Economic Downturn as an Opportunity Investing in Small and Medium Sized Businesses Now
The global economic downturn may seem an unlikely opportunity for creating jobs and wealth, but optimists at the forefront of developing world finance and business argue that now is precisely the moment for big things.
The engines of most of the economies in the world, wealthy or not, are small and medium sized businesses. Studies have shown that for every dollar invested in a small or medium sized enterprise (SME), 12 additional dollars are generated for the rest of the local economy – it has a powerful multiplier effect. From a macroeconomic viewpoint, they are a sure investment bet.
On that broad measure, SMEs are a key to raising incomes and stabilizing economies. But each individual business owner surely has a story to tell about the struggle to find financing to compete and survive.
“I run businesses in Ghana and in the United Kingdom,” says Dr. George Manu, an entrepreneur and management consultant. “I can raise money for my UK business, even when I’m outside the UK. I just use Internet banking to raise a loan of about 30,000 USD. I’ve done it before. It took literally 15 minutes…In Ghana that would take two weeks at least. Maybe a month.”
Manu says the “missing middle” – financing for firms that are too small for traditional funding and too large for micro-lending, need the attention of the banking system.
“My hope is that commercial banks would lend more and also do it quicker for SMEs,” says Manu. In the meantime, Manu is one of the people with an innovative approach to finding investors for SMEs.
He is the West Africa representative for the Africa Enterprise Challenge Fund (AECF), which uses foreign development funds to entice partnerships with private investors to finance agricultural businesses on the continent, thereby minimizing risk for generally risk-averse funders. About half of the AECF’s money supports SMEs.
Manu’s initiative depends on donor funding (from the British and Dutch governments) but expects that will diminish over time. And there are other programs aiming to reduce dependence on aid and capitalize on hidden local wealth not yet being tapped, such as national pension funds.
“In our study we found over $1.1 trillion sitting in public pension funds around the world,” says David Stevens, a US-based investment banker. “That’s a huge resource if you can find a way to tap it -- but safely, at a very high level of credit protection so the pensioners don’t lose money, but make money. Then you’ve found a great way for these countries to develop without relying on foreign aid.
Stevens is working with the governments of three African countries -- Nigeria, Uganda, Rwanda -- to create public pension fund-based bonds that will be used for lending to SMEs. This Local Currency Guaranteed Development Bond SME Loan Program will secure insurance for the bonds, to minimize risk. In Uganda, where Stevens estimates the pension system could fund at least 300 million USD in investments, the multiplier effect would generate over 3.6 billion USD for the country’s economy.
“Were in an era of economic difficulty. And in that environment you can imagine that developed nations are going to have to focus on their own finances and may be able to focus less on donor aid than if we were in an era of plenty,” says Stevens. “So our approach is about trying to help countries that have resources that they may not have thought about to use those resources and to magnify the value of those resources.”
The era of economic difficulty may also force private investors who had become accustomed to sky-high rates of return, to take another look at investments in developing world SMEs.
“Interest rates are extremely low right now, and the problem is people that have a lot of money, they still have a lot of money but it’s just sitting there not yielding a return,” says global venture capitalist Skyler Fernandes. “So the question is: ‘does that yield an opportunity for SME-type of investing.’ We think it does.”
His Center for the Missing Middle, encourages SME financing around the world, in part by comprehensively tracking the performance of SME funds and demonstrating successful returns.
These innovators have entered their initiatives into a global competition for G-20 funding to scale up solutions that unlock SME financing. Theirs are among the more than 150 entries vying to win the G-20 SME Finance Challenge.
Stevens says his macro approach will have a very tangible impact at the micro level. “There are people who don’t have jobs now, or who are underemployed, who will have employment and will be able to house their families, and feed their families, and educate their families better than they otherwise could. And it could happen on a really large scale.”
Alison Craiglow Hockenberry is an Emmy and Peabody Award winning journalist who is a consultant for Ashoka Changemakers.
Photo courtesy of AdamCohn Flickr