Innovative Financing for Sustainable Small & Medium Enterprises (SMEs) in Africa

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1 UNEP FI and WWF Workshop: Innovative Financing for Sustainable Small & Medium Enterprises (SMEs) in Africa International Environment House, Geneva, Switzerland Wednesday 26 th September 2007, hrs This summary document includes: *Agenda *Background information *Information on workshop sessions *Information on hosts & project partners Media Partner:

2 Agenda: Registration and Coffee 0830 Welcome and Introduction 0900 Paul Clements Hunt Head, UNEP Finance Initiative Oliver Karius Event Chair, Managing Director, Vantage Point Global Plenary: Innovative SME investment in Africa 0915 Bruno Wenn, Senior Vice President, KfW Amdu Alem Tsengne Former Secretary General, Ethiopia Chamber of Commerce Barbara James Executive Director, African Venture Capital Association Jen Morgan Manager Sustainable Finance, World Wildlife Fund (WWF) Coffee 1015 Presentations 1040 Successful models for financing Chris Venter Chief Operations Officer, GroFin Paul van Aalst Director, E+Co Nate Schaffran Investment Officer, RootCapital Workshop Session I: Challenges and solutions 1145 Facilitated by Dr.Jem Bendell, Associate Professor, Griffith Business School, Australia Lunch 1245 Presentations 1400 Mitigating risk Andrew Gaines Managing Partner, DeRisk Advisory Workshop Session II: Actions and next steps 1430 Facilitated by Dr. Jem Bendell Coffee 1515 Awards and announcements 1545 Oliver Karius Event Chair, Managing Director, Vantage Point Global Workshop Findings Summary 1600 Facilitated by Dr. Jem Bendell Summary and Closing remarks 1615 Dupe Adelaja Director General, SME Development Agency of Nigeria Oliver Karius Event Chair, Managing Director, Vantage Point Global

3 Background: Introduction The world s top 200 corporations account for over a quarter of the planet s economic activity while employing less than 1% of its workforce 1. However, few debate the view that a vibrant SME sector can form the bedrock on which all economic activity is built, and that SMEs can be the mainstay of an economy, particularly in terms of employment 2. In many emerging markets, Small & Medium Enterprises (SME) sector is one of the principal driving forces for economic growth and job creation. And this holds particularly true for many countries in Africa where SMEs and the informal sector represent over 90% of businesses, contribute to over 50% of GDP, and account for about 63% of employment in low income countries 3. Despite, SMEs in Africa face many obstacles including corrupt governance structures, unfavorable macroeconomic environment, debilitating physical infrastructure, and multitudes of administrative challenges. However, inadequate access to financing continues to be one of the most significant impediments to creation, survival, and growth of SMEs in Africa. Recent interest in SME finance Owing to their high risk profile, SMEs in Africa largely remain an unattractive investment for mainstream investors. Of particular concern to investors are the country, currency, and credit risks characteristic of many African countries in which SMEs operate. Recent years have seen signs of innovation in SME financing models targeting Africa. Such SME-oriented financing initiatives can essentially be classified into public, private, and hybrid categories. Public: Largely led by institutions, such as the philanthropic foundations, development banks and agencies, which see investing in SMEs as a vehicle for development of host countries. Examples include the East Africa Fund by Shell Foundation, and the Africa Enterprise Challenge Fund by DFID. Private: A number of commercial financing models have been thriving particularly in countries that offer conducive business environment. Aureos Capital, a private equity fund manager, invests in several such funds in East, West, and South Africa. Blended Value / Hybrid: Essentially constitutes of models that seek out and invest in enterprises that not only create financial value but also create environmental and social value. In other words, this includes investors seeking Blended Value 4, focusing on sustainable SME sectors, such as clean technology, organic farming and renewable energy. Successful examples include Acumen Fund, New Ventures Inc., and E+Co. While these and other examples show that success is possible with right mix of innovation and skill, they remain few and geographically concentrated. Such scenario leaves huge unmet demand for SME finance across Africa. If the potential of SME sector in the continent is to be fully realized, lessons need to be learnt from current financing approaches and successful models need to be scaled. However, there is also need for caution on one front. 1 Top 200: The Rise of Corporate Global Power, by Sarah Anderson, John Cavanagh; the Institute for Policy Studies. 2 Small & Medium Enterprises (SMEs) and Corporate Social Responsibility: A Discussion Paper, Tom Fox, International Institute for Environment & Development; June Annual Report 2005, UN Economic Commission of Africa (UNECA) 4 Term coined by Jed Emerson, Senior Fellow, Generation Foundation (

4 SMEs and the Climate Change It is common sense that SMEs, as users of raw-material and local resources, have an impact on the well-being of their environment. Although the impact of one enterprise might be negligible, evidence abounds particularly in developed countries that collective environmental impact of SME sector is significant and needs requisite attention. Latest report by the UN Inter-governmental Panel on Climate Change predicts a minimum increase in temperature of 2.5 C in Africa by 2030, leading to expansion of dry areas 5. If this is to hold true, climate change may have a graver effect on Africa than any other continent 6. While the IPCC report also notes that inability of the private sector firms, particularly SMEs, to access, absorb, and apply technological information are barriers to mitigation, it is important to note the vulnerable nature of SMEs in Africa. SMEs are often forced to prioritize short-term survival over long-term strategic measures to address environmental impact, let alone general lack of financial resources. Consequently investments in cleaner technologies and production processes, which become economic only after a period of use, are not affordable to many SMEs. Meeting the Challenge Innovative Financing for Sustainable SMEs WWF and UNEP Finance Initiative recognize that the above scenario presents an opportunity to address both the financing of SMEs as well as use them as a vehicle for creation of sustainable economies in Africa. In light of this, successful SME financing models need to be scaled while new ones need to be created that will change the balance of risks and incentives for the mainstream investment community, leading to increased financing for sustainable SMEs. Towards this end, WWF and UNEPFI will jointly organize a meeting on September 26 th 2007 to discuss innovative investment and risk mitigation mechanisms to increase private sector investment in sustainable SMEs (term to be defined by WWF). Attendees to the meeting will include in African chambers of commerce, bilateral and multilateral aid agencies, philanthropic foundations, private financial institutions including commercial banks and asset managers, financial intermediaries and SME specialists. The objectives of the workshop are to: 1. Outline the importance of SMEs to sustainable development, problems posed by their lack of access to capital, and the reasons for this lack of investment. 2. Clarify the type of SMEs (sector and manner of functioning) that are desirable from a sustainable development perspective that could benefit from improved financing. 3. Outline and appraise current innovative financing initiatives for SMEs, assess the extent to which they address the sustainable development dimension, and the barriers to scaling up these innovative initiatives. 4. Outline the risk issues facing investors and a range of risk reduction mechanisms that could be created to thereby increase financing. 5. Outline 2 to 3 mechanisms that could have most impact, be most suitable as a tool to promote sustainable SME development, are the most appropriate for hybrid collaboration (business, NGO, government), and map out the respective roles and incentives for different actors. 6. Gain and integrate feedback from participants into reports from the workshop (input: facilitated group process. Outputs: revised DeRisk paper, short UNEPFI workshop report). 5 Climate Change 2007: Mitigation of Climate Change, Intergovernmental Panel on Climate Change Fourth Assessment Report 6 Africa s Challenge, The Economist; May 10 th, 2007

5 7. Request and hopefully gain commitment from participants to work together on this agenda, with or without the workshop s convening partners. This will be a facilitated process at end of the workshop on participants interest in collaboration and specific examples of follow up actions. Information on Workshop Sessions Workshop Session 1: Challenges, Solutions and Actors for scaling successful financing models Situating Objectives: 1. Think Big 2. Do not just introduce what your organization is already doing Learning or unlearning objectives: 1. To recognize importance of differentiating between types of SMEs to promote based on sustainability issues. 2. To recognize the relevant diversity of people in the room, and how they view the subject area from different perspectives 3. To better understand the innovative approaches presented in the cases by giving space for active reflection on them. Knowledge generating objectives: knowledge to be sought on following questions 1. What are the biggest challenges to sustainable SME development? 2. What are the biggest challenges to scaling the innovative approaches heard? 3. What could be the solutions to either set of challenges? 4. Who needs to be involved? 5. What can the group of 8 to 10 agree as the 3 most important challenges and 3 stakeholder groups that must be involved? Workshop Session 2: Current and Future Actions and Support Needs to be Active Partners in Innovative Financing of Sustainable SMEs Situating Objectives: 1. Think tangible, concrete, what action can people / organizations actually take? 2. What are the barriers for people to take these actions? Learning or unlearning objectives: 1. To better understand the potential of DeRisk suggestions by giving space for active reflection on them 2. To recognize the relevant diversity of people in the room, and how they view the subject area from different perspectives 3. To better understand the innovative approaches presented in the cases by giving space for active reflection on them Knowledge generating objectives: knowledge to be sought on following questions 1. What is your organization doing to address the challenges (as defined in session 1) / create solutions? 2. What could you do in relation to the key mechanisms just presented? 3. What would be their incentive to do so? 4. What's stopping you from doing it i.e. what do you need before you can become partners?

6 Workshop Hosts & Project Partners UNEP FI: The United Nations Environment Programme Finance Initiative (UNEP FI) is a partnership between the United Nations and the financial sector. Around 160 financial institutions work with UNEP understand the impacts of environmental and social considerations on financial performance. Our work programme provides a forum for signatories to work collectively in advancing dialogue, establishing innovative approaches and determining best practice for environmental, social and governance issues in areas such as asset management, insurance, reporting, property investment, and for issues such as climate change, biodiversity and ecosystems services, human rights, and water scarcity. UNEP FI s regional work in Africa is spearheaded by the UNEP FI African Task Force (ATF), a group of financial institutions, ranging from commercial banks to development banks to asset managers, united by a common objective of defining innovative approaches to sustainability for the finance sector in Africa. Members currently collaborate to advance sustainable finance, responsible investment, and increased provision of financial services for the poor. More information about the work of UNEP FI is available at WWF: World Wide Fund for Nature is one of the world's largest and most experienced independent conservation organizations, with almost 5 million supporters and a global network active in more than 100 countries. WWF's mission is to stop the degradation of the planet's natural environment and to build a future in which humans live in harmony with nature, by: a) conserving the world's biological diversity, b) ensuring that the use of renewable natural resources is sustainable, c) promoting the reduction of pollution and wasteful consumption. More information about the work of WWF can be found at IOMBA: The International Organizations MBA is a unique programme offered by the University of Geneva that prepares professionals for careers in the increasingly interconnected fields of international governmental and nongovernmental organizations and companies that work with these institutions. IOMBA is a multidisciplinary programme taught in English that equips students with (1) an understanding of the global socio-economic context within which international and nongovernmental organizations operate; (2) advanced management training; and (3) ongoing engagement with international and nongovernmental organizations. It brings participants together with internationally renowned scholars, top officials from international and nongovernmental organizations, and business executives, to explore the core issues facing practitioners in these various communities. More information about IOMBA can be found at Additional support for this workshop has been received from the Geneva International Academic Network (GIAN). The workshop is included within the programme of GIAN. On a timely note, the workshop will immediately follow the Geneva Private Capital Symposium, whose theme is on Investing Private Capital in Emerging and Frontier Market SMEs. More information about the symposium can be found at: While the Symposium will shed light on need for SME investment in a broader context, the workshop will be a much more focused event intended to highlight specific financing models for sustainable SMEs in Africa, and discuss specific risk reduction mechanisms that could lead to increased investment in this sector.