Finance for Business

At a corporate forum in Nairobi, Kenya, in March 2011, an official of the International Finance Corporation (IFC, World Bank Group) remarked that there was more money available to businesses in Africa than good projects to absorb them. To many of the forum participants, the statement seemed like an exaggeration. When I was tasked, therefore, by BIF a few weeks later to identify potential sources of funding for an innovative venture in Nigeria, I had a real opportunity to test the hypothesis. The funding requirement for the venture was US$ 7 million for the first phase. I talked to industry insiders, read reports, researched and spent days checking out websites.

I found that there is indeed a large number of funding sources open to enterprises and projects. In addition, several financing options are available including loans, equity, mezzanine finance, guarantees and grants. Specifically, about 100 sources of funding were identified. Most of these could be regarded as impact investors – that is they look to generate not only financial return but also economic, social, environmental and other developmental impact – even if they may not describe themselves as such. However, interestingly, relatively few of these target manufacturing/industry. This in effect restricts the funding market available and further constrains the ability of enterprises to access low cost finance. In particular, non-repayable grants targeting the for-profit manufacturing sector are very few and far between, with several foundations and grant awarding bodies focusing on sectors such as agri-business or groups such as the vulnerable and the bottom of the pyramid. Private equity (PE) funds and venture capital (VC) companies on the other hand typically target high-growth ventures in areas such as technology and the financial sector, not to mention the high rates of return that such funds seek in their investments.

Based on the fit with the funding requirement, project, sector and investment destination, I narrowed down my list to 20 comprising PE/VC firms, development finance institutions and foundations including an indication of the range, average size and type of funding along with the process, criteria, conditions and contact details. It was clear that the industry sector, location, nature of the project, viability and growth prospects, amount required, stage of enterprise (whether it is a start-up or existing business) and management are all critical factors in accessing external funding.

No doubt, there is still a missing middle in business finance in Africa. For, whilst there are literally thousands of micro finance institutions on one hand, there are hundreds of banks and increasing numbers of specialist finance houses on the other. But, there are relatively few institutions targeting the segment between the two ends of the spectrum. Furthermore, the exercise in question highlights the real difficulty of accessing local finance at affordable/reasonable rates for businesses. The missing middle in finance and business is arguably the greatest constraint to private sector development in Africa. The above notwithstanding, the evidence from this assignment and from my own experience including Board appointments of a private equity fund and a venture fund management company largely supports the hypothesis. For BIF, one lesson from the exercise is that development agencies can play an important role in using public funds to leverage private investment for development.