Making money from money

Big Business Ideas

Stephene Chikozho

SOME companies opt to “make money from money”.

This means they use their cash assets not only to further the development of their products, but also to generate money through the financial markets.

Other companies believe that by making hedges (bets) on the fluctuations of the currency markets, for example, they can gain access to a new source of profit.

The two terms that exemplify the idea of making money from money are “treasury function” and “shadow banks”.

Companies with a good cash flow and liquidity can make money from money by borrowing short-term and lending to customers long-term.

But this can prove to be a money-losing exercise if there is a crash in markets or the economy.

As such, making money from money is a risky, short-term strategy.

Understanding ‘borrow short, lend long’

The concept of “borrow short, lend long” involves borrowing funds on a short-term basis while investing or lending those funds over a longer term.

This strategy can be particularly appealing to entrepreneurs and companies looking to capitalise on the difference between short-term borrowing costs and long-term lending returns.

However, the inherent risk lies in the potential for interest rate fluctuations and liquidity mismatches, which can lead to financial instability.

The African context

In Africa, where financial markets are still developing and access to capital can be limited, this strategy presents both opportunities and challenges.

Many African entrepreneurs, especially those in the fintech and microfinance sectors, have adopted the “borrow short, lend long” approach to bridge funding gaps and support long-term growth initiatives.

For instance, microfinance institutions (MFIs) across the continent often rely on short-term borrowings to fund longer-term loans to small businesses and individuals.

This model has been instrumental in driving financial inclusion, providing access to credit for those who might otherwise be excluded from traditional banking systems.

Opportunities and risks

The potential benefits of this strategy are significant.

Through leveraging short-term borrowings, African companies can access immediate capital to invest in long-term projects, driving innovation and economic growth.

Additionally, the ability to offer longer-term loans can enhance customer loyalty and create sustainable revenue streams.

However, the risks cannot be overlooked. The volatility of interest rates in many African countries can lead to increased borrowing costs, squeezing profit margins.

Furthermore, the reliance on short-term funding sources can expose companies to liquidity risks, especially during economic downturns or periods of financial instability.

Entrepreneurial resilience and innovation

Despite these challenges, African entrepreneurs have demonstrated remarkable resilience and innovation in managing the “borrow short, lend long” dilemma.

Many have adopted sophisticated risk management strategies, such as diversifying funding sources and employing hedging techniques to mitigate interest rate risks.

Moreover, the rise of digital platforms and mobile banking has provided new avenues for managing liquidity and accessing capital.

Fintech startups, in particular, are leveraging technology to streamline lending processes and improve financial forecasting, enabling them to better navigate the complexities of this strategy.

The way forward

As African economies continue to grow and integrate into the global financial system, the “borrow short, lend long” strategy will remain a critical tool for entrepreneurs seeking to maximise their financial potential.

However, its successful implementation requires a deep understanding of market dynamics, robust risk management practices and a willingness to adapt to changing economic conditions.

For policymakers and financial institutions, supporting entrepreneurs in this endeavour involves creating a conducive regulatory environment and providing access to financial education and resources.

Through fostering a stable and transparent financial ecosystem, African countries can empower their entrepreneurs to harness the benefits of this strategy while safeguarding against its inherent risks.

Making money from money carries serious risks, whether the bets go wrong or not. This is because the more profits a company’s treasury generates, the less willing the leaders may be to invest in research and product development for the future growth of the company.  This way of making money from money is strongly correlated with short-termism in business.

 Stephene Chikozho is CEO of Africa Business Inc, a network dedicated to fostering collaboration, innovation and success for businesses in Africa. He writes in his personal capacity. You can follow him on social media (Instagram, Facebook, X, LinkedIn, Threads) WhatsApp +263772409651 or email [email protected]