- Readily available SME finance is a requisite of resilient economies. Opening new pathways for small business finance requires a smart mix of international and local institutional capital.
- Social enterprises face many of the same challenges as traditional small businesses in emerging economies.
- Innovative and scalable financing vehicles are originating from locally-based capital providers across emerging markets.
Across the globe during the COVID-19 pandemic, governments have sought to support small businesses through credit guarantee and salary support schemes. This focus on SMEs is logical as small businesses create up to 80% of jobs and generate up to 70% of GDP in Africa alone.
The role of social enterprises and emerging economies in SMEs
Social enterprises, while being a relatively small subset of such SMEs, are becoming increasingly important in their role of actively developing solutions to the most pressing social challenges. The survival and growth of SMEs and social enterprises should be an ongoing priority.
However, these short-term schemes in emerging market economies (EMC) are not enough to address existing, intractable structural barriers to raising finance that most of these businesses face. The yawning gap in the financing runs into the trillions of dollars.
The pandemic has further demonstrated that local and international, public and private sector organizations can work collectively to move money at scale if the motivation is strong enough. It makes economic sense for governments and private markets to do just that in order to build resilient economies.
A blend of global support and local currency solutions
Given the enormous scale and liquidity of global markets, international institutional investors currently allocate a little over 1% of their total assets to alternative asset classes in developing countries. However, global funds need to be thoughtful about additionally (providing capital in quantum or terms that are currently unavailable in the market) and sustainability because of the existing over-indebtedness in many EMCs. This is especially true in African markets where there is limited capacity to take on more foreign debt.
Meanwhile, EMCs in local pension funds generally have both capital and regulatory mandate to support alternative financing assets such as SME finance but do not do so in any meaningful measure. For example, private Ghanaian pension funds control two-thirds of $ 5.4bn pension fund assets at a rate of 30% per year. There is an investment limit of 15% in alternative assets, there is currently only a 0.03% exposure.
What approaches can unlock more financing for SMEs in emerging economies?
As part of its presidency of the G7 in 2021, the UK government mandated an Impact Taskforce (ITF) to support the development of scalable financial vehicles that harness private capital for the public good. The ITF set forward recommendations for a greater amount of capital for the SDGs, with SMEs and social enterprises being the key actors in achieving such goals.
A consortium of partners initiated through the World Economic Forum’s Global Alliance for Social Entrepreneurship, including Collaborative for Frontier Finance, Sustainable Development Investment Partnerships and Global Steering Group for Impact Investing (who led the G7’s ITF), supporting local actors in designing financing to EMCs. that integrate with effective international capital with scalable domestic resources.
In the past year, this consortium has worked with key stakeholders in emerging economies like Ghana and Zambia where each has been developing replicable pathways to finance:
- Private Sector-led Funds (FoF): A national FoF vehicle with a target size of $ 85 million connects to a blend of institutional capital from domestic pension funds and global development funding – to local fund managers that finance the region’s small and growing businesses. This type of structure was one of the recommendations from the SDIP-led “Country Financing Roadmap for the SDGs” to provide an efficient capital mechanism for institutional investors to “reach down” into the underserved, missing middle-market segment, by standardizing and simplifying. The process is as well as diversifying risk and supporting the system.
- Local Bank Credit Risk Guarantee Facility: A guarantee mechanism from the Zambian Central Bank underwrite the working capital and growth finance needs of SMEs by local financial institutions and non-bank finance institutions (NBFIs). This builds on the government stimulus scheme instigated during COVID-19 that successfully distributed $ 590 million to 10 commercial banks and 19 NBFIs. It aims to help local banks overcome the risk that they stand in the way of providing them more financing to SMEs.
The Global Alliance for Social Entrepreneurship is one of the largest multi-stakeholder collaborations in the social innovation sector.
The Alliance has 100 members – corporations, investors, philanthropists, governments, researchers, media, and industry actors – who work together to build an engaged ecosystem of key public and private sector leaders in support of a social innovation movement that transforms society more just, sustainable and equitable.
Launched in response to the COVID-19 crisis by the Schwab Foundation together with Ashoka, Catalyst2030, Echoing Green, GHR Foundation, Skoll Foundation, and Yunus Social Business in April 2020.
In the post-pandemic context, the Alliance community will strengthen the foundations of a highly dynamic and resilient innovation ecosystem supporting social entrepreneurs. In pursuit of that, the Alliance will continue to mobilize a trusted community of leaders together with core partners – Bayer Foundation, Motsepe Foundation, Porticus, Deloitte, Microsoft, SAP and Salesforce – that act and learn together so that social entrepreneurs can flourish.
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How can we build upon and find similar solutions?
- Engage the broader community of pension fund managers across emerging market economies. There are multiple efforts underway to increase the allocation of pension fund assets into alternative investments including the Assets Owners Forum South Africa, the Kenya Pension Funds Investment Consortium, the Ghana Pension Industry Collaborative and the work of GSG with pension funds across the globe.
- Tap the skills, knowledge and deep capital resources of global institutional capital holders, predominantly developing finance institutions, development agencies, foundations and family offices to help create conditions that facilitate private investment in these assets. Global pension funds and corporates will follow development monies once a track record has been established.
- Engage committed and motivated local stakeholders from the EMCs, such as government agencies, local banks, impact investors and providers of other services for SMEs, such as capacity-building, business development tools and access to digital services.
- Bringing together this diverse yet highly complementary community of local and international capital providers to develop and fund innovative and scalable financing vehicles that address existing systemic gaps in providing reliable and affordable capital for small businesses across emerging economies.
SMEs and social enterprises are essential drivers of growth, employment and livelihoods in emerging markets. Providing them with the vital financing they need to support the local investors, fund managers and banks who are closest to them on the ground. That said, in addition to providing financing to empower SMEs in emerging economies, it is important to accompany financial solutions to other types of non-financial support such as capacity building and tools relevant to their business. Experience in Africa shows that digitally-based information and services can be effective tools for empowering farmers and local businesses.
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