Ethiopian BDS Network

The problematic of lack of capacity or willingness of micro and small entrepreneurs to pay for BDS providers’ services is general and even documented by the rigid full-commercial approach defending Donor Committee members:

"Several participants, however, pointed out that although the ideal is to act as a facilitator, in weak markets it may be necessary for an organization to act as a provider for a limited time. The participants agreed that the intervening organization can act as a facilitator, provider, or a combination of both at different stages in a program. Furthermore, NGOs should ensure that their efforts do not distort, but facilitate, market development and should follow a pragmatic approach, depending on the level of development of BDS markets. In general, acting as a provider should be only an interim measure, and an exit strategy should be part of the upfront design." (Nussbaum/Miehlbradt (Donor Committee): Assessing BDS Demand and Supply in Weak or Limited Markets, Washington 12/2003)

Micro and small enterprises do not have a diversified division of labour and management like medium and large enterprises. Medium and large enterprises are organized in various divisions like staff management, supply management, sales management, accounting, and top management. Each of these divisions has its own budget for short-term and long-term interventions. Thus, trainings and consultancies can better be realized than in micro and small enterprises which run their activities with a day-by-day budget. That is why MSEs want to see immediate impact which is normally not the case with medium and long-term impact of management trainings.

Advertising in newspapers or on enterprise level, organizing tailor-made trainings, capacity building of BDS providers, collaborate with business associations – all these standard BDS market development activities based on the rigid full-commercial BDS approach – will not overcome this structural problem in dealing with micro and small enterprises.

That is why in the discussion with banks and rural banks in our last mission in Ghana we introduced an innovative approach to develop market-based paid BDS services:

Create Funds for non-financial Services
in Collaboration with Financial Institutions

It is normal practice that banks in Ghana take proceeding fees or so-called “Commitment fees” for every loan application. Commitment fees in Ghana are between 2-4% of the loan amount.

Our proposal is that banks top up their commitment fee by 0.5-1% - and this in general for all loans. With this 0.5-1% top-up they open an account for non-financial services. Loan clients will get the opportunity to ask for non-financial Business Development Services. The bank will decide on each application and, if necessary, select a business consultant to provide the service. Finally the consultant will be paid by the fund.

This linkage between the financial and BDS structure is not contradictory to the official BDS approach: We do not intend to merge financial and non-financial services in one structure, but strive only for strong collaboration between different services. The bank is free for decision and the BDS provider is still an independent consultant and not staff of the financial institution.

This approach does also not ask for offer-oriented standardized training packages as precondition before loan application (old approach). With the non-financial services fund each bank will have the opportunity to respond on the one hand on demands of loan clients for non-financial services and on the other hand to warmly recommend to loan clients in difficulties to accept the necessary advice.

In both cases, in difference to subsidized voucher systems, this solution is a 100% market solution because the client pays 100% of the service. The big advantage is, that the standard problem of BDS until today (MSE cannot or won’t pay for BDS services) is solved for this segment of business owners who are in contact with credit institutions. Even if not every enterprise is a bank client, this segment of the business community includes a large number of MSEs, an important component of the national BDS market.

All Ghanaian banks and rural banks interviewed on this issue have answered positively because non-financial services for their loan clients would improve the performance of the businesses and increase the repayment rate.

In order to get an idea on the amount that would be available for such non-financial services funds, we asked for the monthly loan volume of banks. Rural banks have a monthly loan volume varying from 2 billion to 5 billion Cedis ( 200,000 - 500,000 Euro ), savings and loan institutions’ and commercial banks’ loan volume varying from 8 billion to 15 billion Cedis. In the case of rural banks an average of 400,000 Euro of loan volume would allow to generate a monthly amount of 4,000 Euro (1%) of each bank for non-financial services. A consultant dealing with local institutions usually is paid with about 100 Euro per day. Thus on average 40 consultancy days could be paid per month by each rural bank with a non-financial services fund on its disposal.

The actual interest rates of commercial and rural banks in Ghana are between 26 to 32%. Seen competition between banks, a ligthly increased interest rate because of an increased commitment fee would not be a real constraint for loan marketing. Especially not for rural banks because these banks are geographically limited and community based with a weak competition to other banks.

The non-financial services fund proposal to banks is a strategic proposal because one step to solve the structural “non-payment problem” of the rigid full-commercial BDS approach. It is not a merger of financial and non-financial structures, but a strong win-win collaboration! Each structure stays with its own competence: banks dealing with financial products and BDS providers dealing with non-financial services. It may even be an example for a general and nation-wide BDS market solution, e.g. in case of compulsory membership of Chambers of Commerce including a general modest top-up on the membership fee specific to Business Development Services for the entire national business community.

Steps for implementation: Contact banks and micro finance; explain approach; ask for opinion and willingness to participate; identify monthly loan volume in order to get an idea of resources available for the fund (1% of the monthly loan volume); ask for decision of the banks' top management; prepare memorandum of understanding; bank opens account for fund and tops up proceding fees with 1% in order to start the fund; together with loan approval, bank distributes application form for non-financial services; BDS facilitating organization provides representative list of commercial BDS providers (consultants, private training centres) including fields of competencies; BDS facilitators start to identify needs for non-financial services of loan clients.

Try this approach in your country, contact banks and micro finance institutions
and explain the approach, start pilot phase of one year to see the results -
ask for more details for implementation to mail@gagel.net .