Conventional wisdom says that in order for one to start a business that succeeds or to run one successfully, they need to have capital. Yet, when one looks closely at the success stories of those who made it big, very few, if any at all, started their vast empires with colossal amounts of capital.
An economist friend of mine once told me a real story on his experiences when he was running a microfinance institution. An organised team of young men approached him to borrow US$70 to manufacture shoe brushes. My friend felt these were time wasters. He could not comprehend how he could spend valuable man hours processing a credit proposal for 70 bucks.
After all, he was a high-flying economist and banker who valued time immensely. He turned them away. Yet they did not give up, they kept on trying. They had been told that his microfinance institution could assist. They had been turned down elsewhere and so their hope was with this man. A few more times they visited his offices, but could not see him since he was busy with other commitments. After all, it is not easy to just walk in and see the chief executive (CE) without an appointment in Zimbabwe. It does not work like that.
So one day the young men came towards lunch hoping to see the CE as he was leaving for lunch. Indeed, they saw him, but it was lunch time. He reluctantly decided to see them and quickly asked them what help they needed from him. They said they required US$70 to manufacture brushes. They had a ready market and the raw materials were off-cuts from manufacturers of furniture and as such they would not pay for them since they would be helping in “refuse” collection.
So as to get rid of them, my friend simply gave them his own money from the back pocket — the US$70. He did not expect the money to be paid back. It was not imaginable that there could be a business case in this instance. When he told me post the event, I also could not believe it. The young men were delighted to have this “huge” capital they could not raise without the assistance of a lender. They went to do business and after a few months they came back to pay. My friend could barely remember them before explanation. They became one of the best customers for this microfinance institution. The subsequent capital they borrowed was to help them meet the huge orders they were getting from the market. They traded themselves out of the microfinance debt and became debt free, but built a solid relationship with this microfinance institution.
Banks sit on piles of cash, but they have no idea how to use it; their role is to look for people with ideas so that they can use the money from both depositors and shareholders. The main job of a bank is to have no business ideas other than those related to financing.
Today, we have a great company in Econet Wireless Zimbabwe, which was started out of great ideas not capital. Econet is now rated as a multinational company (MNC), emanating from Zimbabwe. Its empire spans across many countries in Africa. We have a great company in Mascom (Botswana), which was started out of ideas and not capital. Neither Econet nor Mascom had a track record of trading in cellular systems. But government companies are usually started with capital, hence they tend to do badly in the market.
Though it is sad that most are now ancestors, a plethora of indigenous banks were started out of ideas. Those ideas gave rise to financial engineering, enabling the banks to see the light of day.
I remember vividly the motto “Making money make sense”, which was the buzzline for Kingdom Financial Holdings. They had an idea that they could change the face of the business and banking sector in Zimbabwe and so walked each and every step of the way to build an empire which left a mark on the business landscape in Zimbabwe. They had an idea to take Kingdom to Wall Street. Though the company could not live up to it, the idea was both ambitious and great.
BancABC may be taken to Wall Street. What the founders of BancABC had were ideas. Their great ideas attracted international investors and what will not change is that the bank has Zimbabwean roots.
In the book of Matthew 25, we learn of the Parable of the Talents. As a master embarked on a journey away from his home, he gave his servants eight talents according to their abilities. To the one who had the greatest abilities he gave five talents, and to the second with regards to abilities he gave him two talents. The last man was given one talent.
The master returned home after a long absence and requested a return of reports from each servant. The first and the second servant reported that they had doubled their talents after investing them wisely, but the third had not invested the only talent he had received, rather he had buried the talent in the ground for safekeeping (saved the money at zero rate). He said “Sir, I knew that you were a hard man, harvesting where you did not sow, and gathering where you did not scatter seed, so I was afraid, and I went and hid your talent in the ground. See, you have what is yours.” The master then took the talent and gave it to the one who had 10. So, we see even from the Bible that ideas do matter. The one who had been given one talent had no good idea how to multiply the talent so he put it away and in the end he lost the talent. If you do not have an idea of how to use money and decide to bank it by the time you decide to withdraw it, you may find that it has been wasted away by bank ledger fees!
When the late musician and entrepreneur Prince Tendai Mupfurutsa brought United States-based Senegalese artiste Akon to Harare in 2010, he had no money. Not even any of his properties were used to secure the major transaction. In fact, his fuel business had suffered a severe counterfeit of coupons leading to its fall. Akon alone needed US$250 000 net of expenses to perform while Sean Paul needed US$100 000.
What the late Prince Tendai had was an idea which had been shared with him by a friend who had close connection with the agent that Akon used to book shows. The young friend shared the ideas with Prince Tendai, who immediately contacted me to assist in financial engineering. The deal went through after funding by banks. Initially, funding was obtained from one financier, but as costs went out of control as a result of bringing Sean Paul on board, among other factors, the other tranche of funding had to be sought from another financier after the principal financier decided to limit its expected losses.
To save a friend from a potentially collapsing deal, I gave Prince Tendai the contact details of a great man who now occupies very important office. He assisted with further funding. Indeed, the deal, which was facing collapse, was “resurrected.” Tendai would have lost the entire deposit he paid to Akon, given that the other balance could not be paid. This would have jeopardised the security of his partners, which was being held by the principal financier as the non-appearance of the international singer would have triggered an event of default.
Through exchange of ideas, Akon found his way into Zimbabwe and entertained, in the process Zimbabwe made history of bringing a high-profile musician who was at his peak. Prince Tendai’s intention was to make Akon’s performance coincide with the World Cup in South Africa to ensure he drew huge crowds. The date was to be May 3 2010, but together with my esteemed friend and mentor and former boss, we convinced him to move the date as we only had two weeks to advertise and put together the logistics, which would have been an insurmountable task. In addition, US televangelist Joyce Meyer would be in town on that date and entry to her event was free so it would jeopardise the success of the show. Meyer was being sponsored by a gigantic mobile company, which I had never known to fail, so I immediately called Prince Tendai to change the date.
Yet we need to exercise care in making conclusions as to whether capital matters or not. There are some businesses which are heavily regulated. Such businesses will either be express as to how much capital is needed or how much may be needed. Examples of such businesses are banks and insurance companies. Basel III, which was a response to the global financial crisis, was designed to ensure that another crisis is less likely to occur. Its requirements are stricter than those of Basel II in that more capital is required for the same level of risk.
In addition to net stable funding ratio (NSFR) and liquidity coverage ratio (LCR), Basel III emphasises capital adequacy and leverage. Capital is essential because it supports lending activities of a bank. The more capital a bank has the more lending business it can write.
In a normal business, management decides what ratios they have to focus on as a business, but with banking, a grouping like the Basel Committee and central banks do play a very pivotal role. NSFR is meant to prevent banks from being over-reliant on short-term wholesale deposits. This was a lesson learnt post the global financial crisis, but also when we look at a number of local banks which went under in Zimbabwe, it can be noted that they had an overreliance on wholesale deposits which are hugely sensitive to any adverse market developments.
In computing the NSFR, “available stable funding” is the numerator whereas “required stable funding” is the divisor.
For a viable relationship to exist between available stable funding and required stable funding, the ratio must exceed one. On the other hand, the LCR is meant to ensure that a bank has adequate liquidity to survive 30 days of stressed conditions. In this case, high quality liquid assets are divided by total cash outs expected over the course of 30 days.
Yet even with robust ratios as expected under Basel III that cannot be enough without adequate capital. Capital is the line of last defence, which can help a bank to withstand pressure or any likely distress. Essentially, this entails that the bank, in addition to its permanent capital, should maximise profitability and thus retain more to strengthen its capital base. Customers prefer dealing with banks which are adequately capitalised in order to be reasonably certain that their deposits will be safeguarded and also to ensure that they will be able to obtain loans and draw down as appropriate. A strong bank can easily support the goals and objectives of a well-run business which is creditworthy.
So what is the lesson here? The bank needs capital to run, but for one to start a bank they do not need capital. They need a business idea. They can then approach funders who are in the business of financing or those who have money but no ideas, how to deploy the excess funds they have. In the book of Matthew, the master even asks why the servant he gave one talent could not take the money to the bank to earn interest. When one has no immediate business idea, they take the savings to the bank who will lend to the one who has a business idea. Banks lend against ideas which they term cashflows and not security. Yet when a bank lends to borrowers with no great ideas, it also faces ruin.
When Bill Gates and Paul Allen started Microsoft in 1975 in Albuquerque, what they had were ideas not money. They simply believed that they would be able to win the contract to develop the Basic interpreter which they did not have at the time, anywhere. Today Microsoft employs over 100 000 people globally with revenues of over US$80 billion. This means the company, which is just five years older than Zimbabwe (it was founded on April 4 1975 while Zimbabwe got independence on April 18 1980), is six times larger than the Zimbabwean economy and about one-fifth of the Sadc economy.
Comparably, when Mark Zuckerberg and Eduardo Saverin founded Facebook, they had ideas and not money. They funded the business from their pockets until it attracted an angel investor venture capitalist Peter Thiel, who invested US$500 000 after Reid Hoffman declined, citing conflict of interest with his role as CE of LinkedIn. From a business founded in 2004, Zuckerberg is now worth over US$60 billion. The company recently registered two billion users which is just under a third of the world’s population. Neither was Kentucky Fried Chicken (KFC) started with money, but an idea that selling fried chickens could grow into a big commercial venture.
Today, when Zimbabwe is not at its best it is possible that we can come up with ideas that will radically shift the economy upwards to become a behemoth. It starts with ideas and not money. Yet it is not enough to have great ideas.
They must be implemented. If you have a great idea and leave it in the company’s records or government’s lockers, that would be a wasted idea.
Ideas attract money when they are executed well and professionally. It is possible to have a musician’s brand listed on a stock exchange, as long as there is a great idea and it is well-executed. It is through ideas that we saw the subprime mortgages finding their way into major markets as triple AAA-rated before the bubble burst in 2008!
Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — firstname.lastname@example.org/ cell: +267 73 113 161.