Let the LEAF revolve!

Alvios Tendai Gopo
It was going to be good if everyone had enough money to finance their dreams. Since time immemorial, capital has never been equitably distributed, thereby creating the existence of financiers and borrowers.

In basic Money and Banking literature, credit is the backbone of money creation. The key assumption is that loans are repaid religiously to enable lenders to stay in the business of providing funding.
Repayment is like a womb which possesses money’s creative ability.
The recently launched US$10 million Localised Empowerment Acceleration Facility (LEAF) by the Government through the Ministry of Youth, Indigenisation and Economic Empowerment will undoubtedly provide a great opportunity for youths in business to start or expand their ventures. It is an ideal form of financial inclusion.
The most important thing is not the amount of the seed capital but that the facility has to be revolving based on the basic banking assumption — repayment.
We cannot always be at the starting point. Another Minister … a few people benefit, and then another and a few other people benefit. That is not the desired cycle. Let the funds revolve. Acquire the loan, repay and give a chance to the next person.
If the limit is set at $2 000, the fund will bankroll 5 000 projects at inception.
The number may appear small when compared to the number of graduates coming from tertiary institutions this year alone and better still to the total population of youths in need of the financial support, not to mention that the facility is also earmarked for other groups. But there is always need for a starting point.
A simple amortisation of the loan at conservative rates shows that initial repayments will be able to fund 500 more projects in the following month.
The 500 will fund 50 more and so on.
As a beneficiary of such a facility in the past, I am proud of my ethical conduct. However, reports say we were too few to keep such a national programme revolving.
Statistics indicated that the repayment rate was below 20 percent. The pitfalls of yesteryear boarded around financing of greenfield projects, unwillingness to repay or character or selfishness and the poor economic performance.
Greenfield Businesses
Greenfields are projects that are yet to taste the market with the current promoters. The perception that if a project is successful in town, then anyone can also do it, even without the required expertise and in-depth knowledge of the market is recipe for failure.
There are advantages enshrined in innovation and pursuit of dreams though.
In traditional bank lending, it is important to know how much the project promoters have sacrificed in both time (in years) and own financial resources before giving financial assistance.
In addition they would also want a fall-back position in terms of collateral in the event that the promoters decide to abandon the project or for some reason fail to honour their financial obligations.
This sounds prudential and admittedly to protect depositors’ funds. Greenfield businesses normally fail the traditional banking credit vetting test rendering the majority of business proposals belonging to youths unbankable.
Further, the youths do not possess the required collateral.
Besides own savings, borrowing from family and relatives, LEAF is a great opportunity for youths and let it Revolve.
Most greenfield businesses fail within the first five years of establishment.
This is due to the fact that market response to new products is unpredictable. Supply of raw materials may not be very reliable and in most instances suppliers would be reluctant to provide favourable terms.
There will still be a lot of bottlenecks along the production line. The management also need to identify the right team to work with. Initial desktop projections on income and expenses when compared to the actual figures may reveal shocking variances.
The reality may be a perpetual loss making position, an unprofitable business after all.
However, others have managed to make it with their products becoming instant favourites on the market. In certain sectors managing quick growth is a major challenge.
I had purchased the plant from my savings and was in need of working capital, the first batch of raw materials had hardly been delivered before the first loan instalment fell due.
The money was tied in raw materials when operational and finance costs needed to be paid in an economy where the hard currency is overvalued.
I had anticipated to operate in a loss position for a period and had prepared to support the business from other sources.
What I needed then was long-term financing to ensure my business would grow through the phases or at least reliable short-term finance.
However, I obtained short-term financing with the hope of facility renewal and a vision to grow the business to greater levels. After successfully servicing my facility and having sunk more capital to try to eliminate bottlenecks from the production line, I reinvested everything into the business.
Without support from the bank, the business began to break-even even during bad months.
All I wanted was a little boost of working capital to secure raw materials in bulk from outside the country and burst into profitability. Even my bank deposits had improved.
I went back to the bank six months after paying my last instalment with all the confidence, hoping my good record would support my request for a new loan at increased levels only to be told that the whole facility had been a disaster due to the delinquency in repayments and therefore I could not get assistance under the same facility.
If the LEAF facility is to achieve lifelong success and be identified as a partner in greenfield businesses, it must be designed to support and nurture small businesses. It should be prepared to entertain previous borrowers and even incentivise them by increasing facility limits at every renewal.
Character
I argue that the greatest problem bedevilling our society today is selfishness. Programmes like LEAF have replicating effects only if beneficiaries care to think about the next person and repay their dues.
However, the urge to pay back depends on one’s moral and ethical qualities that are exclusively distinctive to the individual — character. While others lose sleep over pertinent issues, others do not care — that’s how different people can be.
Being a mixed economy, Government intervention has in many instances come to the rescue of consumers and various sectors of the economy. Our political systems are also deeply entrenched in the communist ideology. A case in point is the waiver of utility bills payable to municipalities.
The hyper-inflation used to help a great deal in cancelling out debts. Religiously, missionaries used to finance the spread of the gospel.
These factors could have contributed to a culture where we are the ones to receive and to receive only and never expect to give back even when you owe.
I refuse to accept that we were born without the willingness to repay.
We seem to have been hardened by the above events, now we do not fear borrowing with the hope that something will happen and we benefit.
Credit literature revolves around the five Cs — Collateral, Conditions, Capacity, Capital and Character.
In my experience in the credit fraternity, I came to the conclusion that Character is the most important of the five. Lenders can dictate the other four, at times with certainty, with the aid of mathematical formulas.
The character of the borrower in terms of intentions to repay can never be ascertained. Lenders can only hope and trust that the borrower will repay. I also discovered that character has nothing to do with the ability to repay or profitability of operations.
It is about the willingness and culture to honour obligations. In this aspect we have failed as a society.
Whilst banking as a whole is about confidence, lending is about trust and we seem to lack the most vital parts of that equation at all levels.
It is encouraging when the political leadership reiterates the need to pay back the LEAF and to develop it as a culture on all borrowings.
VP Mphoko implored upon the youths to be financially disciplined and not to be associated with non-performing loans setting the tone for a serious programme. In addition to that, Minister Zhuwao highlighted that disbursements will not be based on political affiliation.
This sets the tone for inclusive development. Inclusive development like in the education sector, has seen the country standing above the rest on the continent.
Granting credit on political basis leads to reckless lending where qualifying projects are crowded out at the expense of connected individuals.
These will not pay for obvious reasons and bankers lack the capacity to pursue politically exposed parties. Let the bankers assess the proposals on merit, LEAF will be a success and the Government will get the credit.
Poor economic performance
Small businesses tend to thrive in an enabling economic environment. They tend to provide goods and services to their larger counterparts. These in most instances buy in bulk, thereby boosting cash-flows with agreed periodical balloon payments.
The economic slowdown has resulted in larger businesses extending payment periods while at the same time increasing their requisitions.
At times, the giants only make enough payment to ensure that their next order is financed without paying for the full invoice amount.
This has an adverse effect of financing these larger corporations.
The small businesses may be relying entirely on one or two of such companies and therefore cannot litigate against them. In fact they seek other sources of finance to fund other orders in the hope of remaining viable. The problem arises when the orders are debt financed.
The bank will continue levying its penalties on all outstanding dues while the business is not passing the same charges to its giant customers, thereby shredding profits. In addition, the entrepreneur would also have other operational costs to meet and the loan may eventually become delinquent.
It may not be possible to eliminate this risk, but I hope LEAF will target projects that do not rely on middlemen but deals directly with consumers and have well defined market segments.
After all is said and done, loans do not become delinquent because of poor credit assessment and analysis. Strict monitoring is of paramount importance.
Monitoring can mitigate against the risk of diversion of funds after approval.
This will ensure that disbursements are channelled towards the intended business purposes.
It also enables financiers to stay close to the debtors, ensure that those repayments are prioritised and help the LEAF to revolve.