Scaling successful models

Impact’s involvement with education has so far been limited, but some success stories have emerged and these can be scaled using further injections of impact finance. One outstanding example is Bridge International Academies, a for-profit whose standardized “academy-in-a-box” model has been highly successful in delivering quality education to poor communities in Kenya.

To date, Bridge has enrolled 95,216 pupils, and counting, with high rates of attainment when compared to traditional forms of schooling. With continued growth in Kenya and plans to extend its reach to other African countries, Bridge shows that it’s possible to come up with scalable models for education delivery.

Bridge represents a new breed of company taking a new approach to education. Cross-sector collaboration has been part of its fabric from the beginning and continues to be central to its development. The company was founded on the partnership between Jay Kimmelman, the entrepreneur behind successful software company Edusoft, and Shannon May, a development specialist. It was established using capital from a wide range of investors including aid agencies like OPIC and DFID, venture capital investors like LearnCapital and Rethink Education and impact investors like Omidyar Network and CDC.

This co-investment approach shows the range of players in the arena and the potential for fruitful collaboration, a theme evident across the whole education investment sector. By using such techniques, it will be possible to generate the capital necessary to bring other promising models to scale, rolling them out across more regions and adapting them to answer local needs.

Exploring the potential of edtech

Impact investors already love cleantech and greentech, but edtech, the new buzzword for education technology, is still largely unexplored ground for the impact sector.

But what is edtech? Edtech involves using information technology—including tablets, smartphones and computers—and working through various media, including social media, to deliver instruction. Its practice involves enhanced learning through computers as well as remote learning and massive online courses, or MOOCs. “Edtechers” in schools, universities and businesses design and produce online classes, tutorials, training programs and exams and then deliver them to students using technology.

Edtech is widely considered to be the new frontier in global education and the momentum behind it is growing. The UK government, long a leader in the development of socially beneficial areas of enterprise, has established an edtech incubator. Meanwhile, mainstream markets and venture capitalists are beginning to get excited about the potential of edtech, with some pundits making bullish predictions about its future The edtech market is projected to grow to $220 billion by 2017, with the US market growing by 47 percent and the EMEA countries (Europe, Middle East and Africa) projected growth standing at around 25 percent.

For impact investors, the rise of edtech, with its potential for delivering returns at both market and below-market rates as well as non-financial benefits, represents another possible entry point into the education marketplace. Education, like clean water, is popularly considered to be a good thing per se and this makes edtech an uncontroversial investment, which in turn should make it attractive to a number of different kinds of socially motivated investors. It’s no coincidence that Bridge founder Jay Kimmelmann was an edtech entrepreneur before he became CEO of Bridge International Academies, a mission-driven education delivery business.

This crossover is important when it comes to financial arrangements, too. Two of Bridge Academies’ major investors,  LearnCapital and Rethink Education are venture capital funds that focus on edtech investing. In another example of collaborative investing, last year they joined forces with the NewSchools Venture Fund, a venture philanthropy organization, to capitalize Britebytes, a platform that helps educators manage their learning technology.
While none of the three organizations in this deal call themselves impact investors, all are pursuing investment strategies that blend business and social benefit through investing in education.

This deal gives us a glimpse of the investing landscape that surrounds edtech. It’s one that draws investors equally from mainstream finance, philanthropy and government, creating a potentially dynamic market for developing education solutions. Impact investors should take note, since the chances are good that more of these collaborative deals will be coming their way in the near future. By being prepared to work with a range of different co-investors with a range of motives and a variety of appetites for both reward and risk, impact investors can play their part in a growing marketplace.

Getting deeper into student finance

Demand for student finance is exploding in developing countries with growing middle classes and increased demand for higher education, such as Vietnam, South Africa, Brazil, Morocco, and India.

At the same time, in the developed world costs for higher education continue to rise uncontrollably in the face of government cutbacks, leading some students to take on unsustainable levels of debt while others have been priced out of the education market altogether. Default rates for student loans, already high, are rising and despite a growth in student numbers the gap between educational attainment rates for rich versus poor students is widening, notably in the US. At the same time, the value of a degree in real terms has never been higher and the demand for highly skilled workers, driven by the growth in technology businesses, is rising, a trend described in a recent book by Harvard economists Claudia Goldin and Lawrence Katz: “The Race Between Education and Technology”.

For all these reasons, student finance is now being hailed as the “new frontier in impact investing.” It makes sense: impact investing has a track record of success both in providing finance directly and backing institutions who do. Recent studies show there are already some workable models being used by non-banking financial institutions (NBFIs) in the developing world some of which are backed by impact investors: South Africa’s Eduloan and Trustco Finance in Namibia, for instance are using methods including social bonds to raise money to loan to students. Other groups are collaborating with universities or governments, negotiating terms, such as discounts and subsidies, that make the programs more sustainable and secure profits for investors. Still others provide finance directly to educational institutions. There is scope for expanding some of the more successful models globally.

In the developed world, there’s also room for growth. Despite the presence of mainstream lenders, solutions are needed in higher education finance, especially for poorer students. As the cost of higher education continues to rise above the rate of inflation, there are calls for new approaches including using privately-financed Social Impact Bonds, which would raise capital for student loans with repayment tied to performance, and Income Share Agreements (ISAs). In an ISA scheme investors pay the cost of college attendance in return for a percentage of the student’s income after graduation. Higher-earning students pay more, but those who earn less pay less to investors.

These are just some ideas for how impact capital could support access to education for all students. With luck there should be many more such innovative approaches mooted in the years to come—and many opportunities for impact investors to get behind the wave of change. As the demand for global education continues to increase and the urgency of the funding crisis becomes more acute, governments, philanthropies, international aid agencies and the public will ramp up the search for solutions. And, in a new era of openness to market-based approaches, impact investors should be ready to do their part.

By establishing a focus on education as an investable sector—and learning how to work collaboratively with a range of other investors—impact investors can help turn the tide in the global education crisis through supporting sustainable, business-based solutions.

Marta Maretich, Chief Editor, MaxImpact

As we established in Part I of this series, there’s a growing global demand for education — in other words, a huge potential market that could be catalyzed by an influx of impact capital.  Add to this the fact that education is pretty much universally recognized as an effective means to break the cycle of poverty and improve lives — it may be the most powerful single tool we have — and the low level of impact involvement in the sector begins to seem surprising.

Yet that’s the reality: of $2.5 trillion is spent on education worldwide, impact capital accounts for just $3 million. In a recent survey of impact investors, only 3 percent of assets under management were in the education sector as compared to 21 percent in microfinance and 11 percent in energy. Only water and sanitation came in lower, at just 1 percent.

Small deals, few deals

A closer look at deals gives insight into what’s happened to date. According to a recent report from D. Capital and Open Society Foundations (OSF), impact investors have hardly entered the education market and when they do, deal sizes are small with direct investments typically ranging between the $.5 million and $5 million. Investment though intermediaries looks slightly more robust, with technology venture capital funds raising the stakes to $10 million, but it’s still a mere drop in the ocean.

Impact’s role in financing the education sector hasn’t only been small in size, it’s been limited in scope, largely focusing on school infrastructure programs and, to a lesser extent, people (for example teacher training schemes). Impact investors have largely ignored the potential for investment in the wider educational ecosystem and have only very limited involvement in areas such as developing new services, tools and technology. Impact investment has been sharply divided, too, between market-rate investors who target middle and upper class populations and those with an impact-first attitude who target populations at the base of the socio-economic pyramid.

What’s keeping impact investors away?

Several factors help explain this picture. First, impact is still a relatively new sector whose development has been largely uncoordinated and sometimes patchy: in other words, just because a sector is worthy of more impact capital, doesn’t mean it’s received it yet.

Impact investing is beginning to develop a track record in areas like agriculture, clean technology and finance but this is largely thanks to the determination of a few leading proponents like Acción, Root Capital and Acumen, who targeted their investments in specific areas. By contrast, few impact investors have made education their sole priority and few have developed well-defined deal sourcing strategies for education even though quite a few (21 out of the ImpactAssets 50 funds, for example) claim education as one area of focus among several others. This suggests that education is often a sideline for impact investors, with small-scale education investments tacked on to ones in more popular sectors such as finance.

Partly, this may be due to the perception that education investments have little potential to produce returns (an assumption new developments in the sector will challenge). Another reason could be that education, unlike other sectors, has traditionally been the sole preserve of governments and, to a lesser extent, international aid agencies. Until now, non-state investors have claimed a relatively small slice of the education pie with private commercial funding accounting for only $500 billion of the $2.5 trillion spending total. The state monopoly on education has created little incentive for innovation or entrepreneurial activity, with the result that there haven’t been enough education deals out there to engage the growing impact sector.

Such market issues may be contributing to the shortage of investable deals and limiting levels of investment now, but the picture looks set to change. Squeezed public budgets and a new spirit of openness on the part of the development aid community are generating more interest in market-based solutions to the education crisis. This raises the possibility of increased entrepreneurial activity in the education sector with impact investment playing a more important role in its financial profile, especially in the form of collaborative investing arrangement with governments, philanthropic bodies and other private investors. The question now is, what exactly should that role be?

Learning to do more

With opportunities at various points in the market, there’s evidence that impact capital can help education in a number of important ways. “Where government is absent,” write the authors of the D. Capital/OSF report, “impact capital can help fill a basic gap that the state cannot. Where the government provides basic services, there is also ample room to supplement public services through congruent education for at-risk children, vocational training or adult literacy services.”

Beyond this, impact investors can do their part to strengthen the sector by:

•    supporting early-stage experimentation and innovation in education
•    innovating new kinds of financial approaches that support education and the ecosystem around it
•    working in collaboration with governments and nonprofits to back socially motivated education programs with impact capital
•    investing alongside venture capitalists and venture philanthropists in scalable education businesses
•    catalyzing co-investment from other sources, such as mainstream banks, private investors and aid agencies
•    scaling approaches that show promise, adapting them and rolling them out in other contexts and other regions.

Marta Maretich, Chief Editor, MaxImpact

The role of education in improving the people’s lives and encouraging economic development is widely recognized, making it a focus for national governments, philanthropic bodies and international development agencies. Increasingly, it’s viewed as an indispensible tool for easing poverty, reducing inequality and boosting economic sustainability. Research has shown that one year of education can increase wages by five to 15 percent, while each year of secondary school raises them by up to 25 percent.

What’s more, quality education for all—including marginalized groups, women and adult learners—can generate huge economic rewards for a country, increasing its gross domestic product per capita by 23 per cent over 40 years.

More investment is needed—right now

There’s little doubt about the value of education. Yet, despite making commitments to Millennium Development Goals in education, the global community has so far failed to come up with the investment needed to hit education targets. While spending on education by low-income countries has increased by an average of 2.9 percent to 3.8 percent of GDP over the last decade rich countries have not stepped up to the same degree.

In 2010 estimates showed that an additional $16 billion per year would be needed just to provide basic education for children, youths and adults by 2015. However, actual spending has hovered around the $3 billion mark annually. The result is a funding gap that has almost doubled in the intervening years. Today, estimates place the annual financing shortfall at a staggering $26 billion.

It now seems likely that the Millennium Development Goal for education will not be reached by the 2015 deadline and there are concerns on the part organizations like Education for All about what will happen to education development post-2015 and in years to come.

In a further development, low-income countries and poor populations aren’t the only ones facing an education crisis. The education systems in rich countries like the US, the UK and Australia, for instance, are also suffering from the effects of squeezed public budgets and skyrocketing costs, especially in the higher education sector. This has left educational attainment rates dropping, especially among poor people and minority groups, over a number of years.   Many would-be students are priced out of access to higher education just when the need for an educated workforce is on the rise.

Innovative finance solutions

So what can be done to help the poorest attain access to quality education and the better-off optimize their access to higher forms of learning? The key, recent research suggests, is to bring more private capital into the sector and to experiment with new kinds of investments that target specific educational problems and meet the needs of specific groups.

In many parts of the world, education has until now been the sole preserve of governments and development aid agencies, but there is evidence that this is beginning to change as new funding approaches — like impact investing— gain popularity and prove their viability. Though governments and development aid agencies will continue to play a central funding role, the education sector is now actively looking for ways to attract private capital, often in the form of impact investment, as a means to fill that yawning $26 billion funding chasm.

Though it’s early days, there’s already evidence that impact finance can be effective in education.  George Soros’ Open Society Foundations have produced some first findings on impact investing in developing countries’ education systems. The results suggest that workable models are evolving on a small scale, often in collaboration with governments, and some are already showing respectable track records of financial return and demonstrable benefit.

These indications are hopeful, yet impact investing in education is still in its infancy. Education accounted for only 3% of the investments of participants in the GIIN’s recent sector survey, a figure that suggests that impact investors have been hesitant to engage in this sector.

The OSF report confirms this image of tentative, early-stage activity in education by impact investors:  “Most deals remain small, and investments in schools currently dominate deal-making, with more innovative technology and management models just beginning to emerge. As yet, few business models deliver strong immediate financial return while reaching the most vulnerable beneficiaries.”

More worrying perhaps is the fact that impact’s involvement in education investing remains split into two camps, according to the report. On the one hand there are impact investors focused on “reaching the lowest income populations without expectation of any financial return”; on the other are investors who expect market rate returns and place capital into deals that “target middle and upper class populations.”

By now, this is a familiar situation for impact, with well-meaning investors in many sectors still struggling to find ways to engage with the middle ground and find models that meet needs while maintaining profitability. Yet, given the pressing global demand for education, there is enormous potential for innovation, both in terms of finance models and in terms of education delivery methods. With more impact engagement—and a renewed commitment by the education sector to finding new ways to finance and deliver good quality education on all levels—there is scope for significant  positive change in which impact investing can play a significant role.

By deepening its commitment to investing in education, the impact community has the opportunity to help solve one of the world’s greatest challenges.In the next blog in this series, we’ll be looking at the places where impact capital has the potential to be most effective in the education sector. As the need for education continues to grow, so will the range of methods and approaches for private capital, including public-private collaborations, an expanded role for impact intermediaries, and new technologies with the potential to deliver education to underserved communities as never before.

By Marta Maretich

FinComEco, a fully integrated Financial & Commodities Ecosystem launches today providing services, financing, capacity building and enablement solutions.   The ecosystem will drive improvements in food security, economic diversity and financial inclusion through a socially responsible commercial delivery partnership. The goal is a sustainable and increasing improvement in the sophistication and living standards of smallholder farmers and their families in developing countries brought about by a venture, which links agriculture to the latest financial technology. It will initially focus on Africa.

“Creating markets, developing infrastructure and providing financing for farmers are key ingredients for transforming agriculture in Africa. These factors were necessary for transforming agriculture into a wealth-creating sector, generating income opportunities for farmers in rural areas .” – The African Development Bank (Note1)

Rt. Hon Mark Simmonds, Chairman of FinComEco, former UK Foreign & Commonwealth office Minister with responsibilities for Africa, the Caribbean, UK Overseas Territories, International Energy and Conflict Prevention, comments, “It is important to recognise each African country is unique with individual economic, political and social drivers.” He added “With FinComEco I believe we have a detailed strategy to support, improve and facilitate the full agricultural value chain improving lives, creating jobs and alleviating poverty.”

FinComEco will encourage growth by connecting the farmer with the exchange, financial infrastructure and national economy. This supply to demand chain also includes small-scale traders, brokers, storage, transportation, shipping, banks and buyers including multinationals. This will enable smallholder farmers to get a better price for their produce, and provide opportunities for further income growth, opening alternative added-value opportunities including e-commerce enabled enterprise.

FinComEco has already successfully proven this concept in Malawi at the Agricultural Commodity Exchange for Africa (ACE) through the GMEX Group. During 2016 substantial benefits were delivered to smallholder farmers with an average 31% increase in income from use of warehouse receipts and better price transparency with 47,000 registered to receive the latest market prices on their mobile phones.

FinComEco will either establish or reinvigorate local commodity exchanges underpinned by trading technology, electronic warehouse receipts and a complete mobile banking solution. It will also enable trade across multiple regions and deliver a holistic secure cloud-enabled financial agri-ecosystem in partnership with development organisations, governments, research bodies and the private sector.

Hirander Misra, Founder and Deputy Chairman of FinComEco and CEO of GMEX Group commented, “The aim of FinComEco is to match exchange trading capability, including derivatives, to physical growers. Also to add value through enabling manufacturing, support services and delivery contributing to additional local employment.” He added, “The initiative will allow smallholder farmers to thrive, enabled by best of breed technology, standards and inputs (including seeds, fertilisers and pesticides). This is coupled with a unique Agri-finance business model to solve credit and financing issues underpinned by improvements in logistics and warehousing.”

Steve Round, Director of FinComEco, CEO at Saescada and Chair at The Big Issue Foundation and Ecology Building Society commented, “There are massive financial inclusion and food security issues across the developing world with not enough being done in a cohesive fashion to address some of them,” he added, “I am delighted that our mobile electronic banking and payments system can add real value, in this unique integrated solution, to many millions of farmers delivering against many of the United Nations Sustainable Development Goals.

FinComEco is currently being syndicated out to strategic investors. Additional announcements on this and further Board and Management appointments will be made in due course.

Many African countries are struggling badly to finance their energy requirements. For example, virtually no African electricity utilities have an “investment-grade” rating which prevents them from raising debt at reasonable rates in order to finance their energy projects.

Projects backed by publicly-owned energy providers also encounter certain limits. Long development lead times together with uncertainty over government commitments to purchase volumes produced – key to any financing project – have led some African countries to entrust energy production to the private sector.

Developing IPPs in Africa

In a bid to leverage the Continent’s vast solar capacities, wind and water resources, many corporations are turning to IPP-type private projects (“Independent power projects”, in industry jargon), primarily to meet their own needs, before transferring any energy left over to the grid. As the authorised production threshold has been raised, the number of such independent projects to produce energy for own-use has grown.

Although the situation varies by country, Africa has enacted a series of sector-based legislation over the past few years, such as Law 13-09 in Morocco 1. This allows programmes to produce energy with an installed capacity of up to 50MW to apply for authorisation from the Moroccan Energy Ministry. Any surplus must be sold exclusively to ONEE (the national electricity and water agency), with whom the independent producer must negotiate a transport agreement and a connection agreement (for the transfer of any surplus energy produced).

Other factors have also contributed to the success of IPPs in Africa: deregulation (albeit partial) of the energy sector, increasing demand for energy and the availability of special purpose financing, all supported by government guarantees to purchase power produced.

Development finance institutions (DFIs) have also played a key role alongside financing from foreign backers, especially Chinese concessional lenders and private investors. It is estimated that energy projects attracted USD 14 billion worth of financing in 2014, the bulk of which came from concessional loans put up by China Exim Bank.

Very welcome structural reforms

Participation in private sector financing is therefore an opportunity not to be missed. However, most African governments continue to regulate their national energy sectors via a single publicly-owned utility. This is still the case in Benin, Burkina Faso, Congo, Gabon, Equatorial Guinea, Mali and Niger, to mention but the countries belonging to the CFA franc zone. Nevertheless, beginning in the 1990s, a number of countries began to introduce structural reforms designed to partially deregulate their vertically-integrated monopolistic utilities. South Africa was the first to do so, followed by Ghana, Nigeria, Uganda and then Kenya. A third category of countries – comprising Angola, Cameroon, Côte d’Ivoire, Madagascar, Morocco, Mauritius, Senegal and Togo – have continued with their monopolies but adopted legislation conducive to IPP-type structures. Indeed, within this category of countries, publicly-owned agencies frequently acquire stakes in dedicated IPP project companies, generating a hybrid market with all sorts of complex governance-related issues. While the existence of an independent regulator may be seen as a safeguard for reassuring investors it does not appear to be an absolute imperative.

Although structural reform has undoubtedly resulted in better governance in the energy sector and an environment that is more conducive to IPPs, widespread financial mismanagement of publicly-owned bodies means that private electricity buyers are becoming more and more common in the industry. Nevertheless, there has to be sufficient industrial demand. Madagascar is a case in point. A number of hydroelectricity projects have been launched by JIRAMA, the public water and electricity utility, however, firm credible commitments to purchase power could not currently be secured for the total cumulative installed capacity of the projects due to the serious financial difficulties of the public energy body. Even by trying to sell to the private sector, there is no guarantee that the shortfall in demand could be made up. Thence the African paradox: a lack of creditworthy customers alongside massive energy requirements!

Adopting and complying with best practices

Nevertheless, the success of IPPs is down to a number of best practices that include more effective coordination between the assessment of requirements and power purchase agreements (or PPAs), setting up a clear, predictable and transparent framework for transferring procurement documentation – even for private initiatives, and coherent decisions regarding project structure and power purchase tariffs.

As regards the first point, too many African countries still suffer from inadequate public policy planning tools in spite of loud media declarations concerning plans or strategies that are supposed to last for a generation. Apart from South Africa, very few governments have actually linked their energy planning requirements to energy procurement strictu sensu. Fragmented structures frequently hamper a coherent public policy capable of ensuring diversity in the energy mix, a network capable of absorbing new projects and consistent arrangements for organising and awarding tenders and concessions.

Procedures for awarding IPPs, even within a private framework, must be clear, comply with  principles of equal treatment of candidates and remain constant over time. This does not mean that they have to be rigid! In a rapidly changing market where technical advances and competitive pressures are tending to push down the cost of equipment and material, investors should be able to enjoy contractual stability and the gains generated from lower market prices should also be split among the different parties. This will ultimately result in lower prices for end consumers, particularly in projects where surplus power is purchased by the national utility.

Lastly, “feed-in tariff ” arrangements (FiT) do not have to be a dogma. While FiTs are attractive because they reassure investors and because they have been successfully used in countries like Kenya, Ghana and Senegal, they curb competition significantly.

The financial strength of “off-takers” (i.e., power buyers), the scalability of their industrial plan and the reliability of their power purchase commitments will all be key to the success of an IPP venture in Africa, especially where the public utility is insufficiently creditworthy to be able to purchase the energy produced over the long term.

By Hugues de La Forge, Partner – Holman Fenwick Willan

“To prosper, Africa needs a massive, concerted, ambitious effort to transform our economies,” Akinwumi Adesina, President of the African Development Bank Group, said. “We need growth that benefits everyone. The High 5 priorities will get us there more quickly.”

The High 5s and the Bank’s recent progress are highlighted in the Annual Development Effectiveness Review 2016 — the latest edition of the Bank’s key monitoring and tracking tool — which was released Monday, June 27, 2016.

This year, the Bank has revamped the review to give greater attention to Africa’s fundamental challenges and how the Bank is addressing them.

The Bank is also reorganising itself to become more agile and responsive to the continent’s needs. A new business model has been adopted and three new vice presidencies established: on power, energy and green growth; on agriculture, human and social development; and on the private sector, infrastructure and industrialisation.

To increase its efficiency and carry out its work more quickly, the Bank is moving closer to its clients by establishing five regional integration and business delivery offices.

All these changes will help achieve the structural transformation outlined in the Bank’s Ten Year Strategy. The High 5 priorities are an integral part of that effort:

Light up and power Africa — About 635 million Africans still live without electricity and demand for energy is rising rapidly. Through the New Deal on Energy for Africa, the AfDB is working to unify efforts to achieve universal access to energy. Its new Energy Strategy aims to increase energy production and access, and improve affordability, reliability and energy efficiency.

Feed Africa — More than 70% of Africans depend for their livelihoods on agriculture. If its full potential were unlocked, agriculture could vastly improve the lives of millions. The Bank is framing its agricultural operations within a business-oriented approach, based on a deeper understanding of the obstacles, potential and investment opportunities.

Industrialise Africa — A persistent lack of industrialisation is holding back Africa’s economies. Over the next 10 years, the Bank will invest US $3.5 billion per year through direct financing and leveraging to implement six flagship industrialisation programmes in areas where the AfDB can best leverage its experience, capabilities and finances.

Integrate Africa — Through its Regional Integration Policy and Strategy, the Bank is focusing its integration efforts not just on movement of goods and services but also on mobility of people and investment.

Improve the quality of life for the people of Africa — Africa’s economic growth has not been rapid or inclusive enough to create enough jobs and improve quality of life. The Bank is committed to building up the availability of technical skills so that African economies can realise their full potential in high-technology sectors. Acknowledging the urgent need to address climate change, the Bank will nearly triple its annual climate financing to reach $5 billion a year by 2020.

By AfDB

“A lawyer sponsored us,” Yohannes says, through a refugee resettlement program of the Third Presbyterian Church in Rochester. Yohannes’ father, whose vision is mostly impaired due to stepping on a land mine in 1978, is now a board member of the church. “Being able to come to America and start over on humble beginnings even after stepping on a land mine is one of the reasons why our founders fought bloody battles,” Johannes adds.

His father now works in a probation office, managing cases involving domestic violence. His mother recently retired from a career in nursing. Yohannes went to law school in Buffalo, and clerked for a judge in Western New York. But thanks to another fortunate connection to a mentor in Washington, D.C., he got into the world of finance. “Finance was never in my language. My DNA is fighting for those who are in need and I got that from my father,” Yohannes says. Now, he can’t imagine himself in another industry.

President Barack Obama announced a new federal $1 billion fund for impact investing in 2011, and he eventually called upon Yohannes to finalize its design and make the program permanent. “This program makes sense to me because it fits my theme in life — make a dollar as well as create positive results for our country,” says Yohannes, whom the president officially appointed to serve as senior adviser to the chief investment and innovation officer at the Small Business Administration (SBA).

The specific goal of the $1 billion is to support small business investment strategies that maximize financial return while also yielding measurable social, environmental or economic impact. The program is housed under the SBA’s Small Business Investment Company (SBIC) licensing program. Under the impact investment program, SBIC-licensed funds promise to invest in small businesses in federal priority sectors and underserved communities, while at the same time contributing to the growth and development of the impact investment industry.

One possible example: using some of that $1 billion to invest in a small real estate developer that is also utilizing new markets tax credit financing for a project to create jobs in a low-income neighborhood.

The standard SBIC license has been a sweet deal for many venture capital or private equity funds. Under the program, for every dollar in capital they raise, the SBA matches up to 2-1, up to a maximum of $150 million. Fund management firms then go out with that federally supersized pool of capital and make investments in small businesses. The fund management firm eventually pays back the SBA, with interest. SBA operations require zero taxpayer dollars, instead funding operations through interest earned on its various investments such as SBIC-licensed funds.

The SBIC licensing program was born when President Dwight Eisenhower signed the Small Business Investment Act, on August 21, 1958 — a date that many would argue is also the birth date of the modern venture capital industry. The program provided the first legal framework as well as financial incentives for people to pool money from strangers for the sole purpose of investing in other strangers — specifically, small business owners. As two legal scholars wrote, in 1959, “Congress has for some time been acutely aware of the difficulties facing small business concerns seeking adequate long term financing for modernization, growth and development. It realized that commercial banks are not able to furnish such long term financing, that public [i.e. stock market] sale of small issues of securities involved prohibitive costs, and that private placements had afforded no general solution to the problem.”

The first SBIC-licensed fund managers were essentially the first modern venture capital firms. “The iconic venture capital firms and private equity funds, generally speaking, have received SBIC dollars or have had a SBIC license,” Yohannes says. “Arguably the most iconic brands have received investments through the SBIC license.” Apple, Intel, FedEx, Costco, Staples, even Build-a-Bear are just a few of the companies over the years that got early stage investment from an SBIC license holder.

While there have been more than 300 SBIC-licensed funds at this point, today they are only a small fraction of the venture capital industry, which has grown to have several well-known shortcomings. Eighty-seven percent of venture-backed startup founders are white; 92 percent are men. More than three-quarters of venture capital ends up in just three states: California, New York and Massachusetts.

In some ways, the SBIC program has already been addressing some of that. From 2011 to 2015, SBIC-licensed funds invested $21 billion in more than 6,400 companies, 20 percent of them located in low- to moderate-income areas. A majority of SBIC-licensed capital went into states other than California, New York or Massachusetts. Part of the impetus for the $1 billion SBIC Impact Investment program is to be more intentional about driving capital to communities that have long been neglected by venture capital and other investment sources.

“Early on it appears that our funds invest more in women and minority-led companies than your standard private equity fund,” says Yohannes. “We’re gonna continue to do that, we’re gonna continue to invest money in the Mississippi Delta, we’re gonna continue to invest money in Detroit, we’re gonna continue to invest money in American small businesses where gaps are the widest.”

So far there are seven impact SBICs. One of them, Bridges Ventures, comes from the U.K. Founded in 2002, Bridges Ventures was created solely for impact investing.

“We have a pretty high bar for impact at Bridges, which is one of the reasons why we felt comfortable committing ourselves to the SBA’s impact bar,” says Brian Trelstad, global partner at Bridges Ventures.

In the U.K., the firm has been active in the pay for performance (or social impact bond) space, for example. They regularly speak about or find other ways to share their evolving approach to impact investing, how to measure it and what are some case studies.

In the U.S., Trelstad says, they are looking at businesses that are located in or serve underserved communities, in the areas of health and wellness, education and skills, or environmentally friendly living.

The SBIC license was an invaluable tool to help them raise capital for the fund. Even conventional SBIC-licensed funds automatically qualify for Community Reinvestment Act credit, providing a strong incentive for banks. “It allowed us to get about $18 million of bank capital,” says Trelstad.

The SBIC impact investment licensing process for Bridges took about a year, but didn’t slow them down from their usual process. “While we were fundraising [from investors] we were also going through the licensing process at the same time,” Trelstad says, adding that one of the advantages of the impact investing program is that they could cut the line in front of others seeking conventional SBIC licenses. The SBA evaluates all SBIC licenses on a rolling basis.

Bridges Ventures has made one investment so far out of its SBIC-licensed fund, in an education company. In addition to businesses creating social impact, they’re looking for a few years of positive cash flow, ideally with $5 million to $10 million in revenue. “We have some flexibility to go earlier, but we’re not going to do a complete startup,” says Trelstad.

While the SBIC Impact Investing program was created as a temporary policy under Obama, Johannes and his team are still working to move it into permanent status. “Our goal is before the end of this year. I can’t say exactly when,” says Yohannes.

By Oscar Perry Abello

It also supports the creation of a larger variety of products and services, improves the management of risks, makes payments easier and helps lenders better monitor their clients. In addition, it provides instruments, such as insurance packages, and information that help households and firms to cope with negative events, ensuring more stable consumption and investment.

Given the weakening growth outlook for the region, examining all potential sources or lubricants for growth is now of particular interest. So, in our latest Regional Economic Outlook for Sub-Saharan Africa we examine the extent to which developed, well-functioning and accessible financial institutions and markets could boost growth and what policy options would best help achieve this potential.

Good progress but significant challenges remain

To fully appreciate the potential for further financial development, take a look at the encouraging progress sub-Saharan African countries have made over the last decades.

First, the region has led the world in innovative financial services based on mobile telephones, especially in East Africa. The fast spread of systems such as M-Pesa, M-Shwari, and M-Kesho in Kenya has helped reduce transaction costs and facilitate personal transactions even in the absence of traditional financial infrastructure. Microfinance has also grown rapidly, providing services to customers at the lower end of the income distribution, and large parts of the population now have access to financial services more generally (Chart 1).

But financial inclusion, the degree to which all segments of the population can benefit from financial services, still lags well behind that of other developing regions of the world. For instance, as cellphone ownership continues to grow among the poor, the less well educated, and women, there is a large potential to fully exploit mobile payments to compensate for the shortcomings of traditional methods in providing financial services to the most underserved.

Second, the financial sector has deepened—the region’s median ratio of private sector credit to GDP has doubled from its 1995 level. However, with the exception of the region’s middle-income countries, financial market depth and institutional development are also still much lower than in other regions.

Third, we now find Pan-African banks—locally-owned banks that operate in several countries—in the vast majority of sub-Saharan African countries. Their expansion has filled gaps in services left by European and U.S. banks, promoted greater economic integration, and made the sector more competitive. But as often is the case with new and rapidly growing financial developments, Pan-African banks also bring a number of challenges, in particular the need to strengthen supervisory oversight on a consolidated and cross border basis and improve the internal controls and transparency within those institutions.

A large untapped growth potential

But how much more financial development could sub-Saharan African countries realistically achieve? Examining a combined index of the various dimensions of financial development shows there’s a substantial gap between the level of financial development at which many sub-Saharan African countries are currently operating, and what they could reach when compared to other regions with similar structural characteristics.

So, the potential for further financial development is substantial, and the impact of filling the gap is about 1½ percentage points additional annual growth for the median sub-Saharan African country, with variations across country groups (Chart 2).

In addition, we show that higher financial development can reduce the volatility of growth, especially if financial development is initially relatively low, as is the case for most countries in the region (Chart 3). Here, more financial development relaxes credit constraints and provides instruments to withstand adverse shocks. However, as the sector deepens, its contribution to reducing volatility declines because financial depth also increases the propagation and amplification of shocks.

Safeguard macro-stability and strengthen institutions stability

So, what should policymakers do to help sub-Saharan African economies reap this potential?

Our analysis shows that the region’s financial development has been largely driven by better macroeconomic fundamentals over the last decades, but hindered by weak institutions. So, providing strong legal and institutional frameworks and corporate governance in particular, are critical for creating an environment in which the financial sector can develop and thrive.

But countries also need to be vigilant about risks to the financial system and their spillovers to the economy. As regulations in many countries are not fully in line with global best practices, and their implementation remains weak, improving the regulatory framework and strengthening supervisory capacity as well as enforcement powers are essential. Among many other reforms, the harmonization of regulations and supervisory procedures to avoid regulatory arbitrage and establishing an appropriate mechanism for resolving nonviable financial institutions are high priorities.

Finally, financial supervisors should monitor carefully the risk related to mobile money transactions as they become increasingly popular in the low-income segment of the population—ensuring households’ funds are safe while allowing them to enjoy making transactions more easily, saving for worse times or taking up a loan to start a business.

By Anne-Marie Gulde-Wolf 

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But perhaps of even more significance is the demographic transformation that Africa is experiencing, and will continue to experience over the next several decades. Now home to 1.1 billion people, by 2050 the United Nations estimates that Africa’s population will reach 2.48 billion; by 2100, 4.39 billion people, a majority of whom will be youth.

When the slow pace at which Africa is developing is combined with the demographic transformation, contrary to the sentiments of many optimists, the future does not look bright. But it can.

Disruptive Innovations Targeted at Non-Consumption

Through the course of my research with Harvard Business School Professor, Clayton Christensen, we have learned that no country has developed in sustainably without investments in disruptive innovations. There are two types of disruptive innovations, low-end disruptive innovation and new-market disruptive innovation. I write about the new-market disruptive innovations, which are targeted at non-consumption, a circumstance where a majority of people in a society are unable to afford a particular product due to cost, time, or skill constraints. These innovations transform the existing complicated and expensive products to simple to use, more affordable products, thereby making them more accessible to a larger set of people in society, such as M-PESA, the mobile money platform in Kenya. They serve as the engine of economic development in a society.

Can Africa Spur Disruptive Innovations

It is tempting to discount the possibility of executing disruptive innovations in Africa because of the many obstacles to innovation on the continent, including poor infrastructure, the difficulty of doing business, and the very low incomes on the continent. But when these obstacles are framed as opportunities, innovators can build truly disruptive companies.

In fact, it is precisely because these obstacles exist that disruptive innovations can thrive in Africa.

Nollywood and Noodles

Nollywood, Nigeria’s film industry, has taken many in the world by storm. While Hollywood’s revenues dwarf Nollywood, it is difficult to overlook Nollywood’s impact in Nigeria. The industry, according to a UN report, is now worth approximately $5 billion, employs more than one million people, and generates around $800 million annually. Nollywood has been able to thrive precisely because it is a disruptive innovation targeted at the average Nigerian citizen unable to purchase, watch, and perhaps relate to Hollywood movies. The innovators in Nollywood have keyed into the vast non-consumption of movies in Nigeria, and Africa, and have created relevant and relatable movies that have given birth to a booming industry.

When Haresh Aswani decided to start importing Indomie Noodles into Nigeria in 1988, the decks were stacked against his company, Tolaram. Nigeria was ruled by a military government, GDP per capita was only $256, and 78% of people lived on less than $2 per day. But Aswani began importing noodles into Nigeria and since then, has built 11 factories that manufacture many of the inputs for the noodles. The company directly employs approximately 10,000 people and hundreds of thousands indirectly. A packet of Indomie Noodles costs roughly 18 cents, a product affordable by the majority of Nigerians. Tolaram has begun expansion plans into other African countries. Where many see obstacles, the company sees opportunity.

The Rebirth of an Old Idea

Investing in disruptive innovations is not a new strategy for creating prosperity. The United States, many European countries, the Four Asian Tigers, and many other rich countries followed this strategy with great success. The returns from their investments were then invested in infrastructure, education, healthcare, and in building institutions. It is tempting to spend billions of dollars on infrastructure, institution building, education, healthcare, and other development indicators that are correlated with prosperity. But a closer look at rich countries today shows that investments in disruptive innovations came first. Africa should thus follow suit.

Governments should support entrepreneurs whose business models are targeted at non-consumption. By doing this, they will inevitably create jobs for many people, as was the case with Nollywood and Indomie Noodles. This, our research suggests, will ultimately lead to unfettered prosperity in Africa.

By Efosa Ojomo

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