SME Finance in Sub-Saharan Africa: How do we achieve significant scale and reach?

Transcription

1 SME Finance in Sub-Saharan Africa: Hw d we achieve significant scale and reach? Executive Summary & Call t Actin 31 August

2 Research Methdlgy & Participants Enclude, ANDE, and the Shell Fundatin have cnducted this research frm late 2016 t mid- 2017, with generus participatin frm leading prviders f SME finance glbally: Rundtable Discussin 16 Participants (Nvember 2016) Wrkshp 11 Participants (March 2017) Survey and Interviews Cnducted 14 and 10 Participants Respectively (April and May 2017) Research Reprts Reviewed 30+ Reprts And mre And mre 2

3 The Apprach: Frm Hnest Talk t Actin 1. Call fr Clarity Frm data pints data sets Segmenting this part f the SME universe and understanding the specific pain pints 2. Call fr Specificity Addressing the pain pints with effective slutins Debunking myths arund surces & uses f resurces t prpel the slutins t scale 3. Call fr Actin Tackling the data challenge Mbilizing the full slutin suite t a target lcatin Activating dmestic capital Building sustained and expanding pls f lcal talent 3

4 Grwth Stage Call fr Clarity: Which SMEs are we talking abut? Fcus f this study is n real ecnmy SMEs that are cmmercially viable with five t 250 emplyees and have significant ptential and ambitin fr grwth Within this segment, fcus is n businesses in the validate and prepare stages seeking grwth and wrking capital f between $250,000 and $1 millin (referred t thrughut as ur Target Market ) Scale Prepare Validate Target Market f SMEs Blueprint $100,000 $250,000 $500,000 $1m Capital Needs >$2m Surce: Frm Blueprint t Scale: The Case fr Philanthrpy in Impact Investing. Mnitr Grup (2013) 4

5 Millins Millins Call fr Clarity: What is the State f the Market Tday? Data Gap: Significant lack f current data n SMEs in emerging markets, and specifically fr ur Target Market. Based n the best available data, we estimate there are 9.4 millin frmal and infrmal SMEs in ur Target Market (see Appendix 2) Funding Gap: We estimate there is currently $25.7 t $30.7 billin in debt utstanding t these SMEs and arund $0.53 billin in equity and mezzanine financing under management targeting thse SMEs, creating a gap upwards f $70 billin MSMEs in Sub-Saharan Africa Number f SMEs that Have Access t Credit Infrmal Micr Very Small 2.3 Small MSMEs in Sub-Saharan Africa 0.6 Medium Very Small Small Medium # f SMEs that have access t credit # f SMEs in SSA Surce: Clsing the Credit Gap fr Frmal and Infrmal Micr, Small, and Medium Enterprises. IFC Advisry Services

6 Call fr Specificity: Hw t Increase Bth Quantum & Distributin? Quantum: Distributin: A material increase wuld require grwth in the quantum f financing targeting an additinal $3 billin in financing by In the near-term this drive will be led by Develpment Finance Institutins representing just ver half f the additinal capital sught Dnrs and fundatins are expected t prvide abut a quarter, with crpratins and impact investrs prviding the remaining quarter This increase in capital shuld be cupled with better distributin f financing reaching ur Target Market By , instead f 1 in 3 SMEs with access t debt, at least 2 in 3 shuld have access; the amunt f equity and mezzanine instruments available t ur Target Market shuld als increase Capital t be Deplyed ($3 billin) $0.30 $0.40 $0.60 $1.60 DFIs Fundatins / Dnrs Crprates Impact Investrs 6

7 Call fr Specificity: Which Appraches can Mve the Market? Enclude evaluated 10 appraches; five were identified as the mst prmising (listed in rder f absrptive capacity and investr appetite); sme appraches can be distributed thrugh multiple channels; thers thrugh a specific distributin channel: Cmmercial Bank with an SME Unit (channel-specific) Absrptive capacity f 40 50% f additinal capital Investment fund prviding mezzanine (multi-channel) Absrptive capacity f 20 30% f additinal capital Asset-backed financing (multi-channel) Absrptive capacity f 10 15% f additinal capital Flexible debt instrument (multi-channel) Absrptive capacity f 5 10% f additinal capital Tailred private equity fund (channel specific with design variety) Absrptive capacity f 5 10% f additinal capital 7

8 Call fr Actin 1: Building a Current Data Set encurage Develpment Finance Institutins (and ther key actrs) t share their data Fundamental t achieving scale and reach is having a rbust data set that tracks and enables analysis and sharpens insights f size, distributin, trajectry, returns and ther data in cmparable ways. T achieve this we must: invite ANDE r a similar industry actr, tgether with academic institutin(s), t be the repsitry f SME data, and take wnership f data cllectin, distributin, and warehusing prvide funding, mainly thrugh Develpment Finance Institutins and fundatins dnating $100,000 per institutin per year fr cllecting, analyzing, and disseminating the data 8

9 Call fr Actin 2: Applying the full suite t a Single Cuntry Ging deep int ne cuntry as a cmmunity f actrs wuld help demnstrate the viability f the five mst prmising appraches, and ptentially help catalyze quantum steps in capital mbilizatin. T achieve this we must: build a calitin f funders that cmmits t a strategic financing plan fr a specific cuntry (e.g. Uganda as a relevant example) t shw what can be dne with a density f funders financing prmising appraches simultaneusly, pursuant t a smart, strategic plan fr scale and reach encurage a Develpment Finance Institutin r fundatin t fund a blue print fr actin f the target cuntry prvide incentives and guidance t a diversity f financial and advisry intermediaries t facilitate capital distributin int existing and new initiatives in the target cuntry 9

10 Call fr Actin 3: Unlcking Dmestic Capital Unlcking dmestic capital markets is the nly viable slutin t freign exchange (FX) issues. We have seen the cnsistent and serius effect caused by FX issues, bth vlatility and depreciatin. In the near-term, we need t create structures and slutins using blended finance. T achieve this we must: encurage Develpment Finance Institutins, impact investrs, and fundatins t participate in structures that use different layers f capital t mitigate FX expsure t keep the cst f capital apprpriate fr the SME encurage Develpment Finance Institutins t emblden dmestic institutinal investrs t participate in structured blended deals, that will be grunded and guided by Develpment Finance Institutins establish a track recrd thrugh these blended capital structures that will stimulate dmestic investment activity that is nt dependent upn FX mitigatin 10

11 Call fr Actin 4: Building Sustained Pls f Lcal Talent Develpment Finance Institutins and fundatins shuld priritize technical assistance expenditures that fcus n develping lcal skills, capabilities, and wnership Ultimately, reliable supprt fr ur target SMEs requires lcal quality resurces. We shuld ensure that every technical assistance prgram and investment vehicle is structured and managed with an eye t building these lcal resurces. all actrs shuld ensure that any cuntrylevel blueprint fr actin as prpsed in Actin 2 cnnects lcal rganizatins that strengthen talent (e.g. universities and acceleratrs) T achieve this: 11

12 Cnsistent Themes Sme mdels shw slid cmmercial prmise, but subsidy will be necessary fr many years t cme The benefits f thse subsidies accrue t cst-effective develpment impact Substantially scaling the amunt f funding and the reach f SME finance shuld deliver a step-change in impact The surces and purpse fr subsidy will als shift Grant, sub-cmmercial, and quasi-cmmercial capital will all be required in greater prprtins in rder t leverage mre cmmercial capital DFIs will remain as the main investrs, but will need t recalibrate and reframe their return expectatins, and lk t lead and be part f bridging slutins & systemic interventins 12

13 Activating Stakehlders in the Right Rles Each actr has a key rle t play in addressing the financing gap: Investr Develpment Finance Institutins Fundatins Impact Investrs Crprates Key Actin Items Will need t t be the primary financier ver the next three t five years, recalibrating return expectatins and strengthening the analysis f impact return Shuld lead in making the case fr SMEs by (i) sharing data and track recrd, (ii) increasing investment activity and results, (iii) mbilizing lcal capital, and (iv) develping lcal talent, thereby crwding-in ther capital prviders (v) and demnstrating the case fr declining amunts f subsidy as SME investment intermediaries mature and scale Shuld embrace mre innvative appraches t SME financing and help finance the building f the SME financing ecsystem T supprt the cultivatin f the SME finance ecsystem (e.g. grant funding fr SME, Intermediaries, and market-level capacity building) Are encuraged t step up and start prviding financing t SMEs thrugh existing appraches, as well as invest in the develpment f mre innvative slutins Are well-suited t push business develpment services and technlgy frntiers Need t be engaged thrugh data sharing and perfrmance track recrd with a particular fcus n business cases linked t the Sustainable Develpment Gals and/r their value chain requirements 13

14 Cntact Infrmatin Laurie Spengler President and CEO, Enclude Rland Pearsn Managing Directr, Enclude Capacity Slutins Steven van Weede Managing Directr, Enclude Capital Advisry Randall Kempner Executive Directr, Aspen Netwrk f Develpment Entrepreneurs Randall.kempner@aspeninst.rg 14

15 Appendix 1: SME Segments Blueprint Validate An idea/cncept/ business plan withut tested prduct r service withut tested prduct r service and revenue A validated prduct r service with initial revenue stream but negative cash flws Prepare A slid business mdel generating psitive cash flws at the business unit level and pised fr further grwth Scale An established business with psitive cash flws at the enterprise level pised fr further grwth, by gegraphy, segment, prduct, acquisitin, ther Surce: Frm Blueprint t Scale: The Case fr Philanthrpy in Impact Investing, Mnitr Reprt April

16 Appendix 2: Number f SMEs in Target Market There is very limited and ften utdated quantitative infrmatin n SMEs in emerging markets; the largest scale study was cnducted by the IFC in 2010 and 2011 Infrmal SMEs: enterprises that are nt registered with the municipality r tax authrity Frmal micr enterprises: 1 4 emplyees Frmal very small enterprises: 5 9 emplyees Frmal small enterprises: emplyees Frmal medium enterprises: emplyees Based n ur definitin, we are fcused n the very small, small and medium enterprises Using this data frm 2011, there are abut 12.5 millin frmal MSMEs in SSA, f which 8.6 millin are micr enterprises, and thus leaving 3.9 millin frmal SMEs Hwever, this data excludes the infrmal SMEs in ur target market, which are imprtant t include fr ur study In rder t arrive at a mre infrmed baseline, we apply a market assumptin that within the infrmal categry, the verwhelming majrity (80%) is a micr-enterprise with the balance made up f very small (15%) and small (5%) enterprises. Applying this assumptin t the set, there wuld be a ttal f 9.4 millin frmal and infrmal SMEs in ur Target Market. 16