How to build resilience in emerging economies? Support small businesses

Across the globe during the COVID-19 pandemic, governments have sought to support small businesses through credit guarantee and salary support schemes. This focus on SMEs is logical as small businesses create up to 80% of jobs and generate up to 70% of GDP in Africa alone.

Social enterprises, while being a relatively small subset of such SMEs, are a segment of increasing importance due to their role in actively developing solutions for the most pressing social challenges. The survival and growth of SMEs and social enterprises should be an ongoing priority.

However, in emerging market economies (EMC) these short-term schemes were not enough to address the existing, intractable structural barriers to raising finance that most of these businesses face. The yawning gap in financing runs into the trillions of dollars.

The pandemic has further demonstrated that local and international, public and private sector organizations can work collectively to move money at scale if the motivation is strong enough. It makes economic sense for governments and private markets to do just that in order to build resilient economies.

Despite the enormous scale and liquidity in global markets, international institutional investors currently allocate little over 1% of their total assets to alternative asset classes in developing countries. However, global funds need to be thoughtful about additionally (providing capital in quantum or on terms that are currently unavailable in the market) and sustainability because of the existing over-indebtedness in many EMCs. This is particularly true in African markets where there is limited capacity to take on more foreign debt.

Meanwhile, local pension funds in EMCs generally have both the capital and the regulatory mandate to support alternative financing assets such as SME finance but tend not to do so in any meaningful measure. For example, private Ghanaian pension funds control two-thirds of ±$5.4bn pension fund assets growing at a rate of ±30% per year. Despite an investment limit of 15% into alternative assets, there is currently only a ±0.03% exposure.

As part of its presidency of the G7 in 2021, the UK government mandated an Impact Taskforce (ITF) to support the development of scalable financial vehicles that harness private capital for public good. The ITF set forward recommendations for greater amounts of capital for progressing the SDGs, with SMEs and social enterprises being vital actors in achieving such goals.

A consortium of partners initiated through the World Economic Forum's Global Alliance for Social Entrepreneurship, including Collaborative for Frontier Finance, Sustainable Development Investment Partnership and Global Steering Group for Impact Investing (who led the G7’s ITF), supports local actors in EMCs to design financing constructs that integrate impactful international capital with scalable domestic resources.

In the past year, this consortium has worked with critical stakeholders in the emerging economies like Ghana and Zambia where each has been developing replicable pathways to finance:

SMEs and social enterprises are essential drivers of growth, employment and livelihoods in emerging markets. Providing them with the vital financing they need necessarily requires supporting the local investors, fund managers and banks who are closest to them on the ground. That said, in addition to providing access to financing to empower SMEs in emerging economies, it is important to accompany financial solutions with other types of non-financial support such as capacity building and tools relevant to their business. Experience in Africa shows that digitally-based information and services can be effective tools for empowering farmers and local businesses.