Impact investing could transform enterprise

The business environment for small and growing businesses (SGBs) and small and medium enterprises (SMEs) is faced with various challenges, among them a struggle to access finances for growth and sustainability.

Access to finance is key for infrastructure developments, expansion, market development or as working capital. Most traditional financial institutions are too risk-averse to offer flexible, tailored financial arrangements for SGBs due to the high cost of finance.

Traditional financiers, such as commercial banks and microfinance institutions, are perceived to be too expensive and can be unsympathetic to SGBs proposing inflexible terms, large collaterals or repayment structures not fitting the SGBs leading to cases of default of payment thus making most of them less favourable to SGBs.

Nairobi is recognised as the hub for impact investors in East Africa. About Sh123 billion was invested in Kenya within the last 5 years to support SGBs in various value chains. The Treasury report produced by DfID and GIIN confirms that between 1998 and 2004, a total of Sh420 billion of impact investment funds was invested in Kenya alone, accounting for approximately 46percent of the total received in East and Central Africa.

A larger percentage of these funds are designed for SGBs as impact investment funds. In simple terms, impact investments can be described as investments that generate social and environmental gains, as well as financial benefit and does not include ‘only investments’ or ‘only financial’ returns.

With the tag “impact”, these funds go towards effecting measurable and visible impact as the name implies. Impact investors operate in a very different kind of system from the traditional capitalist economy that prioritises only financial returns. Most investors target SGBs, financial institutions and any organisation that has the potential to create social, environmental, climate or gender impact in addition to financial profits.

Impact investment funds are also innovative in nature offering blended financing strategies through risk mitigation strategies, output-based incentives or first loss protection facilities, in addition to technical assistance. These investment funds can be invested in different sectors such as fintech, agriculture, health, education and renewable energy.

Surprisingly, some impact investors are now shifting their attention to other countries because Kenya is considered to be saturated with impact investment funds. But the main concerns are even with the extensive impact investment funding available in Kenya is impact being created? Is the impact of these funds felt proportionate to the funding?

In numerous seminars and workshops, you will hear of the figures invested into the said SGBs in strategic economic sectors. Well-sponsored research and discussions regarding the SME/SGB’s challenges continue to be held by the investors to better understand the dynamics and challenges of the SME/SGBs, as well as understand local investment dynamics and suitable approaches to address the never-ending capital gap for SMEs/SGBs. How do you create impact?

Impact investors have the funds in their coffers which they tactfully release. The selection of SGBs is crucial when deciding if a business will be able to create the impact sought. For example, when selecting the SGBs’ eligibility and their degree of investment readiness, the investors expect the locally owned SGB to present audited accounts, audited by an accounting firm certified by ICPAK. Obviously few SGBs are in a position to afford that calibre of auditors to audit their accounts as many are still struggling with their wage bills. That alone hinders their capacity to get on the radar of potential investors.

Another challenge is how to measure impact. Most impact investors are still trying to figure out how to achieve social impact alongside market rate returns. This coupled with limited networks of local organisations that can reach a real and visible impact in the community creates a clear barrier to entry for SME/SGBs. This means that only a few well-positioned enterprises continue to receive impact investment funds repeatedly, while others are not even aware or visible to receive impact funds.

Solutions to the aforementioned challenges could be met in several ways.

The Banking Act (2015) and Microfinance Act (2006) allows impact investors to avail financial services through locally established financial institutions, and because most of the impact investors do not have the capacity in terms of staff and structures to handle the disbursement of the loans to the SME/SGBs effectively, it would be good to partner with local financial institutions to roll out their impact investment programmes.

In such arrangements, investors can only play an oversight and transfer of knowledge role for the local financial institution, so that they do not pass on the cost to clients.

Another solution would be to develop a detailed database of genuine active SME/SGBs that can be used as a reference point by impact investors and other investors. In this scenario, relevant public and private sector actors that are collecting data on business opportunity pipelines can be engaged to facilitate the links between the investees and investors. The data should include detailed performance information of the said business through a focused SME profiling.

There is a strong feeling that the solution for the missing financial need by the SMEs /SGBs still lies with a better understanding of the SME/SGB’s dynamics by the impact investors and there should be a genuine effort to do so by relevant organisations led by the NGOs. In reciprocation, financial institutions and international investors should avail their investment criteria in the same database to facilitate automatic matching.

The writer is SME/Impact Investment adviser.