Investment supply for small and medium enterprises

Abstract

This report presents the results of a study of the supply of financial services to small and medium enterprises (SMEs). A major objective of the study is to document the experiences of providers of financial services to SMEs worldwide, with particular emphasis on identifying innovative business models that can generate financial and social returns. The methodology employed follows the ‘value chain’ approach in that investment processes are analysed and factors facilitating or constraining the fluidity of the chain are identified. The underlying barriers to financing SMEs in Africa can be classified into four types related to: (1) risks involved; (2) institutional development; (3) policy and regulatory frameworks; and (4) skills and training needs. Particular difficulties’ in the fisheries sector include: Information Asymmetry i.e. promoters lack business acumen to fully articulate their ventures to funders; but financiers lack expertise in appraising fisheries projects. Establishing a venture fund is challenging and lengthy; as is accessing local capital. Limited incubation and lack of project preparation facilities that assist fisheries and aquaculture entrepreneurs to develop their ideas into bankable deals limit the pool from which investors can mine potential fisheries and aquaculture investments. Global financiers in SMEs are currently implementing innovative financial models for sustainable enterprises. One key characteristic of investment funds specialising in SMEs in Africa is that they combine investment funds with business development funds in order to ensure the economic growth of SMEs as well as the likelihood of prompt loan repayment. Innovative financial models for SMEs seek to fill the gap between traditional banking and grant-based donor finance. Hybrid business models that can leverage the best aspects of philanthropy and business can help build sustainable, scalable enterprises. The delivery of investment and business development for SMEs can be done directly or through intermediaries. Other forms of innovation include utilizing SME purchase agreements as collateral; specialised financial intermediaries and multilateral agencies acting as co-lenders and risk-sharing of loans to SMEs; and industry partners assisting to develop the economic growth of SMEs and ensuring market access. Lending institutions and investment funds by and large follow a process which can be likened to that of a value chain. The importance of identifying key steps in the lending or investment process and the associated facilitating or constraining factors becomes evident when dealing with SMEs particularly in Africa. Lending institutions, Credit Guarantee Schemes (CGSs) and Private Equity Funds (PEFs) follow pre-determined cycles. This is highlighted in the cases studies in the report. Numerous challenges in finance for SMEs exist. Bureaucracy, actual or perceived, and a lack of awareness about SMEs have been identified as serious barriers to the successful reaching of SMEs. Existing relations are crucial to the lending relationship between SMEs and local financial intermediaries, especially when new products are introduced or for speedy approvals. Appropriate monitoring and performance measurement metrics, which are important in a social business model such as a Fund for SMEs in the fisheries sector are lacking. Country-specific legal regulations are cumbersome for regional funds. In a rapidly changing environment, maintaining the alignment of stakeholders’ interests is critical. Business development support from a group of talented management professionals with knowledge of financial accountability, operations, and international/national markets in the fisheries sector – in order to serve as advisors and talent-enablers to SMEs is crucial. Financial returns and exact exit structure are rarely known or guaranteed. Key interventions to help increase financial access by companies in the sector include: (1) Exit strategies; (2) Incubation facilities; (3) Business Angels; (4) Funds of funds; and (5) Policy and regulatory reforms. The key intervention is to promote financial market growth in Africa to address exit strategy challenges such as small African capital exchanges, Restriction on Listing of Foreign Companies, Share Buyback Restriction and Inadequate Double Taxation Agreements. The business incubation sphere in Africa is very young and underdeveloped compared to other developing countries in the world. SMEs in Africa can also benefit from the formation of business angel networks in combination with the establishment of incubators and investment funds. Amendments to stringent policies that hinder access to key sources of local capital in Africa today are essential e.g. restrictions on illiquid investments by pension funds and insurance companies, which can serve as investment vehicles targeting SMEs