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WEDF 2014 Session report: Growing SMEs through impact investment

  • Impact investment

    Speakers

    • Mr. Jean-Louis Ekra, Chairman and President, African Export-Import Bank, Egypt
    • Mr. Robert Dijksterhuis, Head, Development Cooperation, RVO.nl, Netherlands
    • Mr. Dan Awendo, CEO, InvesteQ Capital, Kenya
    • Ms. Cecile Fruman, Director, Trade and Competitiveness Global Practice, World Bank
    • Moderator: Ms. Shada Islam, Policy Director, Friends of Europe, Belgium

    Overview

    While Aid for Trade is an important source of development assistance, developing countries are exploring alternative funding sources. They increasingly tap into impact investment funds to support their development priorities.

    Trade, investment and banking experts discussed the impact investment market, how countries can leverage these funds and how trade support institutions can better support SME access to this new source of financing.

    Conclusions

    • Development partners need to be at the forefront of facilitating growth in impact investing by supporting and scaling promising innovations to success.
    • Demonstrated above market returns in LDCs mean that impact investors do not have to sacrifice financial returns for social goals.
    • As with other investment classes, impact investing needs to be consolidated through the provision of independent information and research, the development of a common language for the sector, and the institution of mechanisms, such as clearing houses, to facilitate transactions.

    Takeaways

    • The business environment is key to fostering impact investment. Studies show that when this improves, more investments flow into SMEs. This is one area that governments can take more action on - as Rwanda has done - moving swiftly up the ranks of the World Bank’s Doing Business rankings. Rwanda is now ranked at 32nd, close to the Netherlands at 28th place, so investors can see clearly that the risk of investing in Rwanda is comparable to investing in the Netherlands.
    • Regional integration is key to promoting impact investment, just as it is key to promoting trade.
    • Trade finance is where investments need to concentrate – it is a major gap for SMEs.
    • Sourcing adequate collateral that takes into account the investment horizon of impact investing – which is usually ‘patient capital’ – will only be addressed through new and innovative financing instruments.

    Speakers' key messages

    • Mr. Djiksterhuis
      Governments need to take the lead in impact investing where banks are unwilling, by “supporting market development by example”. The Netherlands has launched a new impact investing fund called the Dutch Good Growth Fund, worth 700 million euros. Funds like DGGF have the responsibility to help dispel the myths surrounding risk in Africa. The problem is that the images that the mainstream media present about Africa do not compel potential investors to seek out opportunities there. The DGGF is trying to educate them on these opportunities.
      “Western investors are not cautious or conservative – they just don’t know.”
    • Mr. Ekra
      Risk perceptions in Africa are entrenched and will take time to overcome. Afrexim bank’s non-performing loans amount to just 1% of its loan portfolio – much lower than in Western financial institutions. Yet investors demand at least 25% return on African investments compared with the 3-5% they demand for developed country investments – which illustrates the risk premium applied to Africa.
      “Impact investing is here to stay and grow, because it makes business sense”.
    • Ms. Fruman
      Even in fragile states, impact investment funds can thrive. The IFC has launched impact investment funds in West Africa, covering Liberia and Sierra Leone, and in Central Africa, making healthy returns.
    • Mr. Awendo
      The Western model of investing will not necessarily translate into the African context. The terminology used – such as social enterprises – and the financing instruments available under that model do not necessarily carry over to African SMEs. In the end, Western investors tend to look for criteria that SMEs cannot meet, and the investments flow to bigger firms as a result.
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