Interview with Coy Buckley, CEO of EFTA

EFTA is the first company in Tanzania which is seeking to employ financial leasing to boost employment levels in the country and to bring business growth opportunities to the so called missing middle.

Right.

Would you agree with the assertion that the poor have been hitherto stocked with micro credit whilst the SME sector has been starved?

Yes. I would say that micro credit has its place. It does a lot in terms of providing access to small loans for inputs, for education and overcoming small gaps. It’s also used for consumer credit but I would say the tougher and the bigger aspect of using finance for development is really finding a way to access pre-finance for SMEs. For us, equipment leasing is a very natural way to do that, for a variety of reasons.

So the EFTA's lending model is very innovative. The business is able to use the capital equipment whilst they are paying off their loan thereby side stepping the need for collateral and we understand that only 5-6% of your loans by value end in repossession. How have you managed to achieve such a low NPL (non-performing loan) ratio?

In the SME sector in Tanzania, 80% of the businesses are informal. This means they don’t have formal accounts and they don’t usually have collateral. The lease is a way for us to access these small businesses. We’ve not only developed a financing lease that has helped us overcome the collateral barrier that is often required by the Central Bank, but also a way of assessing a business that doesn’t require a formal account. Generally, formal accounts would help us to understand the amount of a SMEs leverage, the turnover and the amount of cash they have in the bank but if companies don’t have this we have to find other ways to access it and it’s difficult. What we do is use a variety of methods that make sense for an informal customer such as talking to their suppliers, talking to their key customers, looking at their order books, getting high quality references and having a gauge for the amount of turnover the business has and the amount of turnover that is needed to service the loan but does not necessarily have those types of accounts. It’s a unique thing that we do and we spend a lot of time getting it right. Another tool that has come in recently is the Credit Reference Bureau which is something that was introduced a few years ago and in a modern economy would be quite standard. You would know what someone’s credit score is and you could lend to them or not. But in Tanzania, with a relatively low transparency environment, that Credit Reference Bureau is increasing the amount of transparency. They’re telling us: "this is a serial defaulter", which means we need to stay away. Or "this person is unbanked", so we have to do a bit more work around their credit worthiness, but we know they don’t have a history of defaulting which just makes it easier. There are a variety of tools that we can use but really, the core things are, taking time, using what is there, not looking for something that is not there and then having a good understanding of the sector. The other part of what we do is to get sector knowledge documents. We spend a lot of time looking at sectors where we see there are a lot of transactions to try and understand the gross margins, understanding the volumes and understanding the key risks. How difficult is it for them to get raw materials? What’s the seasonality of the business? Then we can gauge how this business, for instance a brick business, compares to another brick business. If we see a lot of variations between those two businesses we can say: "something is not quite right". So it sort of gives us a Rosetta stone of a bricks business and we can compare them across and say: "ok this looks like we would expect and therefore the risk is lower". Those are the three primary ways that we look at it.