Policymakers are developing strategies to address global economic disparities, leveraging innovative financing options as alternatives. These options provide asset owners and investors channels to align with policy objectives. The enhancement of funding alternatives enables underserved sectors, comprising Micro, Small, and Medium Enterprises (MSMEs), access to financial support through opportunities from both public and private investors. Insufficient support for the MSME sector may increase development challenges such as poverty and unemployment, impeding Africa’s sustainable development and economic prosperity.
Globally, MSMEs play a significant role in economic development and social mobility through providing public goods and services, job creation, and social interaction. According to a UNDP article on the African landscape, MSMEs contribute 70% to total employment, and this number is expected to double, given the rising population forecasted to enter the workforce in the next ten years. An OECD report on promoting SMEs for development stated that SMEs comprise 90% of all businesses and more than half of all jobs worldwide. For emerging economies, SMEs account for 40% of national income (GDP) and are estimated to contribute to the global workforce by 2030, creating 600 million jobs. In these markets, many jobs in the informal sector stem from SMEs.
However, access to finance is a critical constraint that impacts MSME growth and the performance of this sector, which influences SME growth capacity in emerging markets and developing countries. SMEs in Africa are mostly informal, and this limits access to finance. This challenge is significant because businesses cannot invest and grow without adequate working capital. Blended finance is one approach to providing SMEs with access to the alternative capital needed for expansion. It is the strategic use of development finance from public or philanthropic sources to deploy additional finance targeted at sustainable development in developing economies. It attracts commercial capital for projects that impact sustainability, providing returns for investors. Development finance has helped deploy sustainable African projects that cut across clean energy and vaccine and immunisation programming. These sustainable projects were funded by SDG-targeted agencies such as the International Finance Facility for Immunization (IFFm), the Universal Green Energy Program by Deutsche Group, and the Global Alliance for Vaccines and Immunisations (GAVI), with funding estimated between $302 million to $50 billion; 55% of the beneficiaries of these transactions were MSMEs.
This method of financing is targeted at SMEs whose agenda is to stimulate positive social impacts alongside de-risking investments, closing financing gaps, and unlocking new funding opportunities. To effectively encourage SMEs who drive initiatives for sustainability, energy, and climate, blended finance is an approach to unlock more investment in these areas by effectively collaborating between investors (public and private), institutions, and capital (e.g., private capital, government aid, development finance institutions, and philanthropic donors). With the combination of financing opportunities, there is an opportunity to unlock new funding opportunities.
Based on the International Finance Corporation (IFC) study, MSMEs face an astounding financing gap of over $331 billion in Africa. In closing these staggering gaps to support MSMEs in the region, there is a need to adopt innovative forms of financial structuring, such as blended finance, to incentivise commercial investors to invest in MSMEs for sustainable economic prosperity in Africa. For MSMEs to seamlessly access finance, African economies must curate investable opportunities by utilising approaches provided by blended finance. The results may reduce the funding gaps to support home-grown small businesses and MSMEs to achieve a sustainable and prosperous future.
The Sub-Saharan African landscape has its peculiarities in climate change, which influences small and medium-sized enterprises (SMEs), specifically those in the agriculture and water systems sectors. SMEs are integrally addressing climate change with the use of technology, and this will require blended finance to adopt these technologies. Blended finance can counter the effects of climate change by promoting inclusive and sustainable development. Since this will drive the SDG goals for financial inclusion, global investors and financial development institutions can support such MSMEs. Emerging regions undoubtedly have real investment risks, such as political instability, market informality, and currency volatility. From a financial development angle, blended finance will build up viable local and regional capital market opportunities. With this in place, there will be a proportionate increase in local and international investors’ capital inflows into businesses and projects. When all is required to ensure blended finance becomes universal, key stakeholders’ expertise, resources, and financing capabilities will be engaged in the ecosystem. They will be empowered to give quantifiable results.
The African region has an increasing population with endless growth potential for innovations and emerging opportunities for improved research and development to solve social impact challenges beyond climate change and energy. As these opportunities emerge, there will be a need to finance such projects. In the case of utilising blended finance tools to develop sustainable solutions, development banks in Africa are gradually playing into this space as there are possibilities in playing a pivotal role in mobilising long-term finance for industrialisation, creating new industries, and de-risking projects through developing capabilities to commence project development, implementation, and monitoring. This funding will bridge gaps in electricity, transport, and water infrastructure. Investments and funding should be targeted towards net-zero emissions, agricultural modernisation, and greener industrialisation.
Embracing blended finance wholeheartedly throughout all African regions holds the transformative potential to optimise development and establish sustainable economies across the continent. This strategic approach is dedicated to stimulating meaningful dialogues among stakeholders within Africa. Prioritising support for private-sector SMEs in sub-Saharan Africa can yield a myriad of benefits:
- Mitigating the Impact of Climate Change: By fostering increased market competition and prospects, supporting SMEs contributes to a reduced negative impact of climate change, aligning with sustainable environmental practices.
- Elevating Livelihoods through Job Creation and Health Improvements: Targeting SMEs not only creates job opportunities but also thrives towards minimising adverse health effects, ultimately enhancing livelihoods and societal well-being.
- Promoting Climate-Resilient Technologies through SMEs: Empowering SMEs to invest in and adopt advanced technologies allows them to adapt to evolving climate patterns, enhancing resilience and sustainability in their operations.
Blended finance is a robust mechanism with enormous potential to unlock prosperity for African MSMEs. This strategic amalgamation of public or philanthropic funds with private capital effectively mitigates risks, reduces financing costs, encourages investment, and fosters sustainable growth. Demonstrated by successful case studies and ongoing initiatives, blended finance emerges as a crucial instrument in empowering MSMEs, enabling their growth, job creation, and significant contributions to the economic well-being of the African continent. Collaboration between governments, financial institutions, and the private sector is paramount in maximising the potential of blended finance to drive sustainable economic growth while empowering MSMEs in Africa. To optimise this approach for SME growth, donors should explore the following avenues:
- Integrating Flexibility in Financing for SMEs: Tailoring financing options to suit SMEs’ unique needs and circumstances, allowing for more adaptable and adequate financial support.
- Developing an Investment Ecosystem for SMEs: Establishing a comprehensive and supportive investment ecosystem that aligns with the requirements and aspirations of SMEs, ensuring a conducive environment for growth and sustainability.
- Engaging Key Local Market Players: Actively involving and collaborating with significant stakeholders within the local markets to understand, address, and cater to the specific challenges and opportunities SMEs face.
- Facilitating Investment Attraction through Strategic Partnerships: Forming strategic partnerships with key stakeholders to enhance investment facilitation, making it more attractive and accessible for SMEs, thereby fostering their growth and development.
Written by:
Olayide Eleso
Senior Analyst
