BY WOSSENSEGED ASSEFA
Civilization exists because of man’s creativity and ability to bring his ideas to life. From all the idea categories, none impacts the economy as much as business ideas do.
However, many startup ideas with substantial potential are left dead because of the lack of financing. Therefore, the entrepreneurial gold mine is left untouched and hidden in plain sight.
It is known that in a truly free-market economic system, economic growth cannot be achieved without the participation of the private sector. However, for the private sector of a country to develop, there is a need for a competent financial sector that is able to fund and incubate it. And as we all know, in Ethiopia the major players of the financial sector are banks and much is therefore expected from them.
In many countries governments including our own, banks and different kinds of investors work out ways to loan money to businesses that show the tell-tale signs of something profitable.
This type of investment is known as business funding. Traditionally lenders need four things satisfied before they loan money or resources these are; capital – business assets that can be used to create products or services and which can be turned into cash to make payments on business loans, Collateral-cash to contribute to the business, Capacity – a track record to show that the business has the capacity to generate enough money to pay back the loan, and Character- this is primarily a good personal or business credit rating.
The major problem with the traditional lending, the system is that most startups or entrepreneurs don’t fulfill these criteria when starting a business. This, in turn, means only a selected few, often the wealthy, get to bring their ideas to life.
In Ethiopia, the traditional lending system has gone hand in hand with the punitive culture that has dominated the business atmosphere. Businesses that are already established, not ideas are financed and when presented with a novel business idea banks first calculate how they can get back their loaned money if the idea fails.
This in turn, instead of appreciating the entrepreneurial skills of citizens, degrades their hopes of using their ideas to start something profitable. To dismantle this inhibiting and retributive atmosphere banks should start focusing on idea financing.
In an entrepreneurship appreciative culture banks would dissect the ideas presented to them, putting the pieces of gold through the fire to find the purest and most profitable pieces from the batch.
When a person comes up with a potentially profitable idea they probably need a website, a team, some form of office space, and, of course, at least enough cash coming in each month to pay the rent. This means they need money.
Whatever the business idea is most entrepreneurs need funding to really get off the ground during the early days or even start the business altogether. That’s where idea financing comes in. Idea financing is the funding of potentially profitable business ideas or startups to help incubate the business to help it grow.
Idea financing revolves around calculations and predictions. In this method, the help that startups get isn’t only financial they also get help in resource management, marketing and so on from the lenders.
This would help the inexperienced owners of great ideas make fewer mistakes and nurture their businesses to full growth. Generally, this might be considered a more risky approach because collateral and capital might not be required in many cases which may lead to a loss if the idea fails.
A failed example of this system is the revolving fund that was initiated by the government to help the youth develop their ideas and bring them to life. However, it had a major weakness that was exploited by many and led to its demise.
Its weakness was the lack of follow up from the government’s side. Funds were given out in wholes and there was no tracking this led to the misuse of the funds and the government shutting down the system. Banks, taking notes of these weaknesses, can use at least two simple yet effective ideas to minimize risk and avoid misuse of funds by individuals.
The first of the two is releasing funds slowly, depending on the amount of progress that the startup has achieved. For example, if a startup requires one million birr, banks should refrain from giving out the loan as a whole. Instead, the banks should release these funds over a specific period of time depending on how well the startup is performing.
This can help banks minimize risk and encourage the startup to grow naturally. The second idea is preparing a follow-up team that could help the startups grow. This follow up team can help fill in the gaps created by the inexperience of the startup owners.
Again this would help minimize the risks that the bank faces by investing in ideas. This begs the question ‘why should banks even invest in something like this?’ The Answer – because if done properly it is highly profitable and can even lead to exponential economic and financial growth.
Startups may be small companies but they can play a big role in economic growth. Globally the startup business is thought to be a $3 trillion dollars economy. That is larger than the GDP of India, UK or even France. Startups create more jobs which lead to more employment and more employment leads to an improved economy.
Startups boost economic growth with revolutionary technology, and over time create new industries. If handled properly they become money-making machines for the owner, shareholders and employees. The owners of the startups become part of a new generation of wealth makers.
Often times these newly made wealth makers put their money towards the businesses of friends and business partners, starting a virtuous circle. This can helps banks make more profit by creating wealth to make more profit more and the cycle continues.
The race would change from ‘taking customers from other competitive banks’ to ‘creating wealthy customers that can help finance the needs of the bank’.
As stated earlier for a free market economic system to grow private sectors should grow, and for private sectors to grow there should be a stable and competent financial sector. A stable and competent financial sector, in regards to banks, develops when there is an active saving culture in a community.
While the country might still need some time to develop such a culture the recent event in regards to the change of notes in our country has created the near-perfect opportunity for banks to practice idea financing.
The estimated amount of money that used to circulate outside of banks was thought to be more than 100 billion Birr, before the notes were changed. After the note change, however, it is estimated that banks have gathered up more than what used to circulate outside the banks.
This windfall gain could be the perfect opportunity for the banks to participate in economic growth at a higher level by investing the money collected on business ideas that have potential.
Like categories that banks have that define where they will be investing their money, such as agriculture, manufacturing, production etc… the banks should include idea financing in their list of investment categories.
By doing this and participating in the conducive cycle of idea financing, banks should step up to the plate and fulfill their corporate responsibility of wealth creation, not just wealth collection.
The Ethiopian Herald January 8/2021
