A Needle in a Haystack: How a New Tool Is Unlocking Entrepreneurship in Africa

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If you want to learn a thing or two about business, just ask Leah Mugure Mwaura. Leah is a charming Kenyan grandmother and owner of a clothing wholesale business in Gikomba, a sprawling, dusty, crowded place on the outskirts of Nairobi that is now East Africa's largest market. Every day, tens of thousands of Kenyans show up to trade in Gikomba's maze of wooden stalls, buying and selling everything from mangos, okra, fish, and poultry to shoes, radios, hammers, and rugs. But Gikomba's main industry is mutumba, Kiswahili for secondhand clothes. Tons upon tons of the stuff arrive every week after being cast away by charities like Goodwill and the Salvation Army. Mutumba is a multimillion dollar industry for Africa, and in Gikomba, it is a challenging but fertile opportunity for Kenyans with a little entrepreneurial spirit.

In 1991, Leah spent all her savings--the equivalent of about USD $180--on a shrink-wrapped bag of used T-shirts, jeans, blouses, and skirts, with the simple goal of turning those wrinkled clothes into profit. In her early years, she'd arrive in Gikomba at 5:30 a.m. with a shoulder-slung sack of mutumba and spend long, hot hours hawking her wares in the vast, open-air flea market. Jostling for space in the throng, Leah would shout out prices for her small pile of clothes as shoppers picked through massive heaps of shirts, mounds of trousers, and pastel rivers of secondhand lingerie--Gikomba's biggest seller, according to Leah.

For nineteen years, Leah built her business from the ground up, without any help. She never even opened a bank account. "I was running it by myself, with my own money," she recalls. "Little by little, I saved." But building the business was slow going, and after a certain point, her sales plateaued. In a highly active market like Gikomba, growth is all about volume: the customers are plentiful, and your sales are limited only by how much merchandise you have on hand. But in order to grow her volume, Leah needed to scale up her business. For that, she needed capital.

Every few years, a microfinance agency would come to Gikomba and offer Leah a small loan, perhaps $500 or $1,000. Microfinance was intended to help the poor, but Leah didn't feel that it was for her. The agencies had a lot of terms and conditions. To qualify, Leah would have to join a group of other borrowers, and if one of them defaulted on their payments, they would all suffer. And besides, Leah needed larger sums of money. By that time she already had a thriving wholesale shop, housed in a warehouse of rusty iron sheets near the center of Gikomba. To really boost her business, Leah would have needed five or six times the amount that the microfinance institutions were able to offer. A bank loan would have helped, but the thought never even crossed Leah's mind. "Banks were for the big people," she explains.

In a country like Kenya, where credit reports essentially don't exist, the banks enforce a seemingly draconian system of lending requirements. For most loans, you have to put up 100 percent collateral. If you do not have enough cash--and small business owners like Leah rarely do--the bank will come to your home to value your assets, from your car to your refrigerator; if you ever default on the loan, these possessions become subject to requisition. On top of collateral, you have to find a co-guarantor who agrees to reimburse the bank in the event of default and a lawyer to process your loan application and financial statements. Banks maintain that they must use such controls to weed out dishonest borrowers--the people looking for so-called hakuna matata loans, because they take the money and run. But as a result, most small businesses are locked out. "It's like a mountain ahead of you!" Leah says. "People fear banks. The banks are not for us little people."

Thousands of shopkeepers in Gikomba, and millions of other small businesses in the developing world, face this challenge. …