Collateral Security : Banks Go Wrong

Published on 3rd December 2012

On Saturday24th November, The Saturday Vision published an interview with Kampala Executive Director Jennifer Musisi. What was compelling for me was her response on the question of the Youth Fund she recently suspended. She said that beneficiaries must be ready to stake collateral security before they can access the money and now through a commercial bank. She argued thus, “...not even your father can give you money without security,” further stamping the convenient pre-condition of collateral security for access to credit finance. Indeed banks in Uganda have demonstrated high-level timidity. When it comes to youth funds, they too see collateral security as a central requirement. They don’t want to lose money in risky ventures when there are opportunities like mortgage finance where they continue to make supernormal profits.

I partly understand their fears, especially where most prospective borrowers have no basic records like clear identifications, permanent places of abode and workplaces and job security. But are there no other ways of dealing with this?  In practical and real economics of credit finance, collateral security is not the most important requirement. What progressive credit entrepreneurs look for is the cash flow and credit history of real and prospective applicants. Partly because of inherent uncertainties in Uganda’s financial environment, banks seek to hedge their risks on movable and immovable collateral. What is making matters worse is also limited financial literacy and backbreaking interest rates that are over and above East African regional average of 13%. 

Most of these conditional realities make un-propertied youth less attractive for lending institutions. This is why the government set up a youth fund to circumvent most of these inhibitions to financial access by youth. So why is Jennifer Musisi taking this money back to the banks? Why is she and KCCA not piggybacking known methods of social collateral and venture capital financing approaches to transform this fund? Are there no lessons of success since this fund was set up two years ago? Will the youth fund provide a silver bullet for unemployment/underemployment in Uganda? I wish to illuminate two strategies that can unlock this dilemma:

A: The social collateral model

Social collateral works amongst a group of people who share similar social and community ties, business vision, enterprise and values – with trust as the anchor which lubricates the social system. What actually links this group is a combination of social and economic pursuits. Such could be youth or women groups in Nakasero and Kisekka markets. They could also be highly informal Eshabwee or Maleewa traders with local expertise in these indigenous gastronomy delicacies. They even could be a group with innate expertise in ensenene business. They could be a group of boda boda riders, young graduates doing crafts or young people fabricating metals in Katwe.

These groups usually have a firm regime of unwritten code and heavy social sanctions on wayward members. If such groups are targeted with financing, liability will be shared, risk spread and members will compel their peers to pay back. No beneficiary would likely default at the expense of losing group trust. Social accountably in such groups is entrenched. With this approach, community ties matter more than a bunch of cold bank calculations. Borrowers under this system don’t pay the common 5% application fee and have a monthly interest rate of 2%, and they can earn discounts for paying off their loans early. This system is working for many quiet informal savings and lending groups in Uganda and formal groups in India and Bangladesh. Can it work for our Kampala youth? Yes, if robust due diligence, quick anthropological inquiries and careful selection of groups is worked out. Are the managers of youth fund ready for this? Can the KCCA study this option?

B: How about the Venture Capital Fund?

Venture funds are meant to capitalize and commercialize agile ideas that would rather be stalled because of lack of financing. Venture capital funds are also created to circumvent strict conditions that strain access to capital necessary to finance entrepreneurs with high potential jobs creating ideas. We must note that, these funds don’t have to necessarily go to the youth, but rather to entrepreneurs (women, men, young, middle aged, old) with an idea that can create meaningful jobs for citizenry.

A youth is concerned about finding a job, no matter who created that job. That’s a detail. Therefore, venture funds can never be about these guidelines we have seen around like having a senior four certificate or an enterprise that employs four people or collateral security among others! Instead, the aim of venture funds/capital is to go around these conditions. Such a venture fund can be run by private sector organisations, trusts, foundations, universities and  governments among others. For example, the Silicon Valley venture capital and angel investors’ schemes were started by Stanford University in California USA. Now Silicon Valley is synonymous with innovation. It is the birthplace of Apple, Google and eBay, among other tech giants. These innovations giants- have created millions of jobs, not just in the United States, but across the world. 

What is Makerere University doing to spur space and investment for innovations? Makerere Katanga Valley which used to be owned by the University is now a chaotic real-estate enclave!  The electronic vehicle, Kiira EV, manufactured by students of the College of Engineering, Design, Art and Technology at Makerere provided the Country an opportunity to test venture capital/financing model. But why isn’t the private sector pitching in money to commercialize production of electrical cars /Kiira EV brand for markets across Eastern Africa? Did Makerere University move forward to put this to test or they want to put the vehicle in the museum?   Can the new Vice Chancellor pitch for us something inspiring and truly imaginative?

You see, the President on the advice of ministry of Finance officials accepted this youth fund proposal because it is key to mitigating surging unemployment and underemployment rates across the Country. We must not frustrate the President’s efforts by pandering to old and self-preserving processes. There are great youth and their groups out there who can be helped by this opportunity. The options of social collateral and venture capital financing should be fully studied and deployed. Let’s not wait for unemployment explosion that will be impossible to manage.

By Morrison Rwakakamba
Chief Executive Officer, Agency for Transformation
[email protected]

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