- Readily available SME finance is a prerequisite for resilient economies. Opening up new avenues for financing small businesses 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 come from local capital providers in emerging markets.
Around the world 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 because small businesses create up to 80% of jobs and generate up to 70% of GDP in Africa alone.
The role of social enterprises and SMEs in emerging economies
Social enterprises, while a relatively small subset of these SMEs, are a segment of growing importance due to their role in actively developing solutions to the most pressing social challenges. The survival and growth of SMEs and social enterprises should be an ongoing priority.
However, in emerging market economies (EMCs), these short-term programs were not sufficient to overcome the existing insurmountable structural barriers to fundraising that most of these companies face. The yawning funding gap is colliding with the billions of dollars.
The pandemic has further demonstrated that local and international organizations, public and private, 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 mix of global support and local currency solutions
Despite the enormous size and liquidity of global markets, international institutional investors currently allocate little 1% of their total assets to alternative asset classes in developed countries. However, global funds need to think additionally (provide capital in quantity or on terms not currently available in the market) and sustainability due to the existing over-indebtedness in many EMCs. This is particularly true in African markets where there are limited ability to take on more debt abroad.
Meanwhile, local pension funds in MECs generally have both the capital and the regulatory mandate to support alternative financing assets such as SME financing, but tend not to do so in a meaningful way. For example, Ghanaian private pension funds control two-thirds of pension fund assets of ±$5.4 billion, which are growing at a rate of ±30% per year. Despite a 15% investment limit in alternative assets, there is currently only one ±0.03% exposure.
What approaches can unlock more finance for SMEs in emerging economies?
As part of its G7 Presidency in 2021, the UK government has mandated an Impact Taskforce (ITF) to support the development of scalable financial vehicles that harness private capital for the public good. The ITF has made recommendations for greater capital to advance the SDGs, with SMEs and social enterprises being key players in achieving these goals.
A consortium of partners initiated through the World Economic Forum’s Global Alliance for Social Entrepreneurship, including Collaboration for Frontier FinanceSustainable Development Investment Partnership and Global Steering Group for Impact Investing (who led the G7 ITF), helps local EMC actors design financing structures that integrate impactful international capital with scalable domestic resources.
Over the past year, this consortium has worked with key players in emerging economies like Ghana and Zambia, where each has developed replicable pathways to finance:
- Private Sector Led Funds of Funds (FoF): a national FoF vehicle with a target size of $85 million to connect a mix of institutional capital from national pension funds and global development finance – to local fund managers who finance the growing small businesses. This type of structure was one of the recommendations of the SDIP-led “Country Financing Roadmap for the SDGs” to provide an effective capital mechanism for institutional investors to “reach” the poorly positioned middle market segment. served and missing, standardizing and simplifying the process as well as risk diversification and system support.
- Local Banks Credit Risk Guarantee Facility: a Central Bank of Zambia guarantee facility to guarantee working capital and growth financing needs of SMEs by local financial institutions and non-banking financial institutions (NBFIs). This relies on the government recovery plan launched during COVID-19 which successfully distributed $590 million to 10 commercial banks and 19 NBFIs. It aims to help local banks overcome the risk that prevents them from providing more finance to SMEs.
The Global Response Alliance for Social Entrepreneurship is one of the largest multi-stakeholder collaborations in the social innovation sector.
The Alliance has more than 100 members – businesses, investors, philanthropists, governments, researchers, media and industry players – 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 to be more just, sustainable and equitable.
Launched in response to the COVID-19 crisis by the Schwab Foundation 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 serving social entrepreneurs. In this pursuit, the Alliance will continue to mobilize a community of trusted leaders with key partners – the Bayer Foundation, Motsepe Foundation, Porticus, Deloitte, Microsoft, SAP and Salesforce, who act and learn together so that social entrepreneurs can thrive.
Contact us to get involved.
How can we develop and find similar solutions?
- Engage the wider community of pension fund managers in emerging market economies. Multiple efforts are underway to increase the allocation of pension fund assets to alternative investments, including Asset Owners Forum South Africathe Kenya Pension Funds Investment Consortiumthe Ghana Pension Industry Collaborative and GSG’s work with pension funds around the world.
- Harness the skills, knowledge and capital resources of global institutional capital holders, primarily development finance institutions, development agencies, foundations and family offices to help create the conditions that facilitate private investment in these assets. Global pension funds and corporations will follow development funds once a track record has been established.
- Engage committed and motivated local CME stakeholders, 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 can bridge existing systemic gaps by providing reliable and affordable capital to small businesses in emerging economies.
SMEs and social enterprises are key drivers of growth, jobs and livelihoods in emerging markets. Providing them with the essential financing they need necessarily involves supporting local investors, fund managers and the banks closest to them in the field. That said, in addition to providing access to finance to empower SMEs in emerging economies, it is important to accompany financial solutions with other types of non-financial support such as capacity building and tools relevant to their business. Experience in Africa shows that digital information and services can be effective tools to empower farmers and local businesses.