Overview: Convergence awarded a proof of concept grant to Total Impact Capital and Capital Tool Company in Q3 2018 to pilot the Strengthening Health through Invoice Financing Technology (SHIFT) program in Kenya. SHIFT is a blended finance solution designed to increase access to finance for healthcare SMEs by allowing pharmaceutical distributors to turn their invoices/accounts receivable into collateral, thereby unlocking longer-term credit for their small and medium-sized enterprise (SME) customers (i.e., pharmacies and clinics). It is the first asset-backed securities transaction in Kenya for healthcare SMEs.
A highly fragmented and inefficient supply chain hampers the distribution of medicines in Kenya. One of the key challenges is a lack of access to finance. The only financing available to the SMEs at the bottom of the supply chain (i.e., clinics and small pharmacies) is credit provided by the pharmaceutical distributors. The terms of this credit are very limited, because the pharmaceutical distributors themselves have difficulty attracting adequate or affordable financing from banks for working capital. This lack of access to capital across the supply chain ultimately means that SMEs struggle to keep their shelves stocked with unexpired and high-quality medicines.
The program securitizes the invoices of distributors under Kenya’s new Asset-Backed Securities (ABS) law to issue investment grade-rated senior notes, in addition to mezzanine notes, in the local capital markets. The approach creates a portfolio of receivables from multiple distributors which reduces default risk. The SHIFT model is supported by an underlying technology that assesses the credit quality of invoices in real-time. The structure will include a reserve, initially capitalized by capital providers that are seeking a strong developmental/social impact and by Total Impact Capital, to achieve the targeted investment grade-rating.
Convergence’s grant will support the team with the structuring, legal, and technology validation work for a pilot in Kenya. SHIFT has received strong interest to date from local distributors, commercial banks and pension funds to participate in the pilot transaction.
Design question and learning potential for the market: How can the SHIFT model be successfully replicated in sectors beyond healthcare and in other countries in Sub-Saharan Africa?
Access to finance is a pressing need for small and medium enterprises (SMEs) throughout the developing world due to the high risks and operational costs related to lending to an SME portfolio. For many SMEs in many sectors beyond healthcare, the only financing available to them is the credit terms provided by suppliers. While there are initiatives designed to increase access to finance for SMEs, many work though banks that require collateral that few SMEs have or through microfinance and financial technology platforms that provide insufficient or unaffordable credit to address current financing needs. By using a mechanism like SHIFT, suppliers/distributors will be able to turn their invoices into collateral, unlocking credit for their customers - local SMEs.
The SHIFT model capitalizes on Kenya’s new Asset Backed Securitization (ABS) legislation, large pharmaceutical market, significant number of potential local institutional investors and the relatively sophisticated local capital markets. Eventually, if successful, the model can expand to other sectors such as agricultural value chains and to other countries in Sub-Saharan Africa, as they develop the appropriate ABS legal and regulatory regime to support securitization.