by Parminder Bahra
It has all the makings of a spoof reality TV show - an African version of Dragons' Den where Westerners invest cash in small African enterprises from the comfort of their living rooms. The Africans pitch their business case to us and we the Dragons offer loans at an interest rate far higher than in the UK. They repay the loans in monthly instalments and we make a tidy profit.
It sounds crass, if not a little shocking. Except that this is precisely what one organisation is doing. Mads Kjaer, the Danish CEO and founder of MyC4.com, believes that poverty can be reduced in Africa if the West views the continent as a business opportunity - one in which loans as modest as €100 (£84) can transform lives.
The idea is alarmingly simple. Through the MyC4.com website, investors put in as little as €5 towards a loan. There are pictures and detailed information about the entrepreneurs seeking financial injections - in most cases the owners of small businesses such as corner shops, cafés or local garages. People such as Steven in Uganda, who is looking for €3,450 to buy a pickup truck for his pig farm. An earlier loan was used to acquire more pigs, which helped his monthly salary rise by €200.
Or Trufena, who runs a modest-looking restaurant near Nairobi, Kenya. Her monthly income - at €90 - is the same as a meal for two in London. But her place is popular and she cannot meet increasing demand. She needs €538 to buy equipment to expand.
The smallest loan request on the site is from Rosaline, who runs a dry-cleaning shop in Kenya. She wants €111 to renovate her premises to attract more customers. She employs one person and will be in a position to employ another if she secures the money.
So how does it work? Once investors have registered and uploaded money into their accounts (by credit card or bank transfer), they can scan the businesses seeking loans and select those that look a good proposition. They then bid to offer a loan at a particular interest rate. The loans with the lowest rates win the auction and the right to supply all or part of the loan.
The winner of the auction becomes a sort of investment banker. The recipient then repays in monthly instalments. The agreed rate is typically between 12 to 15 per cent, but once fees have been added, this works out to about 40 per cent APR.
In each of the countries, there are “providers” - organisations on the ground that screen the businesses and entrepreneurs to ensure that they are in a position to receive and repay the loans.
The providers upload the details on to the MyC4 site. If a borrower defaults, it is unlikely that the entrepreneur will get a chance to pitch for more loans - not least because investors would be deterred by a bad repayment history.
Kjaer says: “When you make your first loan in MyC4 and an e-mail arrives to inform you of the first repayment - you jump up and shout, ‘Heck it works'.”
His first investment was with a Ugandan stallholder who sold small bags in a market. The entrepreneur's customers told him that they had a need for bigger bags and that they'd buy them from his stall. He purchased new stock using the MyC4 loan and has subsequently increased revenues threefold while also employing a helper and opening another stall.
But is it moral for us in the West to make money from people such as Steven, Trufena and Rosaline, who earn only a fraction of our incomes? Wouldn't it be better to give them our money with no strings attached? “Are you patronising the entrepreneur? They don't want charity,” Kjaer says emphatically. “Don't give me fish, give me a fishing rod and I am adding to my life and have fish for ever.” Moreover, unlike donations made to charities, of £100 pounds invested in MyC4, the recipient will see £100.
David Nicholson, a business consultant, was one of MyC4's first investors and has been involved with the company since it started: “When you make a loan with an APR of 30 to 40 per cent, you have to think, ‘Have I become a loan shark?' But this is cheaper than they can get locally.” It is also a better bet than borrowing from a local loan shark.
Kjaer argues that there is a knowledge gap between Western investors and African business people. His website is there to create this relationship. “Africa is not a nutcase - it's a business case,” he says. “It's ironic that we're putting plans together for billions of dollars for Western banks but the rescue plans for developing countries is peanuts.”
He argues that charities and organisations such as the United Nations have been pouring money into the continent, yet it is getting poorer. The MyC4 model is based on the theory of microfinance - small loans, usually of less than €100 - and its founder sees it as an important tool in achieving the Millennium Development Goals (set up in 2000 by the United Nations and signed up to by 190 countries). Microfinance has been successful - Professor Muhammad Yunus, whose Grameen Bank in Bangladesh has provided microcredit to 7.45 million borrowers, 97 per cent of whom are women, won a Nobel prize for his work in the field.
Critics argue that microfinance will not make enough of an impact to lift large numbers out of poverty. Nor do single-person enterprises increase skill levels, unlike larger firms.
Although there are loans that fit the typical microfinance profile on MyC4, Kjaer is hoping to tap into the small and medium-sized enterprise market, where the average loan is €1,600. He points out that these larger firms will create employment if they have the means to expand.
Of course, investors can take their money out of the scheme once a loan has been repaid and realise their profits, but interestingly almost all reinvest their money into new enterprises - less than 0.5 per cent of the €5 million invested so far has been withdrawn. And as with most microfinance schemes, the default rate is very low - around 2 to 3 per cent of total loans, says Kjaer.
According to Nicholson, there are two types of investor: one who offers low interest rates and isn't overly worried about the return on investment; the other is one who sees the loans as a good investment opportunity. The two coexist and use the website for whichever reason they wish to bring their money to the table.
“Money in a share or unit trust is faceless,” he says. “It's interesting and rewarding to look through the opportunities and businesses on MyC4.com.”