Mfi-pe Link Mgmt 809 Final

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    Establishing the Link betweenMicrofinance and Private Equity in

    Sub-Saharan Africa

    Next Generation Catalyst for Sustainability

    MGMT 809 Prof Sammut Spring 2009

    Ahmad Abdul-Qadir (EAST)Aneet Chopra (WEST)

    Nadeem Firasta (WEST)Joy Jacob (WEST)

    Adina Simu (WEST)

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    Private Equity in Sub-Saharan Africa:Next Generation Stimulus for a Sustainable Economy

    To develop towards economic sustainability, Sub-Saharan Africa (SSA) must attract privateinvestment, and along with it, expertise in creating durable social and financial institutionsthat encourage growth. With nascent capital markets emerging, we propose that Private

    Equitywith its emphases on profitability, governance and growthshould become thenext-generation stimulus for Sub-Saharan Africa to achieve a sustainable economy. Whileour recommendations are generally relevant to the 48 independent nations collectivelyknown as Sub-Saharan Africa, we will focus on a subset of these nations in Eastern Africathat share a history of close economic and social cooperation in addition to stronghistorical ties before, during and after colonialism.

    Table of Content

    1 History of Development in Sub-Saharan Africa .......................................................................................3

    2 Microfinance: Road to Economic Development .......................................................................................4

    2.1 Material Benefits of Microfinance .....................................................................................................42.2 Non-Material Benefits of Micro financing ........................................................................................5

    2.3 Challenges in Microfinance ...............................................................................................................6

    3 Sustainable Economy: Private Equitys Role ..........................................................................................8

    3.1 Microfinance and Private Equity (PE) ...............................................................................................83.2 PEs future in Microfinance ..............................................................................................................9

    3.3 Profit Drivers for PE in Microfinance .............................................................................................10

    3.4 Challenges ........................................................................................................................................114 Case Study: PE in East Africa .................................................................................................................12

    4.1 Background ......................................................................................................................................12

    4.2 Business Model ................................................................................................................................134.3 Initial Public Offering ......................................................................................................................15

    4.4 Moving Forward ..............................................................................................................................15

    5 Recommendations ...................................................................................................................................205.1 Geographic Focus ............................................................................................................................20

    5.2 Infrastructure ....................................................................................................................................24

    5.3 Agriculture .......................................................................................................................................25

    5.4 Internet & Personal Computing .......................................................................................................275.5 Semi-skilled Manufacturing and Assembly .....................................................................................27

    5.6 Hospitality and Tourism ...................................................................................................................27

    References: ................................................................................................................................................29

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    1 History of Development in Sub-Saharan Africa

    Sub-Saharan Africa is a geographical term used to describe the African countrieswhich are fully or partially located south of the Sahara Desert. Covering an area

    24.3 million square kilometers and boasting more cultural, ethnic and linguisticdiversity than any other region of similar size, Sub-Saharan Africa (SSA) is still thepoorest region in the world. Excluding the largest two SSA economies, South Africaand Nigeria, 2007 GDP for the rest of SSA was just $399 billion which correspondsto per capital GNI of just $388.

    In the wake of European colonialism at the hands of the English, French,Portuguese, Belgian and Germans to a lesser extent, SSA nations began to emergeas independent nations in the 1950s under visionary leaders such as KwameNkrumah in Ghana, Jomo Kenyatta in Kenya and Julius Nyerere in Tanzania. Muchof the development within SSA since colonialism ended has been channeled

    through non-governmental organizations (NGOs) and agencies of large globalorganizations such as the World Bank and International Monetary Fund.

    A large number of private organizations are trying to address the factorsinfluencing global poverty. Traditionally most NGOs have been focused onoutreach; however, this is not the only area of activity. Focusing on HIV/AIDS, TBand Malaria, Agriculture, Education, Debt Cancellation, Trade, Maternal and ChildHealth, Development Assistance, Aid Effectiveness, Climate and Development,Water and Sanitation, or Governance and Security, organizations such as Bread forthe World Institute, CARE USA, International Medical Corps, International RescueCommittee, Mercy Corps, Oxfam America, Plan USA, Save the Children, World

    Concern, World Vision, Habitat for Humanity have been instrumental in solvinghumanitarian crises and channeling funds from donors to aid receivers.

    The Bill and Melinda Gates Foundation, one of the worlds largest charitablefoundations, has focused the majority of their work in health, poverty, anddevelopment in Africa. Grants have been offered for projects in Ghana, Nigeria,Mozambique, or projects in the US which aim to solve African problems.

    Most recently, the focus moved further, towards sustainability. The WFP, inpartnership with private organizations and charitable individuals, started thePurchase for Progress program, under which the WFP will buy crops from small

    local farmers, which will then offer as food aid. Bill Gates and Warren Buffett,through their private foundations, offered more than $75 million for this program.

    United Nations with over 30 agencies, and UN Millennium Development Goals isthe largest food-distributor in Africa, thorough its World Food Program agency. Forthe last 45 years, WFP has been using donations from rich countries governmentsto feed poor people. The World Bank, IMF and the International Finance Corporationare also involved.

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    Another type of government organization active in Africa is country-specific - oneexample being the United States Agency for International Development (USAID).While the U.S. Government, through USAID, provides assistance to 47 countries inAfrica, the regions economic growth is not amongst the top five priorities. Instead,USAID focuses on bolstering Africas prospects through enhancing strategicpartnerships, consolidating democratic transitions, and helping fragile states.

    2 Microfinance: Road to Economic Development

    Microfinance refers to the provision of financial services to poor or low-incomeclients, including consumers and the self-employed. Traditionally, banks have notprovided financial services to clients with little or no cash income. Banks mustincur substantial costs to manage a client account, regardless of how small thesums of money involved. For example, the total revenue from delivering onehundred loans worth $1,000 each will not differ greatly from the revenue thatresults from delivering one loan of $100,000. But the fixed cost of processing loans

    -- of any size -- is considerable: assessment of potential borrowers, their repaymentprospects and security; administration of outstanding loans, collecting fromdelinquent borrowers and so on. There is a break-even point in providing loans ordeposits below which banks lose money on each transaction they make. Poorpeople usually fall below it. In addition, most poor people have few assets that canbe secured by a bank as collateral. As documented extensively by Hernando deSoto1 and others, even if they happen to own land in the developing world, theymay not have effective title to it. This means that the bank will have little recourseagainst defaulting borrowers.

    Because of these difficulties, when poor people borrow they often rely on relatives

    or a local moneylender, whose interest rates can be very high6

    . An analysis of 28studies of informal money-lending in fourteen countries concluded that 76% ofmoneylenders charged interest rates in excess of 10% per month, including 22%that exceeded 100% per month. Additionally, moneylenders us