Figure 1: Market size and growth of blended finance for Sub-Saharan Africa SME-focused transactions
In Sub-Saharan Africa, small- and medium-sized enterprises1 (SMEs), of which there are approximately 44 million, comprise almost 95% of all registered businesses and contribute to nearly 50% of the region’s gross domestic product (GDP). Despite their importance, 40% of SMEs in Sub-Saharan Africa identify a lack of access to finance as the primary factor constraining their growth, with some estimates put the current overall funding gap at more than $140 billion. This lack of funding leads not only to limited growth potential, preventing SMEs from evolving into larger corporates, but also the forced closure of millions of SMEs on the continent within a few months of launching.
Blended finance can play a role in addressing some of the real and perceived risks associated with investing in SMEs in Sub-Saharan Africa, thereby increasing their access to finance. The latest enhanced data brief from Convergence analyzes how blended finance approaches have been deployed to aid SMEs in Sub-Saharan Africa and presents insights from interviews conducted with industry stakeholders. This article provides a snapshot of the enhanced data brief, including opportunities and challenges in using blended finance for SME-focused transactions2 in the region.
Click here for the Blended Finance in Sub-Saharan Africa: SME Financing enhanced data brief.
Data highlights from the brief:
According to Convergence’s historical deals database (HDD), the blended finance market for Sub-Saharan African SME-focused deals consists of 145 transactions totalling $11 billion. This represents just over 27% of the total number of Sub-Saharan Africa deals in the HDD, but only 14% of aggregate financing.
34% of SME-focused blended transactions in Sub-Saharan Africa are in the agriculture sector
Sub-Saharan Africa is especially vulnerable to climate change impacts given its dependence on rainfed agriculture. Agriculture is crucial for Africa’s economies, comprising 17% of GDP and supporting over 55% of the labour force; however, the impacts of a changing climate have caused agricultural productivity to drop 34% since 1961, the highest decline globally. SME-focused blended transactions in Sub-Saharan Africa most frequently fall within the agriculture sector, with 18% in the agricultural inputs/farm productivity sub-sector and 17% in agro-processing.
Climate change risks only exacerbate the challenges agri-SMEs already have in accessing traditional sources of finance. Blended finance can help de-risk these investments. For example, the West African Initiative for Climate Smart Agriculture (WAICSA) uses a blended finance approach to support agriculture SMEs in West Africa to incorporate climate-smart agriculture (CSA) technology. It provides subsidized interest rate loans to smallholder organizations and agribusinesses with ticket sizes below $1 million. WAICSA also provides capacity building and TA to help local financial institutions design loan products with CSA adoption conditions.
Figure 2: Top 5 sub-sectors in Sub-Saharan Africa SME-focused blended finance transactions
Half of all Sub-Saharan African SME blended transactions are less than $25 million
Sub-Saharan African SME transactions have a median size of $30 million (compared to $50 million for all blended transactions in the HDD), with 19% of the 145 transactions between $10-25 million in deal size and 18% below $5 million. These SME transactions tend to be smaller overall for a few reasons, including that SMEs are often start-ups requiring less capital. Another explanation could be the high-risk perception of these SMEs by banks and investors, making them less willing to invest larger amounts. Blended finance transactions also vary in deal size across countries within the region, which could be attributed to market maturity and varying levels of risk perception based on each country’s unique regulatory, political, and economic environments. For example, the average size of a blended SME transaction in Niger is $72.6 million, whereas in Nigeria, it’s $88.4 million.
Figure 3: Sub-Saharan Africa SME transactions by total size
Opportunities and challenges for blended finance for SMEs in Sub-Saharan Africa
Throughout our interviews with blended finance practitioners across Sub-Saharan Africa, several themes arose regarding challenges and opportunities for SMEs trying to access finance. One common challenge was that private investors are often deterred by the risks of financing SMEs, such as high default rates and a lack of collateral. By fully or partially shifting these risks from the investors to the guarantor, concessional guarantees can improve the risk profile of SME-focused investments by reducing costs to the investor, thereby making them a more attractive investment.
Regional banks can also be especially risk averse, often preferring government-backed investments over SME loans. Blended finance solutions, such as concessional loans and technical assistance (TA), can help make SMEs more investment ready. TA can support SMEs in establishing proper financial and accounting foundations, thereby improving their creditworthiness and appeal to banks. Additionally, concessional finance can provide SMEs with lower-cost capital, extended repayment periods, and reduced interest rates, facilitating their growth and sustainability and making them a more attractive investment with a lower likelihood of default.
Local regulations can also present challenges, with varying policies across the region that can impede SME development. Blended finance offers a potential solution for mitigating the impacts of some these regulatory challenges. For instance, in Nigeria, local concessional guarantees could help counteract the effects of regulations that prohibit hedging with foreign currencies. In Ethiopia, design-stage funding and concessional loans could support SMEs in purchasing office space required for licensing. By leveraging blended finance, investors can navigate these complex environments, enabling greater SME investment and helping to overcome barriers like high investment minimums across the region and outdated business licensing requirements.
SMEs in Sub-Saharan Africa are vital for local economic development, but their growth is hindered by limited access to finance. Blended finance, through mechanisms such as concessional guarantees and TA, can help de-risk investments and make SMEs more attractive to private investors. Addressing these challenges also requires tailored solutions, capacity building, and enabling policies to reduce barriers and facilitate capital access.
For further information on Convergence’s methodologies, click here.
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- Convergence uses the definition of SMEs provided by the World Bank, however transactions are analyzed using publicly available data. An SME-transaction is therefore defined as such based on the disclosure by an investor through publicly available sources, and subsequent due diligence by Convergence against the World Bank definition where possible.
- An SME-focused transaction is defined as one that either provides direct benefits to an SME, for example through funding an SME expansion, or indirect benefits, such as supporting a fund that invests in SMEs
