from a commercial banking background working with Barclays Capital in Paris and London. The team they have built at AGF is diverse, hiring local talent and African ex-pats from Europe and other continents. He still feels that there are a lot of human resources that are based outside of the continent and would like to see more of them working in Africa at organisations such as his to help develop innovative and game changing solutions.
The other issue, he argues, is not capital but the lack of financial instruments to deploy that capital. Banks are still on the whole risk averse, so the challenge is working with the banks to reduce that risk. Their own institution has grown fivefold in terms of their own capital base, from $50m in 2014 to $250m today.
They have a structured finance team that works on developing appropriate solutions. For the bank, any risk reduction will generally encourage greater lending.