On Saturday24th November, The Saturday Vision published
an interview with Kampala Executive Director Jennifer Musisi. What was
compelling for me was her response on the question of Youth Fund she recently
suspended. She said beneficiaries must be ready to stake collateral security
before they can access the money and now through a commercial bank- she argued thus,
“...not even your father can give you money without security”- further stamping
the convenient pre-condition of collateral security for access to credit finance.
Indeed banks in Uganda have demonstrated high-level timidity when it comes to
youth funds- they too see collateral security as a central requirement. They
don’t want to lose money in risky ventures when there are opportunities like
mortgage finance where they continue to make supernormal profits.
I partly understand
their fears- especially where most prospective borrowers have no basic records-
like clear identifications, permanent places of abode and workplaces –even job
security. But are there no other ways of dealing with this? Because in
practical and real economics of credit finance- collateral security is not the
most important requirement. What progressive credit entrepreneurs look for is
the cash flow and credit history of real and prospective applicants. Partly
because of inherent uncertainties in Uganda’s financial environment, banks seek
to hedge their risks on movable and immovable collateral. What is making matters
worse is also limited financial literacy and backbreaking interest rates that
are over and above East African regional
average of 13%.
Most of these conditional realities make un-propertied
youth less attractive for lending institutions. This is why government set up a
youth fund to circumvent most of these inhibitions to financial access by youth.
So why is Jennifer Musisi taking this money back to the banks? Why is she and
KCCA not piggybacking known methods of social collateral and venture capital financing
approaches to transform this fund? Are there no lessons of success since this
fund was set up two years ago? Will the youth fund provide a silver bullet for unemployment/underemployment
in Uganda? I wish to illuminate two strategies that can unlock this dilemma;-
A: The social collateral
model
Social collateral works in a group system of people
who share similar social and community ties, business vision, enterprise and
values – with trust as the anchor which lubricates the social system. What actually
links this group is a combination of social and economic pursuits. Such could
be youth or women groups in Nakasero and Kisekka markets. They could also be
highly informal Eshabwee or Maleewa traders with local expertise
in these indigenous gastronomy delicacies. They even could be a group with
innate expertise in ensenene business. They could be a group of boda
boda riders, young graduates doing crafts, young people fabricating
metals in Katwe etc. These groups usually have a firm regime of unwritten code
and heavy social sanctions on wayward members. If such groups are targeted with
financing, liability will be shared, risk spread and members will compel their
peers to pay back. No beneficiary would likely default at the expense of losing
group trust. Social accountably in such groups is entrenched. With this
approach, community ties matter more than a bunch of cold bank calculations.
Borrowers under this system don’t pay the common 5% application fee and have a
monthly interest rate of 2%, and they can earn discounts for paying off their
loans early. This system is working for many quiet informal savings and lending
groups in Uganda and formal groups in India and Bangladesh. Can it work for our
Kampala youth? Yes, if robust due diligence, quick anthropological inquiries
and careful selection of groups is worked out. Are the managers of youth fund
ready for this? Can the KCCA study this option?
B: How about the Venture
Capital Fund?
Venture funds are meant to capitalize and
commercialize agile ideas that would rather be stalled because of lack of financing.
Venture capital funds are also created to circumvent strict conditions that
strain access to capital necessary to finance entrepreneurs with high potential
jobs creating ideas. We must note that, these funds don’t have to necessarily
go to the youth- but rather to entrepreneurs (women, men, young, middle aged,
old etc) with an idea that can create meaningful jobs for citizenry. A youth is
concerned about finding a job- no matter who created that job- that’s a detail.
Therefore, venture funds can never be about these guidelines we have seen
around – like having a senior four certificate or an enterprise that employs
four people, collateral security etc! Instead the aim of venture
funds/capital is to go around these
conditions. Such a venture fund can be run by private sector organisations, trusts,
foundations, universities, governments etc.
For example, the
Silicon Valley venture capital and angel investors’ schemes were started by
Stanford University in California USA. Now Silicon Valley is synonymous with
innovation. It is the birthplace of Apple, Google and eBay, among other tech
giants. These innovations giants- have created millions of jobs, not just in
the United States, but across the world. What is Makerere University doing to spur space
and investment for innovations? Makerere Katanga Valley which used to be owned
by the University is now a chaotic real-estate enclave! The electronic vehicle, Kiira EV, manufactured
by students of the College of Engineering, Design, Art and Technology at
Makerere provided the Country an opportunity to test venture capital/financing
model. But why isn’t the private sector pitching in money to commercialize
production of electrical cars /Kiira EV brand for markets across Eastern
Africa? Did Makerere University move forward to put this to test or they want
to put the vehicle in the museum? Can
the new Vice Chancellor pitch for us something inspiring and truly imaginative?
You see the President on the advice of ministry of
Finance officials accepted this youth fund proposal because it is key to mitigating
surging unemployment and underemployment rates across the Country. We must not
frustrate the President’s efforts by pandering to old and self preserving processes.
There are great youth and their groups out there who can be helped by this
opportunity. The options of social collateral and venture capital financing
should be fully studied and deployed. Let’s not wait for unemployment explosion
that will be impossible to manage.
Morrison Rwakakamba
Chief Executive Officer
Agency for Transformation (AfT)
Aft is a think and do tank
based in Uganda
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