Expert Insight: How DFIs can exponentially expand their support for the world’s smallest businesses

Small and medium-sized enterprises form the backbone of emerging and developing economies, responsible for around 70% of formal employment and 40% of GDP. Yet, according to the World Bank’s International Finance Corporation, the total worldwide SME finance gap is at US$5.7tn, and “swells to $8tn when informal enterprises are included”. In emerging economies, where economic transformation hinges on entrepreneurship and job creation, this financing shortfall marks a key development issue. 

It is increasingly clear that the scale of the challenge dwarfs the financial firepower of DFIs. Instead, DFIs’ greatest strength may lie in their ability to catalyse other capital

For decades, development finance institutions (DFIs), which include multilateral development banks, bilateral development finance institutions and public development banks, have worked to bridge this divide. To support small enterprises, DFIs invest 75% of their SME finance indirectly through financial institutions and private funds. But it is increasingly clear that the scale of the challenge dwarfs the financial firepower of DFIs. Instead, DFIs’ greatest strength may lie in their ability to catalyse other capital – particularly from domestic, private sources.

• Read more: Why don’t DFIs provide the funding that early-stage entrepreneurs so desperately need?

A report launched by GSG Impact at the Fourth International Conference on Financing for Development (FFD4) in Seville, Spain, A New Lens on SME Mobilisation: How to Maximise Private Capital Flows to SMEs, reframes how we think about that catalytic role. Drawing on new data from British International Investment, Norfund, and the US International Development Finance Corporation, as well as 13 case studies, the report spotlights a powerful yet under-recognised pathway to SME finance: secondary mobilisation.

What is secondary mobilisation?

Unlike primary mobilisation, where DFIs invest and co-invest alongside other DFIs or institutional partners, secondary mobilisation occurs downstream. After receiving DFI support, banks may use their own capital to expand SME lending and funds may help investee companies raise follow-on funding from local sources. Domestic institutional investors may then start allocating to SME-focused vehicles, often in local currency. 

While the order of events may vary, this tendency to bring in secondary sources of capital occurs without direct DFI participation but because of DFI influence.

This is real, commercial capital, moving on local terms. And it is already happening.

New data, new insights

The GSG Impact report presents compelling evidence that secondary mobilisation is possible and replicable. Consider Kenya’s KCB Bank. After receiving US$265m from DFIs and less than US$1m of technical assistance, the bank grew its SME loan book from a mere US$4m to over US$900m in just six years – that’s a multiplier of over three times!  

Most of this growth came from the bank’s own balance sheet rather than additional foreign capital. Technical assistance helped reshape internal processes, review client segmentation and create new SME products, unlocking a scale of SME finance that traditional mobilisation metrics would entirely overlook.

In West Africa, impact fund manager Investisseurs & Partenaires (I&P) used DFI support to attract dozens of local private investors. The final leverage ratio? For every $1 of I&P’s initial capital, $6.30 came from additional investors.

Across the Atlantic, Mexico’s Fondo de Fondos platform, with initial DFI support, has catalysed over US$1.6bn across 118 investment vehicles, backing more than 1,400 companies and creating 740,000 jobs, primarily by channeling domestic institutional capital, particularly from Mexican pension funds, into long-term investment vehicles.

These examples, and others in the report, point to a shared lesson: DFIs can do more by being more intentional in mobilising private capital for SMEs. By focusing on how much capital they deploy and also on how much capital they unlock for SMEs, they can understand, measure, and expand their reach exponentially.

A shift in mindset – and metrics

Traditional DFI metrics tend to focus on the immediate moment of investment: who else is at the table, how much co-investment is mobilised, and where the capital is coming from. 

Secondary mobilisation gives us a new lens. It tracks what happens after DFIs have invested

The next frontier is now to incentivise and capture the compounding effects. This is proving to unlock the most sustainable sources of SME capital: domestic financial institutions, local investors and fund-of-funds vehicles.

Secondary mobilisation gives us a new lens. It tracks what happens after DFIs have invested, yet where their prior engagement helped build capacity, credibility and appetite for SME risk.

We are working hard as a development community to use this week at the FFD4 event in Seville to improve development finance. Secondary mobilisation offers a chance to refine what’s already working.

By setting targets for secondary mobilisation, deploying ecosystem support, embedding expectations in their partnerships with intermediaries, and tracking downstream capital flows, the global community can prepare banks for additional SME lending, funds to improve investee fundraising and support for scaling up. 

Turning evidence into action

The report lays out a three-part call to action:

1. Track and measure: DFIs and partners must systematically identify and quantify secondary mobilisation. Without data, it remains invisible – and undervalued.
    
2. Incentivise intermediaries: From fund managers to commercial banks, local actors can develop strategies to expand SME finance as part of their core business. DFIs and all practitioners looking to increase the flow of capital to SMEs can make this a condition of support.
    
3. Build local ecosystems: Long-term success depends on more than individual deals. DFIs and practitioners should invest in the broader infrastructure – legal, regulatory, and institutional – that enables domestic capital to flow towards SMEs.

At GSG Impact, we are working with our National Partners in Ghana, Nigeria, and Zambia to design local investment vehicles aimed at unlocking US$1bn in pension fund capital for SME finance. These models are built with secondary mobilisation in mind: leveraging catalytic capital from DFIs and others, and designed for local sustainability.

A window of opportunity

The global community convening in Seville for FFD4 faces a sobering economic landscape. The promise of inclusive, resilient development hinges on SME finance. The good news: secondary mobilisation represents an opportunity to target, track, and unlock the capital that SMEs – and the economies they power – so urgently need.

• Krisztina Tora is managing director at GSG Impact which aims to boost impact investment around the world. This article was written with Zafrir Asaf, a senior adviser to GSG Impact on finance for SMEs.

Header image: a woman farmer in India. Photo by EqualStock on Unsplash.