Small and growing businesses make the biggest impact on economies, and they need more support

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Austin Mwape, Board Chairperson, Absa Bank Zambia Plc and National Advisory Board for Impact Investment Zambia, Hamdiya Ismaila, General Manager, Ghana Venture Capital Trust Fund, Diana Guzman, Head, Sustainable Development Investment Partnership, World Economic Forum & Drew von Glahn, Executive Director, Collaborative for Frontier Finance

• There is an urgent need to unlock more financing for small and growing businesses (SGBs), particularly in sub-Saharan Africa.
• A focus on de-risking the investment process and fo
• stering greater collaboration between public and private actors, will be key.
• Several initiatives in Africa are paving the way with actionable opportunities to accelerate the deployment of finance to SGBs.

In Africa, small and growing businesses (SGBs) handle over 60% of all food production and trade on the continent; yet these businesses receive just 10% of commercial bank lending. This bizarre situation is playing out in all sectors. While SGBs are a vital engine in most economies – making up more than 90% of businesses, employing more than 80% of the workforce and generating 70% of GDP in some countries – there is a historical systemic failure in making capital accessible to them. And without the fuel they need to grow, these businesses are being strangled.

COVID-19 has made this situation much worse, especially in sub-Saharan Africa, where the financial markets are shallower and less developed. Prior to the pandemic, the financing gap for SGBs was estimated at $1trillion per annum. Now, a recent survey conducted by the Collaborative for Frontier Finance among 90 local capital providers across sub–Saharan Africa, revealed a dire need for liquidity among 96% of such providers and for working capital for 85% of the SGBs they support, many of them being healthy, growing businesses before COVID-19.

What can be done about this? There is a growing understanding of the diverse barriers constraining SGBs from accessing finance at the scale required. One that stands out across countries is the fact that, for financial institutions, these businesses are unattractive due to greater perceived risks. This translates into a reluctance to lend, and thus lending occurs at high interest rates, with short tenors and very demanding collateral requirements.

De-risking lending a key place to start

A focus on reducing this risk perception could therefore be an important step towards increasing financing flows to these important businesses. And this is exactly what the Country Financing Roadmap (CFR) for SDGs, initiated by Ghana’s government together with the Sustainable Development Investment Partnership (SDIP) – a joint initiative between the World Economic Forum and the Organization for Economic Co-operation and Development (OECD) – proposed to achieve.

The CFR has come up with a range of specific solutions that include enhancing regulatory policies, scaling up innovative sources of financing, such as SDG bonds. It also places a particular emphasis on new instruments that reduce financing costs for private-sector investors and transfer financial risk to other actors. The combination of concessional financing (i.e., financing that offers more favourable terms than the marketplace), and grants from public actors such as international development institutions or governments with private financing, can help attract institutional money towards SGBs, ease lower interest rates and relax collateral requirements for them. Consistent with this premise, President Nana Akufo-Addo of the Republic of Ghana, has launched the Ghana Enterprises Agency and a US$25 million grant fund.

Other de-risking solutions such as credit guarantees aimed at encouraging lending to businesses perceived as “too risky” will no doubt be part of the solution. For instance, in Zambia the Central Bank is in the final stages of establishing a pilot $270 million guarantee facility backed by affordable credit line of up to $1 billion to support SGBs affected by COVID-19. Non-financial de-risking mechanisms will also play a pivotal role, as detailed by the World Economic Forum’s Global Future Council on SDG Investment’s latest report.

The solutions must extend beyond banks

Evidence shows, however, that de-risking mechanisms, such as credit guarantees, are an insufficient solution if they are limited to banks: it is essential to provide support to local non-bank capital providers and financial intermediaries. With a presence on the ground, these entities have the local knowledge, the reach, and the capability to support SGBs, and effectively ensure that progress is driven by principles of multi-stakeholder collaboration and inclusivity for sustainable and just solutions.

A growing number of non-bank lenders in Africa including the likes of local debt funds, fintech firms, supply chain finance, lease finance providers and other financial intermediaries, have already developed a track record of providing the types of flexible, affordable, longer-term financing that small businesses need, often pairing financing with supportive technical assistance. They have shown that they understand and can manage the perceived versus actual risks of early-stage investment and have the flexibility to tailor financial instruments to support businesses’ working and growth capital needs. Yet they still have, to date, insufficient access to capital and technical expertise to enable them to scale up their impact. Thus, there are substantial opportunities to unlock finance for SGBs in developing more effective de-risking mechanisms combined with an increasing direct support to non-bank local capital providers.

This month, a SGB Financing effort is launched in close collaboration with the World Economic Forum to test this approach through a cooperation between different types of capital providers. The initiative which is launched with support from the John D. and Catherine T. MacArthur Foundation, brings together the work of the World Economic Forum COVID Response Alliance for Social Entrepreneurs, two of their members – the Collaborative for Frontier Finance (CFF) and the Global Steering Group for Impact Investment (GSG), and the Sustainable Development Investment Partnership (SDIP). The initiators will work under consortium to support the implementation of SGB financing pilots being led by local public and private actors in both Ghana and Zambia.

Who are the collaborating partners in this SGB Financing Initiative?

The COVID Response Alliance for Social Entrepreneurs is a coalition of 86 global leaders who jointly serve close to 100,000 social entrepreneurs and touch the lives of an estimated 1billion people. Initated out of the World Economic Forum’s Schwab Foundation, its mission is to join hands in support of social entrepreneurs everywhere as vital first responders to the pandemic and as pioneers of a green, inclusive economic reality. In January of 2021, its members launched its 2021 Roadmap through which its members collaborate in 10 areas of work – including capital mobilization under whose umbrella this initiative is being undertaken. Read more about the Alliance here.

The Sustainable Development Investment Partnership (SDIP) is a global platform of public, private, and philanthropic institutions with the ambition to scale and accelerate sustainable investments in developing countries and emerging markets, by creating the conditions for capital to flow where in support of the Sustainable Development Goals (SDGs). SDIP network encompasses multilateral banks, development finance institutions, financiers, private investors, asset owners, asset managers and foundations. As a joint initiative of the World Economic Forum and the Organisation for Economic Co-operation and Development (OECD), SDIP’s mission is to address the systemic challenges to finance the SDGs by creating the conditions for capital to flow where it is needed most. Read more about SDIP here.

The Collaborative for Frontier Finance (CFF), has as its mission to build a better financial ecosystem for SGBs and increase the access to appropriate capital for these businesses, works with diverse stakeholders – including local capital providers, institutional investors, development agencies, philanthropic funders, and field builder organizations – to accelerate financing solutions that target SGBs. With a bias to action, CFF works in three ways: by building and empowering networks of these stakeholders, performing “actionable research” and undertaking market-based initiatives to address systemic barriers. Read more about CFF here.

The Global Steering Group for Impact Investment (GSG) is an independent organization promoting sustainable development and advancing education in impact investment. The GSG was established in 2015 as the successor to, and incorporating the work of, the Social Impact Investment Taskforce established under the UK’s presidency of the G8. The GSG’s currently has 33 countries as its members through its National Advisory Boards (NABs), which are local platforms representing all stakeholders needed to redirect significant capital flows towards positive social and environmental impact. The GSG brings together leaders from finance, business, philanthropy, and governments to drive a shift towards impact investment and more equitable economies for all. Read more about the GSG here.

In Ghana the consortium is supporting the implementation of solutions outlined in the CFR in coordination with the government and Impact Investing Ghana, the Ghana National Advisory Board for Impact Investing, that is working on the development of a private-sector venture capital fund-of-funds to ease local capital provider access to finance. In Zambia the consortium is supporting the National Advisory Board for Impact Investment (NABII) in its work with the Bank of Zambia to pilot a guarantee facility that is targeted at both, banks, and non-bank capital providers.

There is an urgent and massive need but there are also actionable opportunities to accelerate the deployment of finance to SGBs. As populations grow, hundreds of millions of jobs will need to be created within the coming decades in sub-Saharan Africa alone and SGBs will be an essential path towards creating such employment and providing sustainable livelihoods.

We invite capital providers of all sorts, private and institutional investors, public and philanthropic funders to engage with us to exchange best practices, test, implement and scale up actionable solutions both in Africa and globally.