Many entrepreneurs have had their chance at launching a business thanks to loans supported by Kafalat, the government-sponsored loan guarantee company. In fact, of the 20 entrepreneurs featured in this month’s Executive report on entrepreneurship, seven received funding from Kafalat. Given the company’s essential role in bracing entrepreneurship in Lebanon, Executive sat with Khater Abi Habib, chairman of Kafalat, to discuss his views on the issue.
Total Kafalat loans reached $109 million for the first nine months of the year. That’s down 14 percent on the same period last year. Are these loans falling because of a reluctance to increase lending in these challenging economic conditions?
The fall is due to three factors. Most fundamentally, when there is political and economical uncertainty, people defer their [financing] decisions. I suspect that when people get used to the fact that we live in stressed times, demand will increase a little. In addition, we had some banks reducing their lending activity [due to the economic crisis]. Finally, some banks used their limit of Lebanese lira statuary reserves at the central bank as they went into a house-lending spree. They are now waiting for an augmentation of the reserves.
What percentage of Kafalat loans goes toward funding startups?
Fifteen to 20 percent of loans go to absolute startups, companies that are just formed. Then around 30 percent go to relative startups, companies already in business but wanting to expand because [they have a] new idea, there is a new trend, etcetera, and they want to grow beyond their saving ability. Finally about half or more of Kafalat loans are for well-established businesses that want a fresh expansion and need loans.
Do you intend to increase loans to startups going forward?
It is a matter of demand. We are there for them and we have the capacity to do it. Let them come. They have to come and be serious about it. Our innovative loan, which is dedicated to startups, encourages banks to lend as we give a 90 percent guarantee [on the loan]. That’s like saying we take all the risk.
We are advocating startups to resort to seed capital whenever possible. We are absolutely dedicated to lending to them but from experience, when they have seed capital they behave better entrepreneurially. When they have a loan to repay even though conditions are good, they reduce their strategic vision and become hasty to reach cash. With equity funding, especially from an institutional source such as venture capital (VC) funds, there is less of an urgency to cut corners on governance, transparency and so on. It also brings strategic minds with it, people with experience. We favor this and we have been trying to promote the notion of seed capital and in its absence, we are ready, willing and able to provide loans.
What are the major obstacles you face when looking at startups?
Sometimes good entrepreneurs are not disciplined in their approach to money and that is dangerous. Sometimes, they have a good financial plan but they are weak on execution. Both are sources of failure. When you have a good balance, enterprises take off very smoothly. I encourage people to have the right mix.
Specialized technologies still account for just 1.5 percent of Kafalat loans. Is there a plan to provide more loans to this sector going forward?
We supply the demand. This sector is also getting equity with several VC funds and also implicit VC funds investing, such as family offices. The International Finance Corporation, the private lending arm of the World Bank, has also invested in a tech company based in Tripoli that started with a small loan with us.
I understand that Kafalat is considering investing in equity. Is that correct?
There are advanced stage discussions with the Lebanese state and the World Bank that a certain line of long-term capital will be committed to Kafalat’s care and will be co-invested in equity [along with the Kafalat loans]. But it is not yet here. We are always ready, willing and able but it depends on other parties. The fund will be a few tens of millions of dollars in size but I am afraid I would rather not discuss this further at this point.
What is missing from the entrepreneurial ecosystem?
We need more and better VC and seed capitalists; more funds which understand both languages, the local market language with its institutional and structural elements as well as the principles of entrepreneurial capitalism. When you have the two, you get very effective results.
If one takes the last five years, we have been filling many bits of the matrix. At the beginning, there was Kafalat, then came the Berytech incubator, then we started to have other incubators — one in Tripoli and one in Saida — universities started tinkering a little, but it was more for show; and then we started having VCs such as the Berytech Fund and then associations like Bader who provide entrepreneurial support; then we got [the] first business angel network where people get seed capital with somebody coaching them. Now in Hamra, there are accelerators. We hope very soon to have most slots in the matrix not just filled but filled amply.
If we play our cards well, all the elements will come together not necessarily like a clock but in mutual support. We have to be serious and not let each other down. The bits are falling into place fairly quickly and consistently. It is not a rushed job but I prefer it not to be a rushed job.
What advice would you give to Lebanese entrepreneurs?
I would tell them to collect as much information as possible and read thoroughly. When they are in doubt go to people who might know and ask. It will never be frowned upon to ask. Come to us, to associations, to incubators and university professors. No one amongst us knows enough. One feels that one has to learn every day of the week if one wants to be close to best practice. We are a very sociable and approachable nation and networking is very easy in Lebanon. Let’s not just use it for pleasantness, which is superb, but for action as well.