SME focused Liberian merchant banking institution

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SME focused Liberian merchant banking institution

Liberia
Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

A Liberian-owned and operated merchant banking firm which addresses the unique financing needs of Liberian SMEs - a segment which fits between the funding profiles sought by traditional banks and microfinance institutions and currently overlooked by existing Liberian banks and lending institutions.

About Project

Solution: What is the proposed solution? Please be specific!

RCS will be established and licensed as a local merchant banking institution in Liberia with a clear mission to support the development of the small and medium enterprise sector in Liberia through the intermediation of prudent financial services and capital. This will be the first-of-its kind institution in Liberia. RCS will operate under a non-bank financial institution license to be issued by the Central Bank of Liberia and will be funded by international, regional and local investors, thus enabling local SMEs to access a diversified and a possibly, cheaper source of funding. RCS will offer a wide range of specialized financial services targeted at the SME sector which currently do not exist in Liberia for this target group, such as project finance, equipment finance, advisory services, business planning services and other capacity building activities delivered to clients by highly skilled indigenous personnel. RCS’ business strategy is to intermediate the flow of funds from the international and local money markets and channel those funds to appropriate areas of investment within the country. RCS will primarily focus on Liberian owned and managed manufacturers, agricultural enterprises, importers, exporters and entrepreneurs who demand and value knowledgeable and professional services tailored to their needs.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

Channeling financing to small and medium sized companies in emerging markets requires specialized expertise and local context. Many small and medium enterprises fall in the “missing middle” -- too large for microfinance loans and yet lacking a sufficient track record or collateral necessary to qualify for a traditional bank loan. In markets like Liberia, where long term investment capital is lacking in the banking sector, even more established businesses lack local access to long-term funding to finance their growth needs. While a few enterprises may have the contacts and skills to access international sources of financing, most do not have the experience or may be too small for export banks or other International Financial Institutions (IFIs). A merchant banking institution can address this bottleneck by identifying promising companies and structuring and packaging transactions for investors. In this way a merchant banking institution can support this market segment by providing financial services which are currently only available to the top tier local corporations and multinational companies.
About You
Organization:
Republic Capital Holdings (Liberia) Ltd., in partnership with ShoreBank International
About You
First Name

Daubney

Last Name

Cooper

Website
Your Organization
Country

, XX

About Your Organization
Organization Name

Republic Capital Holdings (Liberia) Ltd., in partnership with ShoreBank International

Organization Phone

231 624 7005

Organization Address

96 United Nations Drive, Mamba Point, 1000 Monrovia 10, Liberia

Organization Country

, XX

Organization Type

Private Institution

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

815,000 (2011-2015)

Number of employees in your target firms

Average number of employees of your target firm

23 (2011-2015)

Specify the size, average and range of expected loans or investments in each target firm

Republic Capital (RCS) will primarily engage in two financing activities:
Merchant Banking: Advising, Arranging and Investing in comprehensive financing solutions for Liberian SMEs. It is expected that RCS will be able to execute 2 – 4 transactions per year with an average capital raise of US$2.5 million (25% equity / 75% debt). RCS will therefore participate in the capitalization of target clientele through provision of equity, debt and/or transaction advisory/structuring services.
Equipment Leasing: It is expected that once the new Liberian leasing laws are formalized (expected late 2011), RCS will be able to fund between 50 – 150 unique leases per year with an expected average lease size of US$75,000 and a tenor of 3 years.

What stage is your solution in?

Operating for less than a year

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

RCS has partnered with world-class organizations versed in the development of financing institutions for the bottom-tiers of an emerging market economy and has put forward a compelling value proposition to a range of development finance institutions (DFI’s) that will effectively multiply access to capital for its target activities by about 20 times the private capital it is raising.
The Paris Club on June 30th 2010 removed Liberia from the Highly Indebted Poor County (HIPIC) list paving the way for government investments in basic infrastructure such as roads, ports and electrification, all necessary to support the thriving business economy. Additionally, Liberia has been working with the World Bank to develop institutions, including a robust regulatory system and transparency in the legal system. These two avenues of improvement will reassure both international investors seeking opportunities in Liberia and local entrepreneurs with business opportunities. These positive developments will help reinvigorate investor confidence in the Liberian economy and will also encourage more Liberian nationals to start their own businesses, both of which will bode well for Republic Capital’s business model.

What barriers does your proposed solution address?

Lack of collateral, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Specific barriers to fragile and weak states.

If you checked any of these barriers, describe how your solution addresses them

a) Lack of collateral
The majority of the Liberian SME sector funds itself though retained earnings, which significantly hampers their ability to grow.
Additionally, the banks’ requirements for collateral, which is as high as 150% of the loan amount, significantly limits enterprises’ ability to access bank funding. RCS will address this barrier by offering financial services to SMEs which lack the collateral to qualify for a traditional bank loan

b) Lack of SME access to skills / knowledge / markets

RCS will contribute to capacity building amongst its target clientele by assisting with business planning, business structuring and establishment of internal controls that are pre-requisites for successful business conceptualization, funding and implementation.
RCS, through its diligence process, will help local entrepreneurs who lack the skills necessary to navigate through the investment process to gain access to such skills and knowledge.
c) Unavailability of financial products tailored to SME needs

The majority of the financial products available in Liberia are focused on the needs of large international firms and are primarily short term in nature. RCS, through its comprehensive range of offerings designed for the SME segment will expand access to such financial services.

d) Underdeveloped local capital markets (term local currency funding, exit options for SME equity)

Owing to the underdeveloped nature of the Liberian capital markets, investors (both international and local) do not have a safe channel for investing in the Liberian economy or exiting from their investments. Since RCS will intermediate the flow of funds from both international and local markets, it offers a unique opportunity for such investors to help build a healthy SME sector in Liberia.

e) General barriers to SME development related to investment climate

In markets like Liberia, where long term investment capital is lacking in the banking sector, even more established businesses lack local access to long-term funding to finance their growth needs.
A merchant banking institution such as RCS can address this bottleneck by identifying promising companies and structuring and packaging transactions for investors.

f) Specific barriers to fragile and weak states

The 15 years of civil war in Liberia has deprived the country of the infrastructure and institutions necessary to support the required development. The current government has initiated a lot of efforts to build the infrastructure and develop institutions, including a robust regulatory system and to ensure transparency to increase investor-confidence and thereby, attract investments. Similarly, private sector initiatives such as RCS will set a precedence for private sector inflows in to the Liberian SME sector and encourage more such investors to follow suit

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

RCS is successfully engaging with a diverse range of financial sector participants and international organizations to assemble pools of funds and capacity sources to unclog the SME financing gap in Liberia – a major issue that remains unsolved, but is critical to Liberia’s resurgence as stable developing nation.
RCS is a successful trailblazer in Liberia in forming an institutionalized approach to solving difficult funding problems for the Liberian business class.
In Liberia, as in other emerging market economies, enterprise creation and the associated financing of the business sector represents an important engine of economic growth and poverty alleviation; and creates employment, generates tax revenues and provides a training ground for the country’s managerial and entrepreneurial classes.
The small and medium enterprises (SMEs) financing market in Liberia in particular, exhibits the characteristics of most transitional and developing markets worldwide: high demand, but low penetration on the part of established financial institutions due to risk-averse lending policies, poor product design, and inefficient distribution networks.
Lack of access to financial services by SMEs is primarily due to their inability to comply with banks’ rigorous underwriting standards, in particular, requirements for financial reporting.
In addition, Liberia faces the additional challenges of a displaced, vulnerable population and damaged infrastructure, associated with post-conflict economies.

To address this funding gap, RCS will adopt an integrated approach to supporting the emerging SMEs by offering the following products and services:
Advisory Services – Assisting companies in developing business plans and identifying the appropriate capital structure
Arranging Services – RCS will work with local, regional and international banks and investors to intermediate funding
Investments: RCS will make direct equity and debt investments into promising SMEs to demonstrate its commitment to the opportunity
Equipment Financing – RCS will provide direct debt funding ranging from US$50,000 to US$500,000 for SMEs to purchase or lease equipment.

How many firms do you expect to reach?

RCS will start operations in 2011, and is expected to provide Advisory, Arranging & Investment services to 2 – 4 SMEs per year reaching 15 – 18 SMEs by 2015.
RCS expects to provide leasing services to between 50 to 100 SMEs per year starting in 2013.

What is the volume of private SME finance you aim to catalyze?

The average transaction size is expected to by US$2.5 million for Arranging and Investing services resulting in approximately US$38 million in total capital mobilized. This combined with an additional US$20 – 30 million expected from the equipment leasing activities will amount to a total volume of US$100 million.

What time frame will be required to reach these targets?

Republic Capital will initiate operations in 2011 and will continue to ramp up operations from 2012 onwards.
It is expected that it will take approximately four to five years to reach the targets articulated above.

Does your solution seek to have an impact on public policy?

Yes

What would prevent your solution from being a success?

There are two main obstacles to success:
The inability to attract international financing to provide the catalytic capital necessary to establish Republic Capital and to on-lend to the SME sector.
Lack of success in the development of the local management team to identify and structure transactions, deploy capital into them and monitor those investments

Sustainability
List all the funding sources that are required for the sustainability of this solution

It is anticipated that Republic Capital will require TA grants, equity and debt as follows:
TA Grants: US$2 – 4 million
Equity : US$7 – 9 million
Debt : US$ 15 – 30 million

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The initial equity has been provided by Liberian professionals, and will be leveraged by international development institutions.
However, it is expected that within 5 – 7 years, the international ownership will transfer to local and regional investors as Republic Capital demonstrates an attractive business opportunity.
Given the lack of term debt funding in Liberia, 100% of the debt capital will be provided by international development agencies.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

RCS will be targeting a diversified investor base, thus ensuring that the continuity of the business is not contingent on funds from any single large private investor.
However, in the unfortunate event of any private investors dropping out, RCS will approach its remaining private investors to make up for the loss.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

Partnership with the Soros Economic Development Foundation (SEDF) and Humanity United Foundation (HUF) sponsored Business Development Center (BDC) – an incubator run by Devin Corporation that will serve as a training ground for a new generation of Liberian entrepreneurs,
Partnership with HUF and TechnoServe to implement the Liberia Opportunities Study (LOS) that they have undertaken. The LOS identified 18 “Attractive” Business Opportunities and drilled down to four “Highly Attractive” business opportunities. Republic Capital has been requested by HUF (the project funder) to assist it in implementing these projects.
Partnership with ManoCap Venture Fund, an equity fund focused on Sierra Leone, Liberia and Ghana for co-venture opportunities.
Partnership with the Philanthropy Secretariat in the office of the Liberian President to link up social investors with business opportunities that meet their investing criteria.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

Political and Regulatory instability, can erode investor confidence, reducing the capital (both foreign & domestic) inflows into Liberia, resulting in a reduction of business opportunities for SMEs. Given that SMEs are often suppliers for corporates and the government, scaling down the growth plans of corporate and the government could greatly impact SMEs.
Additionally, the 15 years of civil war has put a large strain on the human capital as the education system in the country suffered greatly during that period. If Republic Capital is unable to find SMEs with strong management teams, this will greatly reduce the amount of financing it can place in the market.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

Republic Capital will invest in all sectors of the Liberian economy; however there are immediate needs in the manufacturing, agriculture and healthcare sectors.
As the Liberian economy expands, Republic Capital will be poised to respond to the evolving financing needs.
Initially Republic Capital will focus on Liberia, however, it is expected that once the model of a successful merchant banking institution is proven, there will be opportunities to expand into other West African or post conflict countries which could benefit from diversifying the financing sources away from large foreign owned banks and micro-finance focused lending institutions.

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