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

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.

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.

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.

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.