I recently participated in a business coaching event, of mainly youthful entrepreneurs, and noted that one of the key challenges they face is the inability to access credit and capitalize their businesses sufficiently.
My advice to them was that youths in business should mainly look to investment clubs and SACCOs for their funding needs. This is because Uganda’s predominantly youthful population implies that many promising entrepreneurs are often unattractive for commercial banks and thus unable to obtain credit from the banks, by virtue of their young age.
Such young entrepreneurs often lack admissible collateral to secure their borrowing and also do not have the benefit of impressive banking histories to convince credit analysts in banks. Banks are actually also normally extremely averse to funding business startups, which form a big proportion of businesses that youths would be looking for capital to facilitate.
A few days after my interaction with the said young entrepreneurs, a friend and business associate of mine brought up this same matter in a brief but insightful social media commentary, indicating the high potential that these clubs and SACCOs hold to transform lives of youths. He also pointed dangers that can destroy them and I will cite those, further on.
Uganda, uniquely due to having one of the youngest populations, has many young entrepreneurs. There is also reliable record of many business that are started every year, and similarly many others failing, in the country. Among many other reasons, some of the businesses fold for lack of capital to facilitate their continued existence and growth. Even with civil society youth programs and government initiatives, it is possibly difficult to satisfy the capital needs of such an entrepreneurial mass of youths that the country has today.
Forming, joining and growing finance vehicles of investment clubs amongst peers are most impactful means of financial liberation for Uganda’s young entrepreneurs. It is no wonder that some banks, even as they may not easily lend to individual youth entrepreneurs in some instances, have singled out and promoted investment club savings groups to empower the youths, among other savers’ groups.
Although investment clubs traditionally are designed to focus on stocks, bonds and other related options, they can be diversified in purpose to avail capital to members and even their associates, through loans extended under flexible terms. In any case young entrepreneurs are often constrained by small financial needs which are within the means of such clubs. Youth SACCOs serve the same purpose, though they may come with more formalities.
These groups have the ultimate advantage that they can be ran, to a large extent, on the terms agreed by members. This creates ease of access to accompanying benefits which in turn results in enhanced impact to the members and others to whom they decide to extend these benefits. Many challenges that youths and startup businesses face from commercial banks when they need loans are therefore eliminated in the process. The groups are normally formed against mutual trust of members, unity of purpose and as they evolve they can enlist formalities which are again agreed upon by the membership. In fact, formalities evolve with the financial advancement and transformation of members which results enhanced financial strength and expansion of potential benefits to be derived from belonging. There is room for exponential growth, since cost of funds obtained from peer-owned investment clubs and SACCOs is way cheaper than bank loans while at the same time the rate of repayment default on such funds is low due to the firm social structure against which these clubs operate.
However, the strengths that these clubs and SACCOs enjoy, mainly drawn out of thin formalities around their operations, often also pose the dangers that threaten their continuity. Key ones include the tendency to compromise records keeping and therefore have no comprehensive evidence of transactions. This complicates resolution of misunderstandings between members when they arise. Lapses in transparency, principles of fairness and accountability, while they would be standalone challenges would get enhanced in an environment where off-record transactions are rife. Also, because these clubs and SACCOs are normally borne of social oneness, they normally suffer from failure to separate them out and handle them as separate entities, independent of relational sentiments. This sets the stage for tumbling down. The clubs and SACCOs grow only against periodic contributions of funds by members and yet, although agreed upon, these can hardly be enforced and some members can lapse and let down others strategically.
Investment clubs and SACCOs, especially those focused on youths, should therefore be highly promoted and encouraged and if possible members should be aided to developed sufficient skills and practices that promote business continuity.
Raymond is a Chartered Risk Analyst and risk management consultant