"First impact investor providing loans in Guinea..."
Impact investing is about to come to Guinea – one of the focus countries of the West Africa Bright Future Fund, it has been largely overlooked by fellow impact investors. "Investing here takes more time, patience, and understanding, but the resilience of people in Guinea is truly inspiring,” says Sjoerd Melsert, Senior Investment Manager at CIM. Coming back from a pipeline-building trip, Sjoerd shares unique insights on the local investment climate, challenges, risks and opportunities for bringing positive social change to Guinea.
Being the first impact investor providing loans in Guinea is a thrilling opportunity, and it means that we can truly make a unique impact in the country. And while there is another impact equity investor in Guinea, there is plenty of room for growth and innovation.
Most mainstream investors in Guinea operate in the natural resources like mining iron, gold and bauxite. As you can imagine, dependence on the mining industry is not sustainable for the country's economy. When the prices for these minerals drop, mining companies might not be interested in staying, which could lead to even bigger unemployment and economic instability. It is, therefore, very important for an economy to diversify, not to become (too) dependent on one sector.
One of the major challenges we face is the highly informal market where many people don't see the benefits of paying taxes, so they don't. The group paying taxes is relatively small, making their tax burden high. Consequently, the infrastructure in its broadest sense (roads, electricity, education) is all relatively poor, creating many challenges for entrepreneurs.
Moreover, Guinea is, like many other West African countries where we operate, heavily dependent on imports of all kinds of food products, such as rice, meat and vegetables. This situation is not unique to Guinea, but the COVID pandemic and the war in Ukraine have interrupted food supplies, pushing Guinea to become more self-sufficient. To achieve this, the private sector needs support from the government, but public funds are limited (circling back to tax avoidance), so impact investors like CIM would be the first ones to try to tackle this. It is a first step to contributing to the development of the country.
To say the least. Guinea is in dire need of further development at all levels, from education to roads. Lack of infrastructure is a common challenge in West African countries, but the situation in Guinea is even worse. On top of that, the lagging education system makes it challenging to find qualified staff. Ones who can afford it go to study abroad - and only some come back to foster the development of their home country. Encouraging to see, but it's not enough. A temporary military government adds an extra layer of complexity, even though the country is considered peaceful compared to neighbouring countries like Mali and Burkina Faso. There is a risk of economic sanctions if the government doesn't act quickly enough and plan the elections, but overall, we were able to move freely around the country, which is very different from when we visited Mali or Burkina Faso.
On the bright side, it is a coastal country with a relaxed atmosphere. People were playing football on the street at night and dancing on the beach – it is a friendly environment. It doesn't strike you as a busy place with a vibrant entrepreneurial spirit, but the country has a small but supportive investment community. We were pleasantly surprised by the active support of the government's investment promotion agency, APIP, led by an inspiring female managing director.
Access to finance for SMEs in West Africa is virtually impossible, MFIs focus on loans up to around USD 100,000, and banks focus on financing low-risk large corporate companies as they lack the resources and expertise to provide loans to SMEs. As a result, many banks choose to invest in low-risk treasury bills instead, which can yield good returns at low risk. However, this also means these banks are essentially financing their own government rather than supporting local businesses. We are filling this "access-to-finance" gap by providing loans to these SMEs.
High unemployment rates, particularly among women, are a pressing social challenge. The government is promoting small and medium-sized enterprises to address this issue, but external resources are often needed to make this happen. On the environmental front, while Guinea has access to fertile land and water, access to electricity remains a huge challenge, especially in rural areas. Solar energy presents a promising option, as it can be implemented quickly and without large-scale infrastructure and is a good alternative for the challenging last-mile distribution in this region.
To address these challenges, the key to sustainable development in Guinea lies in supporting local businesses and investing in clean energy solutions – the WABFF is working to support this effort.
We visited a variety of companies that USAID selected with the support of Cross Boundary, our own network, and we even got some additional references through the earlier-mentioned promotion agency APIP. At every meeting we had, we came across new prospective investees. In the end, we ended up with a solid list of eight potential investments, five in the agricultural sector, one in renewable energy, one in waste management and one in microfinance. I have to say I was pleasantly surprised by the level of professionalism and organization of the companies we spoke to, being relatively well organized, working on business plans and able to give us insight into their financial position but above all, the enthusiasm of these entrepreneurs.
There are a couple of risks in providing loans to SMEs in this environment. As mentioned before, poor infrastructure gives entrepreneurs numerous challenges that translate into additional risks for us. The management capacity of SMEs can also be a concern, especially if the company relies heavily on one individual. Even a good entrepreneur needs support from qualified people to face many operational challenges. Another risk lies in the quality of information that we receive. As an investor, we really need to be on the ground to verify. And support the company where it is needed with technical assistance.
Currency risk is a significant factor to consider. The Guinean franc is not part of the CFA currency system as Mali, Ivory Coast, Burkina, Senegal, Togo, and Benin, meaning it is not pegged to the euro. It is more volatile, so there is always a risk it will drop overnight. Working in a country where currency fluctuations are a constant concern, we have to hedge our investments in Guinea. The hedging comes at a cost and is much more tricky for agricultural- or SME loans as their cash flows are more difficult to project. Unlike most investors interested in cash crops, our focus is mainly on food crops serving the local market, which has a higher uncertainty on its cash flows.
Indeed, we can make a difference. It's incredibly challenging but fulfilling work. We just need to continuously remind ourselves that it is a different investment climate, one that requires a special approach. Working in fragile countries like these presents a unique set of challenges we cannot imagine. As impact investors, we aim to create an environment where people can access financial products and services that are not readily available through local sources. Unfortunately, the lack of infrastructure, education, and electricity, coupled with non-supportive governments (not because they don't want to, but because they don't have the resources), makes it difficult. Starting and running a company here means dealing with issues like a lack of electricity, water, and even basic communication tools that we take for granted. On top of that, the global market is not a level playing field: local producers have to compete against cheaper imports (often subsidized), and the local government has limited possibilities to protect their own entrepreneurs.
Our investment team on the ground and our risk and legal units are used to working in an environment where the circumstances are vastly different from what we are accustomed to. Investing here takes more time, patience, and understanding, but the resilience of people in Guinea is truly inspiring. Even when faced with many obstacles, they remain eager and are able to make things work.
Guinea is a new country for us, so we are testing the ground carefully, relying on partnerships. One of WABFF's external IC members is from Guinea, and he provided some helpful introductions, connecting us to people interested in developing entrepreneurship in the country. During our trip, we met many people eager to help us succeed. From people related to the financial industry to government officials to various not-for-profit organizations, everyone was ready and willing to meet, talk and support us. This level of flexibility and willingness to work together is something that's hard to come by in other places. Try scheduling a meeting with a high-ranking official in the Netherlands – you'll have to do this three months ahead of time. But in Guinea, people are ready to seize the moment. This prevailing spirit of collaboration makes me believe we can create a long-lasting positive impact together.
