10 Ways Crowdfunding Will Impact Investment Banking

When enhanced technology touches an industry, there are often casualties. Unfortunately, in many instances, technology progression and creative destruction mean a net job loss. Jobs are created in one area, but higher-tech replaces many others elsewhere. We are seeing upheavals almost everywhere, from transportation to education. Investment banking is one industry on the cusp of a major overhaul. Financial technology, including crowdfunding is leading the way. While still in its infancy, equity crowdfunding and all that surrounds it does not seem to be going anywhere. With the crowdfunding industry’s substantial growth, many are wondering how this will affect traditional finance, including investment bankers. As always, there are pros and cons to the introduction of nascent trends and technologies into a very traditional business, but there is always opportunity in the face of change. The key is to find how to ride the wave as it moves along.

While crowdfunding and other financial technologies do not represent a cure-all or complete replacement of traditional methods, there are areas where both crowdfunding and traditional finance and investment banking will work in tandem to effect major change within small business finance. There are also downsides, some of which we discuss more in-depth here.

Speed of Transactions

In almost every instance, when technology touches a market, it increases both speed and efficiency. Corporate finance is no exception. With the help and encouragement of both regulators and technologists, companies are seeing much more rapidity in investment cycles. Services like digital signatures, escrow, accredited investor confirmations and bad-actor checks are all becoming more streamlined. The push for direct, internet investing is adding fuel to the fire to make this happen with more efficiency.

As the various required regulatory items in capital transaction see drastic reductions in their hurdle speed, transactions flow more smoothly and deals get done more rapidly. It’s a win-win for all involved.

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The importance of SMEs in growing inclusive growth in Africa

Inclusive economic growth is growth that leads to job creation, causing a ripple effect on the purchasing power of the majority of the populace. The private sector, and in particular small and medium enterprises (SMEs), are the drivers of an economy. SMEs are also the largest providers of direct employment and inclusive growth can be achieved through promotion of policies that would drive their development.

According to the Central Bank of Nigeria, 96% of Nigerian businesses are SMEs (US = 53%, EU = 65%). Inclusive growth can be achieved by positioning these SMEs to take advantage of the opportunities in the economy.

Financial services is crucial to SMEs

According to the Small Business Administration of the USA, two of the top 10 reasons why SMEs fail are lack of capital, and poor credit management. It is no different in Nigeria and the rest of Africa. While there are several aggregators/sources of capital including Private Equity (PE) funds, development finance institutions (DFIs) and insurance companies in Africa, the key players in the financial services industry that are optimally positioned to serve SMEs and therefore drive inclusive growth are banks and micro-lenders.

Government macro-economic policies impact SME financing

Lenders operate within the wider macro-economic environment, and government policies regarding inflation and infrastructure are crucial to keeping the cost of funding down. When inflation drives up the cost of funding and ultimately lending costs, it in turn drives up the cost of production, making SMEs less competitive.

Standardisation of physical address systems is another area where African governments can make a meaningful contribution to SME growth. Inconsistent address systems make it difficult for SMEs to establish formal relationships and credit histories with suppliers, customers and transient clients.

What can banks do?

At the credit application and processing stage, banks need to invest in systems that allow more efficient and tailored risk profiling. Such a system rewards diligent entrepreneurs with lower lending rates and greater access to capital.

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Gambia: GCCI, GEF/UNIDO Project convene SME forum on renewable energy

Reel Fruits, a fruit processing company leading the pack.

Affiong Williams is on track to becoming one of Nigeria’s young, high net worth individuals with her fruit processing company, Reel Fruits. Set up in 2014, the company packages, brands and processes locally grown fruits. Williams has grown from packaging the products in her home, to running a small factory that now supplies 80 stores in Nigeria.

Affiong is a leading example of Impact entrepreneurs building businesses that create jobs, increase access to opportunity, and enhance quality of life for their employees, customers, partners, and community.

Africa truly need more of such entrepreneurs that would help in creating the opportunities and enable millions of youths and women to be gainfully employed and sustain the current growth.

US$100 Million Grofin SGB Fund Supporting SMEs in Africa

The Fund has initial commitments of US$100 million, which is expected to grow to US$150 million in two years, making it one of the largest funds specifically targeting small and growing businesses. * This Fund is a follow-on to the US$170 million GroFin Africa Fund that is fully invested * The GroFin Small and Growing Businesses (SGB) Fund aims to support over 9,800 under-served entrepreneurs and help create 47,000 sustainable jobs across Africa over the next 10 years. * The Fund has attracted investment from a range of development funders and investors including Shell Foundation (an independent charity), KfW Development Bank (KfW), the Dutch Good Growth Fund (DGGF) and Norfund. * The GroFin SGB Fund seeks to provide business development assistance and finance to small and growing businesses that are currently under-served in Africa.

Kampala, Uganda – Wednesday 23 September 2015 marked the official launch of the GroFin Small and Growing Businesses (SGB) Fund in Africa that aims to catalyse sustainable job creation through supporting small and growing businesses in Ghana, Nigeria, Uganda, Zambia, Kenya, South Africa, Rwanda, Tanzania and Egypt. The GroFin SGB Fund seeks to provide an integrated solution of patient risk capital and end-to-end business support for SGBs. Each year the Fund aims to support up to 100 entrepreneurs, with an estimated average loan size of US$ 350,000. Over the next 10 years the Fund will target the creation of 47,000 sustainable jobs. The Fund’s tiered capital structure is a distinguishing feature that enables a range of social and commercial investors to join the Fund post its launch. The fund is an uncapped and unlimited-life fund, and GroFin aims to initially grow the dedicated SGB Fund to US$150 million.

Typically, SGBs and entrepreneurs in Africa lack the vital resources they need to succeed: access to flexible patient capital; access to business skills and training; and linkages to the supply chains of larger organisations.

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