Different strokes for different folks? Redrawing the Boundaries of Creative Financing.

Has conventional banking excluded the creative economy?

I pondered this after a recent Banking SME event, where I crossed paths with Roy Gitahi, an unconventional SME advisor, with a blend of playful charisma and razor-sharp insights. Roy offered a thoughtful view of a world where creative energy clashes with the challenging reality of financial inclusivity, and this prompted further conversations about the untold stories of the incredibly gifted individuals who bring us laughter, innovation, and vibrancy to our world but often find themselves on the left out of the financial scene.

I realize now that having a brilliant idea is one thing, but navigating the banking industry poses a significant challenge for creatives. The absence of conventional collateral, such as property or assets, becomes a roadblock. In the eyes of banks, security is a crucial safeguard for depositors' money. Without tangible collateral, financial institutions hesitate to extend loans, creating a formidable barrier for creative individuals seeking financial support.

This dilemma underscores a systemic issue where the lack of traditional security measures leaves many creatives locked out of the banking system, hindering their access to crucial funds.

Roy Gitahi is the Founder and CEO of Art at Work, and Chairman of Wabunii Sacco, a savings and credit organization sponsored by Art at Work to provide financial inclusion and financial solutions to creatives like Visual Artists, Performing artists, Creative artists, creative writers, and anyone using their gifts or creativity to make a living who have no collateral that traditional financial institutions demand for when advancing loans.

Here's our Conversation:

In what ways do traditional banking systems fail to accommodate the unique financial needs of creative professionals and businesses?

Traditional banking systems, developed over decades, assess borrowers based on the 3 Cs: Capacity, Character, and Collateral. Creative professionals often fall short of these criteria. They may lack formal business registration, societal recognition, and traditional collateral. The mismatch between the creative sector and the financial sector demands a re-evaluation of the lending process to better accommodate the unique characteristics of creative businesses.

Can you elaborate on the specific challenges faced by the creative economy in accessing financial services?

Based on the 3 Cs which are Capacity, Character and Collateral, Creatives fall short in the following ways

1. Capacity: Many Creatives have failed to register their businesses with the Government. This then becomes difficult to establish if a business is legitimate or not. Creatives also do not have records of their dealings as they have a healthy fear of the tax man. It becomes difficult to establish cash flows that can be used to evaluate an individual for lending.
2. Character: Society has a healthy respect for formal professions like Medicine, Law, engineering, and the like but does not have the same level of respect for subjects considered as hobbies. These are Music, Dance, Visual Art, Acting, and other creative expressions, which were perceived to be for those who were not as bright in school. This attitude affects consideration by persons in the banking sector.
3. Collateral: Many in the Creative sector are young and have not accumulated the traditional forms of collateral that banks require, such as Land, buildings, Log books, receivables (income from other activities), and shares in companies.

Under this traditional mode of lending, it becomes difficult for creatives to align with the banking requirements and get the much-needed financing that they require.

How do financial institutions assess risk in the creative economy, especially when non-traditional assets and intellectual property are involved?

Any asset outside the traditional form of land, buildings, and log books is met with a healthy dose of skepticism. The reason for this is, that the traditional forms of collateral have a process of recovery.?

• Land or buildings can be auctioned and ownership can be transferred to recover the monies owed to the bank.?
• Laws exist where the ownership of the traditional collateral is easily verified and ascertained?
• Processes and institutions exist around the auction, trade, transfer, and insurance of the traditional forms of collateral?

When laws, institutions, and protection of ownership are not clear, the bank views such securities as risky and not viable.

The bank must always have an asset recognized and protected in law that has universal demand and that it can easily sell to recover the money loaned to an individual.

Are there any existing financial models or instruments that address the collateral limitations faced by the creative sector? If not, what innovations or changes are needed?

Finance is a field that is constantly evolving, and different models are emerging and instruments are are are being created. These processes require the participation of the Government, private sector players, guarantors, the law, and the Market.

Globally, the use of Intellectual property is rapidly evolving and copyright is getting traction and recognition. Using someone’s song without permission is subject to punitive fines. This means there is a growing recognition of the Value of Intellectual property or Creative products.?

In Kenya, we have seen cases awarded to local musicians for violation of their intellectual Property. We have Laws in place like the Movable Property Security Rights Act of 2017 that recognize the use of intangibles or non-physical assets like Art, Music rights, and IP as security for loans.

To begin using IP as security, a collaborative effort between the Government, the Private sector, Creatives, and Banks needs to be coordinated and structure established to ensure that intangible assets are elevated to the level of tangible Assets. Thankfully, this process is ongoing.

How does the intangible nature of creative assets, such as intellectual property, pose challenges in securing loans or financial support?

Navigating the challenges embedded in intangible assets, especially within the Kenyan landscape, proves to be a complex endeavor.

The central predicament lies in their intangibility; distinct from tangible assets like land or buildings, intellectual property (IP) lacks a physical form. This characteristic presents a unique hurdle as human perception is predominantly visual, making it arduous to encapsulate the essence of IP.

Compounding this issue is the uncertainty surrounding the valuation of artistic and creative expressions, prompting essential questions about what confers value upon art and whether a standardized, scientific method exists for assessing the worth of intellectual property.

The opacity extends to the market dynamics of intangible assets—where it is, who comprises the buyers, and precisely what they are acquiring. The pivotal concern of documentation arises, as establishing ownership and determining the value of intangible assets demands robust support. The speed at which these assets can be liquidated, coupled with the experiences of those who have utilized intangibles as collateral, and the recognition conferred by government institutions, collectively contribute to the intricate nature of this landscape.

Addressing these critical questions calls for a purposeful and strategic approach involving policy development, legislative measures, and practical strategies. Unlocking the potential of intangibles as collateral holds the promise of not only navigating these complexities but also enhancing financial inclusion and expanding access to loans.

As Kenya grapples with these challenges, a concerted effort toward understanding, valuing, and incorporating intangible assets into the financial framework stands to foster a more inclusive and dynamic economic landscape.

Are there successful examples of alternative financial inclusion strategies for the creative economy that have been implemented in certain regions or by specific institutions?

Several initiatives have been undertaken to create financial products that leverage digital platform revenue. One notable example involves a banking institution that tapped into the earnings from a local streaming platform, offering tailored products to creatives within that digital space. While the outcomes of this initiative are currently awaiting evaluation, it reflects an innovative approach to aligning financial services with the unique revenue streams of creatives.

Another significant stride in enhancing financial inclusion for the creative sector is exemplified by the establishment of Wabunii SACCO which is specifically tailored for creatives, providing an institutional framework for disciplined savings and responsible borrowing. The Sacco capitalizes on the relational strengths inherent in the creative community. The collaborative effort involving Art at Work, the Kenya Bankers Association, and Wabunii SACCO, facilitated through the National Bank of Kenya, exemplifies the industry's commitment to developing a functional model for providing financial support to the creative sector. This partnership underscores a collective endeavor to bridge the financial gap and foster sustainable growth within the creative economy.

What role can technology and digital platforms play in creating new forms of collateral or financial instruments for the creative sector?

Technology is an enabler and gives transparent accountability of transaction inflows and outflows. This transparency enables financial institutions to evaluate the ability of an individual to repay based on the number of transactions on the platform. MPESA statements are used to determine the income and expenditure of an individual. The platform keeps are verifiable record of transactions which can be used by the bank to evaluate suitability for a Loan.

The SACCO platform is digital which allows for a complete evaluation of cashflows, payments, consumers, and frequency of trade. These platforms help with establishing the Value of the products by a Creative, this then helps in lending to the Creative individual or company.

How can policymakers and financial institutions work together to develop more inclusive financial systems that consider the unique characteristics of the creative economy?

In the creative sector, key stakeholders include the government responsible for policy and legislation, the private sector for policy execution and compliance, development partners for support, and creatives as both beneficiaries and product sources. Achieving successful financial inclusion necessitates collaboration among all stakeholders. The government and private sector's combined efforts are crucial, recognizing each entity's unique strengths. Development partners like The World Bank, African Development Bank, Afrexim Bank, and Financial Sector Deepening Trust play a vital role by providing technical and financial assistance to unlock the potential of intangible assets, notably through initiatives with the Kenya Bankers Association. This collaborative approach signifies a unified commitment to tapping into the creative economy's untapped potential.

Are there any best practices or recommendations for creative professionals and businesses to navigate the challenges of financial inclusion, given the current limitations in collateral requirements?

?I’d like to offer these practical suggestions to artists and creatives:

1. Officially register your business.

2. Establish a clear separation between your personal and business affairs.

3. Institute a salary for yourself.

4. Enroll in the Capacity Building program facilitated by the Kenya Bankers Association and Art at Work.

5. Ensure compliance with national and county regulations through proper licensing and taxation registration.

6. Maintain comprehensive records, preferably utilizing technology platforms for transactions.

7. Consider hiring a professional manager, accountant, and lawyer to enhance business operations.

8. Register and assess the value of your intellectual property (IP).

Banks prioritize individuals with verifiable records, either through government documentation or a well-maintained account. Transparent channels for income and expenditure simplify evaluations based on income, increasing the likelihood of successful financial assessments.

In conclusion, I hope you agree with me that the financial landscape for creatives demands a paradigm shift. As we unravel the intricacies surrounding intangible assets, intellectual property, and the unique challenges faced by the creative economy, it becomes evident that collaborative efforts between policymakers, financial institutions, and creatives are imperative. Innovations in financial models, recognition of intellectual property, and the leveraging of digital platforms offer glimpses into a more inclusive future.

With each recommendation, a path emerges—a path where creatives can navigate the financial terrain with confidence, breaking free from traditional constraints. By embracing change, we unlock a world where creativity intertwines with financial empowerment, We owe that, at the very least, to our creatives!

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