June 5, 2019
Min read

The Key to SME Survival and Growing the Economy of Sub-Saharan Africa

Nairobi, Kenya
Michelle Boise

Julian Kyula, a serial entrepreneur from Nairobi, first gained experience in the credit and tech sectors and has since moved on to managing two firms: one which supplies engineering equipment and another in real estate. He shared with Kountable the challenges facing SMEs today, especially in Sub-Saharan Africa, and how he scaled his businesses despite them.

While working with Alegis Group in Houston Texas, Kyula scored Citibank and Amex as a client; he also was an Operations Analyst and Collections Manager for Nationwide Credit Inc. in Houston. Soon after, he founded Quest Holdings, and in 2010, started Mobile Decisioning (MODE), which in only two years, won the IBM Global Entrepreneur of the Year Award.

“MODE gave me a lot of exposure, “said Kyula. “[It] helped me grow my mind to understand the world a lot better, understand the world of finance and technology and understand where technology is going.”

MODE is a technology company that provides value added services to mobile network operators in emerging economies. Its main product is Airtime Credit Service, which allows prepaid mobile customers to get emergency airtime credit when needed and payback when he or she reloads.

“We were in the business of giving small loans through the mobile phone,” explained Kyula, “mostly for airtime anywhere between $.50 to $3-5 USD, depending on the market. The phone companies worked well with us because we […] turned prepaid customers to daily post-paid customers, which made a big improvement on their numbers.”

The service MODE increased ARPU (relative usage of airtime per person, per month), which meant larger profits to phone companies. Kyula explained that for every market MODE entered, it quickly generated 15-20% of sales for the mobile company in that region. After launching in Kenya, MODE grew to 28 countries across Africa, including Indonesia as well as India, with over 300 million subscribers.

Scaling to this size wasn’t easy though. In fact, one of the biggest obstacles facing SMEs today in developing economies is the lack of financing. According to The World Bank, “About half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account. Overall, approximately 70% of all micro, small and medium-sized enterprises (MSMEs) in emerging markets lack access to credit. While the gap varies considerably region to region, it’s particularly wide in Africa and Asia. The current credit gap for formal SMEs is estimated to be US$1.2 trillion; the total credit gap for both formal and informal SMEs is as high as US$2.6 trillion.”

“In emerging markets, most formal jobs are generated by SMEs, which also create 4 out of 5 new positions. However, access to finance is a key constraint to SME growth. Without access to capital, many SMEs languish and stagnate” (The World Bank).

“I understand that banks are not in the business of investing in startups,” said Kyula, “and that’s fine, but that’s the missing link for a lot of SMEs in this part of the world.”

MODE was even one of the more fortunate startups that began with a hefty sum of seed money from angel investors, and was still turned down for a bank loan when it scaled past 10 employees.

“As the business started to grow,” said Kyula, “we needed the bank to start financing us for where we needed to go. We went to the bank and asked for $100,000 USD of credit and it said, ‘Absolutely not, you are not qualified.’ And we said, ‘What are you talking about; we just moved a couple million dollars through you. Here’s our business this is what we are doing.’”

“They said, ‘You have to be in business for at least three years; we need to see at least three years of financial statements.’ I said it was ridiculous, ‘If I could show you three years of statements; if I survive that long, I am not going to need you.’”

“SMEs play such an important role [in the economy]; here we have employees and are starting to build something,” said Kyula. “In 2017, we had over a billion transactions in MODE, and this was a company that nine years ago the bank said, ‘I am not going to touch you. I don’t think you are a business that I understand.’”

In emerging economies, formal SMEs contribute up to 60% of total employment and up to 40% of national income (GDP)” (The World Bank).

Kyula added that he understood though the hesitancy on the bank’s part to give loans to SMEs, since 80% of businesses fail in the first two years. High risk and small returns don’t help; however, Kyula raised the important point of who then finances this group which plays such a vital role in economic growth?

“There is a missing piece in the ecosystem; there is a missing middleman,” Kyula said, “and that middleman is the one that helps. You have different ways to raise capital in different parts of the world — you’ve got the three Fs — friends, fools [and] family. You’ve also got angel investors: people who start to help you bridge.

“That’s [what] excites me about Kountable. When you find groups like that who can actually come and play in that space — the more there are, the better it will be for the economy.”

Although Kountable does not give loans to SMEs, it has funded nearly 200 projects from SMEs in East Africa, estimated at $54 million USD, by buying the goods required on behalf of the entrepreneur. This kind of partnership in trade immediately puts the SME at an advantage and Kountable gets paid only at the completion of the project.

“I think what Kountable has done is give you a great financial operations management set up without having to spend it for your SME,” said Kyula, “and that’s priceless. You immediately move to almost […] a tier two, tier one company without the direct expenses of setting that up.

“I have seen many people file [for] bankruptcy, or go into serious debt who are holding very good supply paper. They basically got over excited about it and didn’t form a business process, and make preparations for it, and they ended up spending their money before they [were] ever paid. That’s dangerous. Kountable will just help counter a lot of this thinking and thought pattern.

“It’s very important to have a partner who can teach you how to work your business,” said Kyula. “If I had Kountable for my first company, I would have been the happiest man on earth. But I had to go to the university of hard knocks to learn how to build and understand that right.”

Hear more from SMEs who have partnered with Kountable and the impact it’s had on their business ⟶
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