How Banks can responsibly connect Global Donor Organisations and SMEs
By Jan de Kock, Head CFM Origination, Absa Corporate and Investment Banking.
Almost five years since that first terrifying lockdown, small and medium enterprises (SMEs) across the African continent are still feeling the impact of the global pandemic. A study by COMESA (the Common Market for Eastern and Southern Africa) revealed that 80% of the businesses surveyed in these regions were severely affected by the health crisis, with cash flow outlooks cited as a major concern for many of them.
In Uganda, the report by the Economic Policy Research Centre (EPRC) indicates that an estimated 366,000 jobs were lost from 2019 to the end of the second lockdown period (June- August 2021), a total of 11,000 jobs had not yet been recovered by October 2022.
Specifically, small and medium-sized enterprises had not yet recovered 26,000 and 2,000 jobs, respectively. The manufacturing sector, according to the report had a slow job recovery, with an estimated 16,000 jobs not having been recovered by October 2022, followed by the education sector at 8,000 jobs.
But even as the pandemic waned, the difficulties have continued: rising interest rates, limited economic growth, and access to funding have continued to hamstring these vital economic engines of the developing world.
Many global donor organisations (GDOs), from sovereign donors like the governments of Germany, the United States, or Japan to multilateral development banks, recognise that SMEs play an essential role in economic development and poverty alleviation for low-and-middle-income countries. This is why we are fortunately experiencing a global funding trend toward SME development.
Donor Tracker, a central source of information about global donor trends, noted as far back as 2022, that the pandemic had sparked significant growth in funding of SME development – with the EU and institutions from the USA among the top donors looking to unlock financing opportunities for SMEs.
Unlike Development Finance institutions (DFIs) – who offer complex financial instruments and have strict requirements on financial returns – GDOs focus on broader social and economic developmental goals, providing grants, technical assistance, and funding for projects that align with these goals.
However, there are often challenges in ensuring that such assistance makes its way swiftly, respectfully, and cost-effectively to the beneficiaries, alongside efficient facilitation of these impact initiatives. GDOs in the Global North have mandates to deploy hundreds of millions of dollars every year across Africa.
To ensure the success of these programmes, GDOs need partners on the ground to ensure good governance: facilitating payment processes, compliance with local law, and most importantly, ensuring that these vast funds end up in the hands of those who need it most.
But now, there is a key opportunity for banks to assist, both on the SME side and working with the GDOs themselves – facilitating the partnerships that can create genuine social impact. For many enterprises – especially those at the beginning of their entrepreneurial journey – a strong balance sheet can be difficult to achieve and is a vital part of securing traditional lending.
However, such loans require oversight that a development-minded bank can provide – administrating funds for the GDOs while also providing the inclusive finance products and support systems to SMEs. Certain banking institutions already have these capabilities – from credit provision to administrating funds to post-loan collections monitoring.
This, alongside a deep knowledge of local legislation and regulations, and the auditing capabilities to protect against any misspending. These banks can also provide SMEs with the technical assistance to improve their capabilities and business skills through third party service providers who can mitigate the risk that comes hand-in-hand with lending.
Then, as the SME becomes more established and builds towards a better balance sheet, the traditional finance institution can take over as a lender to help maintain and run the business.
However, to secure this role as facilitator, banks must shift focus from commercial, balance sheet-based lending and more towards developmental lending, which I can proudly say has been our mission at Absa for years. While there does not seem to be a history of banks becoming so entrenched in the relationship between GDOs, SMEs, and their partners, Absa has been developing in this space since 2015. We also work with local accounting firms to support SME borrowers with finance readiness and post-lending financial management.
When we first began this work, our approval rate for SME development loans was below 5%. Now, almost a decade later, we approve over 90% because, much like the GDO space, we know that SMEs are going to be integral to transforming economies across the continent.
It is this developmental mindset that I believe will help our sector become more involved in the facilitation of GDO initiatives. We must have regular engagements with these GDOs to showcase our local expertise and help to co-create SME development solutions that can work across the regions in which we operate and in the countries that a specific organisation can reach. Because SMEs are more than just businesses. They drive economies, provide services to even the most remote areas, and can transform communities – but only if they have the right kind of support.
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