These foreign investors, foundations and trust managers are through their investment addressing significant challenges that Africa faces in respect of poverty, infrastructure development, healthcare, education and transport by supporting companies dealing with these issues on the continent. Initiatives in these sectors are considered to be viable impact investment opportunities, and investors are seeking them out. Impact investments are those investments that provide a measurable social or environmental impact, as well as a financial return.

Much of the work in impact investing markets is starting to look at how money invested in social and environmental good could be allocated in a way that uses data to determine the effectiveness of programmes and institutions. One of the innovative financing mechanisms to emerge from this process is the Social Impact Bond.

A Social Impact Bond (SIB) is a financing contract designed to drive commercially sustainable social outcomes. The bonds work by attracting socially motivated investors to fund social services up front. Repayments to investors are then made by government and/or private funders if pre-agreed outcome targets are achieved. SIBs enable governments and donors to allocate resources more effectively to address societal challenges particularly in the face of fiscal austerity, by way of public-private collaboration.

The use of SIBs stands poised for considerable growth in Africa. The magnitude and speed of this growth depends on the extent to which African governments create an enabling environment through policy. In this regard, South Africa has a relatively established social investment market, albeit small by international standards, facilitated to some extent by Regulation 28 of the Pension Funds Act, an example of how policy can be used to leverage institutional investment towards social outcomes.

Regulation 28 is the prudential investment regulation that governs how and where South African pension funds can invest, and it obliges pension fund trustees to consider environmental, social and governance factors in pursuit of a sustainable returns policy. It expressly incentivises institutional investment into the rest of Africa. Similarly, there are regulations in several African jurisdictions that allow, even compel, domestic pension funds to invest in other African countries.

Larger African institutional investors are quite familiar with other initiatives to strengthen awareness and implementation around ESG and responsible investing, for example, the UN Principles for Responsible Investment (UNPRI), the closely aligned Code for Responsible Investment in South Africa (CRISA) the Responsible Investment Ownership Guide for Pension Funds in Southern Africa published by the Sustainable Returns for Pensions and Society initiative in 2013. Zimbabwe also introduced responsible investment codes recently and Kenya implemented its stewardship codes last year.  The King Code IV has also placed emphasis on corporate social responsibility and has referred to CRISA.

The regulatory environment in South Africa has arguably led to the increased interest from foreign foundations, looking to invest or create investment opportunities in projects in South Africa and to expand them into Africa. These projects involve many industries, (although we have seen particular enthusiasm in the healthcare and agriculture sectors), with the need for legal advice on all levels.  Exchange control rules often have to be adhered to, when the funding initially enters South Africa, and for any subsequent investment abroad. These constraints dictate the structure of the deal and the flow of funds and make legislative advice a pre-requisite.

Foreign investors also frequently look for partnerships with local companies that have the expertise, the location and the know-how to address socioeconomic issues. In South Africa, the obstacles faced by load shedding as a result of energy capacity issues, for example, have given rise to many businesses offering renewable energy and solar energy solutions – which in turn offers more ESG friendly investment opportunities for local institutional investors.

In the alternative energy market, measuring the return on investment is becoming relatively straightforward. However, it is less easy to put a price on investing in human dignity or cognitive development in children, for example. One of the sticking points in the impact investing movement has been how to gauge if funds invested in social good are having any measurable impact.

Earlier this year the Western Cape Departments of Health and Social Development in South Africa allocated up to R 24 million to trial three Social Impact Bonds (SIBs) aimed at improving the health, nutrition and developmental status of pregnant women and children, up to five years who live in low income communities. Two corporate donors have committed another R 24 million rand to bring the total amount of the bonds to R48 million.  The Bertha Centre for Social Innovation and Entrepreneurship at the University of Cape Town’s (UCT) Graduate School of Business, facilitated their development and Bowmans advised on the legal and tax structuring of these SIBSs.

These SIBs are the first to be initiated in an emerging market, and they will provide useful guidance and lessons on how these bonds can be implemented in other countries in Africa going forward. This innovative financing mechanism could be a powerful tool providing a practical and workable solution for Africa’s most pressing challenges, while at the same time offering worthwhile returns for socially motivated investors.

By David Geral and Kim Goss, of Bowmans South Africa, and Aunnie Patton of Bertha Centre

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

The importance of supporting women was one of the main leitmotivs of the Africa Impact Investing Leaders Forum, held in London on 27 Oct, 2016. Delegates asserted that this historically disempowered group plays a pivotal and well-documented role in augmenting positive social, economic and environmental outcomes – particularly when impact investments find their way into microfinance, agriculture, renewable energy and infrastructure sectors.

Women are integral to social impact investing

Speaking from the podium, Suzanne Biegel, founder of Women Effect, urged all investors to use a “gender lens” when considering impact ventures. And to ask some salient, due diligence questions, such as: “Where are the women in this investment? Are they on the product design team if the product concept is for women? Do they have a formal leadership or decision-making role where the project in question is targeting women”?

Caroline Mulwa, Kenya country manager of social impact investor, Oikocredit, agrees wholeheartedly with this view. Referencing the smallholder agriculture sector, she says: “88% of Africa’s female population live in rural areas; 70% of agricultural labour is provided by women; 90% of all food is produced by women, but women own less than 2% of the land. Yet women have a significant, measurable, positive impact on small business ventures, local communities and families. And they have been proven to reduce investment risks”.

Mulwa highlights one of Oikocredit’s microfinance partners as “exemplary when it comes to considering the roles and needs of Kenyan women from every angle”. She continues: “KWFT – Banking on Women focus single-mindedly on the unapologetic financial support of women” – a phrase which Caroline says inspires her.

Led by women for women, KWFT has provided financial services to unbanked women in Kenya for over 30 years. With 800,000 clients now on their books, KWFT offer a unique product range spanning microloans, savings accounts, insurance loans and financial literacy training. Products are designed around the specific needs of women, such as planning for healthcare during pregnancy and childbirth; saving to ensure their own financial independence, and setting up small businesses. In-branch, KWFT provide footstools for teenage girls so that they can be on an “equal level” with bank tellers, as well as baby-changing and breast-feeding facilities for young mothers.

Across Africa, Asia, Latin America and central and eastern Europe, 86% of the end customers of Oikocredit’s microfinance partners are women, meaning that vital access to finance and other support is offered to around 39.5 million women worldwide. Scott Brown, president & CEO of VisionFund International likewise emphasises the importance of women in the impact investing space, highlighting that over 70% of the end clients of VisionFund’s microfinance partners are women.

Client Protection Principles (CPP) are critical to the due diligence strategies of both Oikocredit and VisionFund, and partners are required to demonstrate an ongoing commitment to eliminating any potential exploitation of end clients.

The impact investing potential within African agriculture

Agriculture, a sector in Africa which some say may be worth $1tn (£816m) by 2020, was also a lively theme during the forum. A panel, comprising leaders from Africa Agricultural Development Company, Alpha Mundi Group, ScopeInsight and Oikocredit, all highlighted how impact investing in smallholder supply chains can create one of the biggest impacts on reducing poverty – the UN’s sustainable development goal one.

Agriculture, however, is often characterised by extraneous economic, financial and other challenges such as the impact of extreme weather; changes in global commodity markets, particularly price and currency volatility; shifts in government policies and weaknesses in local infrastructure. In order for the sector to mature, panellists discussed the need for higher levels of professionalism (including stronger due diligence and governance) and more innovative, public-private partnerships for impact investments.

Applying her own experience of managing risks, Mulwa says, “It takes experience: taking risks, making mistakes, but learning from those mistakes”. She adds: “It also requires us to look beyond the obvious and take a long-term view. So, we first consider the social mission within our investment decision-making, thereafter weighing up the risks in the context of the longer-term potential. I’m referring here to “patient capital” and a willingness to consider a project that may not look promising in the short term, but might bear significant financial and social returns in the longer term”. Patient capital is an investing attitude which all panellists agreed is vital for successful impact investing.

Showcasing this approach in the context of Oikocredit partner, Githunguri Dairy Farmers’ Co-operative in Kenya, Mulwa explains how, at first glance, their request for €1.5m (£1.3m) investment – to set up a processing plant for 31 dairy farmers and 200 employees; producing 15,000 litres of milk and generating a €0 return – looked risky. Other investors backed off, but Oikocredit saw the long-term financial and social potential and went ahead. As with many so-called risky ventures which Oikocredit supports, Githunguri paid off. Today, the co-operative has 15,000 members and employs 8,000 people across their entire value chain. They produce 220,000 litres of milk each year and, in 2015, reported a turnover of €52m (£46m).

If you are interested in investing in the Oikocredit International Share Foundation*, please contact our UK office. Alternatively, if you are a mid-stage inclusive finance, agriculture, renewable energy or infrastructure venture looking for equity or debt financing in Africa, please contact our east Africa or west Africa teams.

*Capital at risk. Terms and conditions apply. 

By

Monica Middleton

national director, Oikocredit UK & Ireland

Join these organisations to scale impact and discover new opportunities at the next edition of the Africa Impact Investing Leaders Forum in 2017 by Registering your interest as a partner, delegate or speaker. >> http://aiilf.com/register-your-interest/ 

Trickle-down has no effect

There was a time when ‘trickle down’ was the favourite word in the lexicon of economists worldwide. According to this theory, as long as an economy is growing, the benefits will eventually make their way through the system.

For the proponents of trickle-down economics, the belief was that rising incomes at the top end of the spectrum would lead to more jobs, less poverty and higher incomes at the lower end – much like a rising tide lifts all boats. However, over time, it has proven to be a fallacy, just like any other belief in equitable wealth distribution as a natural course of events.

The Global Experience: The Rich get Richer

Indeed, a research study published by the IMF in June 2015 has decisively debunked the theory at a global level. The report titled ‘Causes and Consequences of Income Inequality’ in fact goes on to prove that a rise in incomes at the top can actually adversely impact overall growth, poverty and employment.

Looking at data from 159 countries from 1980 to 2012, researchers found that when the wealthiest 20% see their share of income rise by one per cent, the economy grows 0.1 percentage points slower over the next five years. Conversely, raising the income of the poorest 20% by a single percentage point raises annual growth by 0.4% over the same period.

While it lasted, the misplaced faith in the trickle-down theory appears to have exacerbated inequalities globally. A 2016 report by Oxfam has revealed that the richest 1% have now accumulated more wealth than the rest of the world put together. Meanwhile, the World Economic Forum notes in a 2016 article that the wealth owned by the bottom half of humanity has fallen by a trillion dollars in the past five years.

The African Experience: The Poor stay Poor

In Africa, this woeful absence of a trickle-down effect is borne out by the successive experiences of individual economies that have experienced stellar economic growth, such as Nigeria and Kenya.

Even as Nigeria recently became Africa’s largest economy with growth averaging over 6% each year from 2005 to 2014, the reality remains that most Nigerians still live on less than US$ 2 a day, while the country lags behind in key development indicators such as health.

On the eve of the country rebasing its GDP to factor in the contribution of new sectors to the economy, the then Finance Minister Ngozi Okonjo-Iweala, a former World Bank managing director, confirmed to the country’s business leaders that:

“It is clear that the top five to 10% is capturing most of whatever growth there is and people at the bottom are being left behind.”

Similarly, Kenya woke up to economic disparities with the government publishing a ‘Socio-Economic Atlas of Kenya’ at the close of 2014. The report exposed significant disparities in poverty levels across the country. Just before the government survey of income inequalities was released in November 2014, in autumn came news from theWorld Bank that Kenya had seen its economy grow 25% after statistical revision and is now officially a “middle-income country”.

As Nigeria and Kenya, the pin-up economies for Western and Eastern Africa respectively, wake up to trickle down woes, it is clear that the experiences of other African economies that are emulating their wealthier neighbours is likely to be no different.

Development Infrastructure to bridge the divide

Lately, a survey by Afrobarometer of 35 African countries released in January 2016, struggled to find any correlation between the reduction in poverty seen in 22 countries in the survey and the recent rates of economic growth.

Instead, it found that there was a high correlation between creation of development infrastructure and improvement in the lives of the people at large.

“ While growing economies are undoubtedly important, what appears to be more important in improving the lives of ordinary people is the extent to which national governments and their donor partners put in place the type of development infrastructure that enables people to build better lives,” the report noted.

Then, rather than pushing ahead with a blinkered focus on high GDP growth that is clearly not translating into employment security, poverty reduction or inclusive growth, the solution lies in concertedly creating a conducive environment for businesses that create jobs and empower persons at the base-of-the-pyramid.

Impact Investing to build the infrastructure

It is here that impact investing, with a focussed agenda to grow businesses that have significant socio-economic impact, can make a real difference to the lives of those at the base-of-the-pyramid, instead of trusting to trickle-down economics that has so far only seen the top 5-10% push their economic agendas through at the expense of the majority.

Impact investors seek to start at the roots and build a strong foundation for those pioneering entrepreneurs that are seeking to provide basic amenities such as shelter, food, water and education in a sustainable and viable manner, rather than simply choosing an investment that boosts their financial returns and is regarded as a conventionally ‘bankable’ business.

As a specialist SME financier in Sub-Saharan Africa and MENA, GroFin is one such impact investor that is making a difference to the lives of entire communities in its locations of operation. With a concerted focus on investing in small and growing businesses in priority sectors such as Education, Health, Food Security, Energy, Manufacturing and Water/ Sanitation, GroFin is helping local entrepreneurs tackle key community issues such as health, nutrition, education, electricity, water and sanitation.

So far, over 16 years of applying its SME finance and business support solution, GroFin has made a difference to 7,000 entrepreneurs, sustained over 62,450 jobs and changed the lives of more than 312,270 family beneficiaries through its investments.

Support impact investors such as GroFin and others in Africa with your efforts as an entrepreneur or funding partner. Remember, the fate of an entire continent could rest in your hands.

 This article was originally published by GroFin. 

1. Trust: Rentier economics in our countries is well-documented and as such, investors are likely to touch down in Accra and drive to the project site accompanied by concerns about self-interested officialdom. However, local stakeholders will often have a similarly low opinion of the ‘outsiders’ – informed by their experience of programmes or investments quoted in the millions, high living standards of expatriate staff and the slow pace of progress. ‘Out of the total committed, more is going to personnel pretending to work than anything else’ is a typical refrain. The result is a ‘them and us’ culture which, if not addressed properly, can harm the quality of communication, warp relations and working practices.
2. Expectations: And yet, and yet. Prevailing incentives in major impact-oriented sectors such as agriculture, healthcare and social housing can be an impediment to productivity. For example, as stated by a policy adviser at a recent Savannah Development Authority (SADA) dialogue, business pipelines are distorted by government waivers. There can also be an expectation of ‘handouts’, which, if denied, might create a constituency that will work to frustrate the proposed intervention or at the very least, not assist.
3. Disjointed Strategies: There is no shortage of individuals launching businesses in Ghana with an implicit and real commitment to creating social goods such as healthcare or jobs for communities that need them. They are motivated by profit certainly but alongside that are goals for society at large. However, at times, fear of alienating categories of investor or customer will create distortions or contradictions in business plans or marketing strategies.
4. How to Say No: Generally-speaking, there is an aversion in our community to delivering the word, ‘no’. Points one, two and three above notwithstanding, local partners are often reluctant to display their disagreement directly. With everyone bending over backward to be polite, clients may miss opportunities to get on the same page as their stakeholders. Instead, things just will not happen as expected or seemingly agreed.

In this context, it is important that clients prioritise culture and that they adopt a listening posture concerning internal and external stakeholders. Learning how others have made it work, or failed, taking time to build trust and understand the terrain – in other words ‘local intelligence’ – are equally key. Finally, in deciding how to engage, bear a Songhai maxim in mind, ‘you will spend money or you will spend time’. In setting strategy, it is safer to keep that expectation in mind than to seek short-cuts to making a profit and doing good.

By Songhai Managing Partner Nana Adu Ampofo (London) and Lord-Gustav Togobo Director of Healthcare and Social Impact (Accra)

“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 

Join leading players to shape the industry. Click on image below to learn more

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

Drive economic development and inclusive growth by supporting innovation and encouraging entrepreneurs. 

Entrepreneurs: Submit your projects for funding (Apply) | Investors: Find scalable projects with both financial returns and social impact. Click image.