Opinion: Finance is failing emerging market SMEs – as impact investors, we can change this

Larger businesses are often seen as a better investment bet, but if we want more resilient emerging market economies – and better livelihoods – we must focus on helping SMEs to flourish. GSG's Krisztina Tora on lessons from pioneering efforts in Zambia and Ghana.

Krisztina ToraAround the globe, small and medium-sized enterprises or SMEs are the economic driving force, supporting employment and sustaining communities. Yet when it comes to access to capital and funding for growth, they are often overlooked in favour of larger businesses that are perceived to be a better investment bet. The situation is acute in emerging markets, and Africa in particular.

SMEs in Africa account for up to 70% of employment and 40% of GDP across the continent. However, only one in five of those businesses has access to financing through local banks. Meanwhile, private capital funds can often be too large to meet the needs of smaller businesses. Moreover, they are often provided by funds and investors with international – rather than local – views and objectives. As the world faces the threat of another global economic downturn, there is the risk of a further crunch for small companies that are already struggling to attract financing.

The Covid-19 pandemic marked a turning point for governments and investors. It highlighted the growing disparity in opportunities and wealth between developed economies and emerging markets. It spurred debate and action around rebuilding fairer economies that benefit all people and the planet. This is why the UK Presidency of the G7 mandated us to lead its Impact Taskforce last year. One of its main goals was to focus on the key leverage points to increase the flow of capital into investments that can have positive benefits for society and the environment, particularly in emerging markets which are in danger of being left behind.

To implement the recommendations made by the G7 Impact Taskforce, we at the Global Steering Group for Impact Investment joined forces with the World Economic Forum, the expert group Collaborative for Frontier Finance and other partners. Our goal is to improve SME finance in countries including Ghana, Zambia and South Africa. Together, we have investigated ways of channelling more investment into this critical segment to help create more resilient economies that can provide more people with better livelihoods.


Ample capital

It may come as a surprise, but there is ample untapped capital in African markets. Home-grown private pension funds in Ghana control about two-thirds of the country’s $5.5bn in pension assets and are growing at a rate of about 30% a year. But while the industry is authorised to allocate up to 15% of assets to alternatives, data from the Ghana National Pension Funds Authority shows that only 0.03% is actually invested in private assets. Even in South Africa, where pension funds invested $8.9bn in private equity and venture capital in 2021, many funds are far short of their permitted limits. Rather than availability of capital, the issue has been the lack of the right kinds of locally-led financing structures that can meet the needs of SMEs.

There is no one-size-fits-all approach, but rather a range of options depending on each country’s needs. Yet the goal is the same – to encourage domestic institutions to put more investment into small and growing businesses, while drawing in more international investors with growing appetite to invest in impact.

Rather than availability of capital, the issue has been the lack of locally-led financing structures that can meet the needs of SMEs

In Ghana, our local partners have started to structure a fund-of-funds model that can draw investment from domestic institutional investors, as well as international development finance institutions and impact investors. That fund will then invest with local capital providers (or, in other words, impact venture capital and private equity funds), who in turn will finance SMEs in the volumes that they need – typically the $50,000 to $500,000 range missed by many larger funds. That investment could be debt, equity or mezzanine finance, so long as it has impact goals at its heart. Critically, the local capital providers will be led by home-grown talent with intimate understanding of local markets, rather than international investors with more of a helicopter view.

In countries like Zambia, where SMEs are smaller and financing options less developed, the government is pursuing a credit guarantee scheme. For pension funds whose primary consideration is protecting capital, such structures can de-risk their investment while enabling capital providers to channel money into SMEs via loans and other debt. Investors with a higher appetite for risk may underwrite the guarantee, providing investors with impact returns and companies with capital to grow. The credit guarantee scheme that our partners are currently developing with the Central Bank in Zambia will initially be targeted at smallholder farmers in the country, who produce 80% of the domestic supply of food. Allowing them to improve their resilience thanks to appropriate finance will in turn have a positive impact on food security and poverty reduction.


Skills and talent needed

As always, there are challenges in developing new forms of financing for SMEs. Careful consideration needs to be given to the structures for funds of funds (and other schemes) to incentivise managers and provide de-risking mechanisms to attract new kinds of local and international investors. Furthermore, there are a limited number of people with the experience and know-how to set up and run such impact investment vehicles in Africa and other emerging markets.

The pioneering efforts in Ghana and Zambia are an example of how other countries can empower smaller businesses

But that is changing. The growing supply of capital into the SME space in Africa will fuel innovation, catalyse the creation of new investment structures, and spur the development of skills and talent. If we want more resilient economies, where people have better livelihoods, then we need to focus more on SMEs and creating the ecosystems that can help them to flourish, and to contribute to the Sustainable Development Goals.

The pioneering efforts in Ghana and Zambia are an example of how other countries across Africa, as well as Asia and Latin America, can empower smaller businesses. They show how home-grown investors and managers can unlock essential investment for small businesses and, in doing so, pull in even more impact investment from international investors.

To create fair economies and just societies in emerging markets, we must focus on the small businesses at their hearts. It’s time to get involved.

Explore this topic further at Joining forces: growing impact in Africa & beyond, a side event co-hosted by GSG at the Finance in Common Summit, in Abidjan, Côte d’Ivoire on 18 October. Plus, part 2 of the GSG Impact Summit Series takes place online on 22 September, on the theme of Boosting Capital Flows in Emerging Markets, with a panel discussion on increasing investment in SMEs.

The detailed findings around how Funds of Funds vehicles can help improve SME finance can be read here.


  • Krisztina Tora is chief market development director of the Global Steering Group for Impact Investment.

Header image: a view of Accra, Ghana (photo by Muntaka Chasant, CC BY-SA 4.0)

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