Post by, George Gachiri, Credit Risk Manager at Pezesha
Pezesha was invited to the inaugural Joint Capital Markets Conference Held at Abidjan, Ivory Coast on February 10-11, 2020. George Gachiri, the credit risk manager at Pezesha represented the company in the 2 Day Conference that was set up by the World Bank Group’s Joint Capital Markets Program (J-CAP) and the Conseil Régional de l’Epargne Publique et des Marchés Financiers (CREPMF), an organ of the West African Monetary Union that is entrusted with the Protection of savings and investments.
Overview and Objective of the Conference:
The purpose of the conference was to identify the ways in which Capital Markets across Africa, can strengthen protection for investors, modernize the legal and regulatory framework for public offerings and introduce new instruments to bring in new issuers. Pezesha held a workshop on how Fintechs are defining the future of Capital Market Development though its infrastructure and participation in the CMA Sandbox program.
The J-CAP conference had 58 high profile speakers ranging from Ministers, CEOs, Senior Sector Economists, Directors, Senior Managers and the like. Various issues were discussed such as: What Approach should capital markets take on developing themselves? What are the basic frameworks for capital markets Development? What is the future of Capital Markets Development? And how to attract investors both foreign and domestic.
Throughout the 2 day conference there was a clear understanding across all the panels on the need for innovation, specifically how SMEs can be empowered and through this empowerment, lead to the creation of deeper, more robust capital markets. Currently as it stands, there isn’t a clear universal definition as to what constitutes an SME as there are various factors to look at such as: The economy of the nation, regulatory definitions across different markets, cultural practices and norms and the tax benefits tied to SME definitions.
Regardless, there was an undeniable optimistic atmosphere at J-CAP regarding the impact SMEs have on both emerging and frontier economies both in terms of job creation and contribution to the Global GDP. For more context a recent World Bank report places the global SME Funding Gap at USD 5.2 trillion, with Sub Saharan Africa making up USD 331 billion of the SME GAP. SMEs additionally contribute to over 50% of employment worldwide, while in Kenya they make up over 80% of employment, which is higher than emerging markets at 70%.
What this indicates is that there is a need for policy reform and innovation so as to increase access to finance to SMEs, this strategy combined with the attraction of both domestic and foreign investors will ensure that the SME gap reduces in the long-term and Pezesha is currently ahead of the curve through its partnership with the regulator.
Fostering Innovation Through Technology and Regulatory Collaboration
Pezesha presented at the fintech panel where the future of capital markets development was discussed. There were two key questions that were addressed during this workshop 1) what are the opportunities for potential partnerships between Fintech’s and Regulators? And 2) how can we unlock these opportunities so as to build scalable, long-term solutions across Africa?
In relation to success stories and progress on the ground, opportunities arise through the leveraging of technology developed by Fintechs such as Pezesha. The Pezesha infrastructure improves operational efficiency and turnaround time from the point at which an SME applies to the point of funding them. When it comes to our credit scoring, we are able to assess a business in less than an hour, and the plan is to take this down eventually making it realtime, resulting in more SMEs gaining access to finance across multiple industries.
The Pezesha platform allows for portfolio optimization, transparency and increased lender returns. This is achieved by carrying out detailed KYC checks on businesses and in the process has led to a 0% default rate for our SME portfolio this far. Furthermore through our matching algorithm, we minimize concentration risk by allocating funds partially, this has led to improved Investor performance and additionally Pezesha through Capital Markets sandbox has launched SME loan notes, that will allow investors of various risk profiles to invest in businesses that match their risk appetite. The offering of SME loan notes shall not only introduce a new asset class that will allow investors to further diversify their investment base, it will allow more capital to seep into the SME space greatly impacting the lives of business owners and communities at large.
Pezesha also utilizes different distribution channels such as the direct acquisition and working with partners in the supply chain both of which have proved instrumental in growing the SME pipeline exponentially. The direct acquisition approach ensures that we are vetting businesses that require funds for working capital purposes. The benefit of this is that working capital typically leads to reduced costs as well as increased revenues. A good example of this is one of the SMEs we have funded that is in the fitness space. The supply chain approach provides a different angle as it gives us access to a variety of SMEs through working with distributors/suppliers. This approach eliminates credit risk as funds are collected at source greatly improving investor returns.
This opportunity is further enhanced through our partnership with the Capital Markets Authority, which gives Pezesha and Fintech’s at large a path to validate their products and services and in the long run building credibility not only for Pezesha but for all Fintechs and stakeholders alike.
For the second question regarding unlocking potential, this is largely dependent on the success of the solutions offered by Fintech’s to regulators. For Pezesha’s case unlocking potential means: Opening up the platform to more Investors and markets, continuous improvements on the infrastructure i.e. SME credit scoring , collections mechanisms and SME financial education by empowering them with the right tools to manage their business efficiency in order to be eventually financially included. In addition, Pezesha has played an authoritative role by frequently reporting to the regulator on our learnings and progress to influence policy and any regulations in the crowdfunding space. In the long run Pezesha sees itself contributing to the creation of an ecosystem of financial inclusion, through origination of quality SMEs stemmed from our credit scoring robustness and strategic partnerships with market networks and banks.
In conclusion the J-CAP conference showcased the desire for innovation and collaboration across the fintech and regulatory ecospheres across Africa. More so, the passion and desire for innovation and value creation through leveraging tech with the guidance of regulation is a sure fire combination, that will lead to elevation of the underserved. Converting them into the premier class that will undoubtedly propel Kenya and Africa by extension into the next decade of financial inclusion.This is the reason why Pezesha is partnering with the CMA as the partnership will foster growth and competition in the SME space. Ultimately developing the economy as well as create jobs, lowering the youth unemployment rate in Kenya that is currently at 39% and in the process, increasing financial inclusion to underserved SMEs which is Pezesha’s mission.