Loans on honor: an effective financial tool to get started

In ACP countries, a large number of companies and especially the smallest and the youngest, are struggling to find the financing they need to grow, despite a general awareness of their crucial role in job creation and economic development.

In recent years, solutions have emerged by combining both support and financing. The Prêts d’honneurs/ Loan on Honor mechanism is one of these solutions that has gradually developed in Africa, in particular through decentralized cooperation projects. This instrument was the subject of a webinar, organised on March 11, 2021 by ICR Facility in partnership with AFRIKWITY and Red Mangrove Development Advisers.

In his introductory remarks, Mr. Escipion J. Oliveira Gomez, Assistant Secretary General of the of the Department of Structural Economic Transformation and Trade of the Organisation of African, Caribbean and Pacific States (OACPS) recalled that access to finance is one of the main challenges for MSMEs and welcomed the importance of this type of financial instrument to contribute to the promotion of MSMEs and to the competitiveness of enterprises.

On the upswing

The loan on honor is a repayable loan at zero interest, with no collateral required, and a loan to the person (that is to say to the entrepreneur, not to the company). The funding is reinvested in the company in the form of equity and allows maximum financial leverage. Support for the entrepreneur facilitates access to financing by helping the entrepreneur to structure his project: a financial education component allows the entrepreneur to acquire a loan and to be able to repay it, knowing how to structure his cash flow and the profitability of his business as a result; the territorial animation component within the investment committee constitutes support for business creation and local development.

Already well established in North Africa and West Africa, the system is gradually being adapted to several other countries, including Kenya and Nigeria. Today there are more than 80 operators covering 17 countries, more than 11 million euros have been granted to finance more than 3,000 entrepreneurs, while the number of jobs created or maintained is estimated at more than 9,000. Depending on its target, the financing needs or the maturity of the business, the honor loan is very flexible covering the micro or informal level up to the start-up. The advantage of this mechanism is that the support is visible in the short term. Another significant advantage is the incentive for formalisation and banking and, in the medium term, it creates a financial leverage effect and a dynamic in favor of entrepreneurship.

ICR Facility is funded by the EU, the OACPS, BMZ and British Council and implemented by GIZ, British Council, Expertise France and SNV.

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