Investment clubs: Alternative funding for SMEs

Uganda is still ranked as the most entrepreneurial country in the World. This is according to a report by B2B Marketplace Approved Index published in 2015.

In spite of this ranking, many of the enterprises that start don’t live to celebrate their first anniversary or take off.

This is a problem mostly attributed to a number of reasons but the most outstanding has always been the high cost of capital which in turn leads to a high cost of doing business.

Considering the high cost of capital, it is imperative to explore alternative sources of finance.

Although experts say private equity is a relatively new investment financial model in East Africa with Uganda emerging as the second most active country after Kenya, it presents a lease of life to the Small and Medium Enterprises (SMEs) sector.

Mr Peter Mulira, an investment executive-investment promotion division of Uganda Investment Authority, says investment clubs can be a good source of capital to established SMEs that want to expand through capitalisation.
Ideally, an investment club is a group of fewer than 100 people who pool their money to invest in ventures they deem profitable.

The investment clubs are organised as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members.

He further says that the clubs can offer a short, medium to long term financing to SMEs with growth potential, and seek high returns on their capital then exit after achieving their required return.

“Most of the investment clubs would not only provide capital but also act as a partner to provide strategic and operational support due to their diverse background,” Mr Mulira says.

Mr Charles Ocici the executive director Enterprise Uganda says: “Investment clubs are on the right track in terms of going into business given the spirit of Ugandans, which is already impressing. Investment clubs have space in our community because people are already happy with the desire to go into business.”

He says because the appetite for the startup is good in the country, the role of investment clubs would be to instill the business management skill to keep these startups in the market.

Secondly, investment clubs bring in the aspect of leadership and governance. Because failure to keep businesses in the market many times this is attributed to leadership.

Mr Mulira says with the unequal distribution of wealth and income in Africa, investment groups are increasingly providing equal opportunities to financial freedom through collective schemes.

Currently, there are over hundreds of investment clubs that have been formed in the country. Some are so structured that they offer services less to those of commercial banks.

Through Investment clubs, commercial banks are beginning to see one way of creating a culture of saving and investment.
Realising how organised these clubs are, many commercial banks are scrambling to offer services to these investment clubs.

Some of the commercial banks taking the lead in this market space are Dfcu Bank, Centenary Bank through its Center Investment club and Equity Bank.

These commercial banks are offering attractive packages ranging from giving reduced interest rates, giving loans that double their bank balances, access to financial literacy training sessions to dedicated relationship officers.
Banks speak
“Most of the clubs are doing well though they have a few challenges. They are growing savings though most are not digitized in record keeping and they still save in boxes,” Mr Anthony Kituuka the executive director of Equity Bank says.

At Equity Bank Mr Kituuka says they have endeavored to give low account charges (no account opening charge. Provide interest in savings on accounts and offer digital channels for promoting transparency.
Although he is secretive about the actual number of investment clubs they work with, he says they are in several thousand with the majority on the Eazzy Biz platform and their deposits are heading to about Shs20 billion.

Challenges
Although commercial banks are competing for these investment clubs the road has not been without challenges dealing with them.

Non-registration of Investment clubs for fear of many factors among which is the false fear of taxation is one of the challenges banks face dealing with these clubs.

“Many of these clubs are hard to access because some hold their meetings at night. It becomes difficult to offer financial literacy training,” Mr Kituuka says.

The other challenge is that of taking a long and hard time to make decisions due to big sizes and no proper structure.
While the other challenge is that of some investment clubs still want to get to see their physical cash comfortably saved in boxes.

Experts’ advice
Experts say some banks have not necessarily endeavored to teach individuals who go and form investment clubs because they assume that these people know what they’re doing.

“Banks need to educate the principles of these clubs on how to sustain their clubs,” Ocici said.
He advised that banks need to work with either agencies that offer business support services or establish a desk dedicated to giving weekly or monthly guidance on how to run such clubs.

While UIA’s Mulira thinks that the creation of rural investment clubs can offer communities a safe and supportive environment to learn the basics of investing and financial literacy.

It also enables them to invest in agro supplies and products as a community and take advantage of economies of scale brought about by bulk buying.

Saving culture
An investment club is a group of people who pool their money to invest in ventures they deem profitable. Usually, investment clubs are organised as partnerships and after the members study different investments, the group decides to buy or sell based on a majority vote of the members.
Investment clubs are slowly evolving from simply being a social occurrence to a necessity even for small businesses.
Given the risky nature of small business, the solution is to diversify by taking some of your wealth and investing it in something other than your company so that you can grow your money. While relinquishing the investment of money does not sound exciting, joining or starting a savings and investment club may be a good option – even for a business. First, you must cultivate a culture of saving.