We are convinced that the elimination of extreme poverty and chronic hunger can only be achieved through the development of the local business sector in sub-Saharan Africa. More people have lifted themselves out of extreme poverty in China and India over the last twenty-five years than anywhere else at any time in history. This was achieved through the growth of thriving domestic business sectors, the leading source of mass prosperity in all developed countries.
The key challenge Small Foundation has set itself is to correctly identify the most highly-leveraged intervention points in the system that will lead to an improved local business sector and then use all the assets available to us, including our networks, human capital, influence, risk appetite and funds, to maximise our impact. This is why we think in terms of an ‘action’ strategy rather than an ‘investment’ strategy.
It is widely acknowledged that there is a ‘missing middle’ in the provision of finance for businesses in Africa. This gap lies between microfinance and commercial finance. It is a very wide gap ranging from about $3,000 to $2m in terms of size of advance, though it is impossible to be precise about the boundaries. The missing middle is highly segmented, both in terms of size of advance, and stage and risk profile of businesses.
There are several organisations focused on the provision of social capital to the upper segments, from about $250k upwards, and Small Foundation is supporting some of them. These segments are still far from being adequately serviced but, we believe, it is in the lower, harder-to-reach layers that the highest leverage points are to be found at present. These layers are hard to reach because transaction costs per dollar advanced are very high and credit risk is also perceived to be very high.
Small Foundation believes that it is vital to remove this blockage to business development. Without access to finance, many early-stage businesses will languish or die and the pipeline of businesses ready for investment by those servicing the upper layers of the missing middle and beyond will dry up.
At present, we believe the most highly-leveraged interventions to catalyse positive change for the MSME sector in rural SSA are likely to be through the creation of actionable, field-building knowledge and new inclusive business models that are highly replicable and have the potential for commercial adoption to reach the scale necessary to eliminate extreme poverty from Africa.
SF will focus on the following avenues:
- Business incubators and accelerators with a focus on agribusiness
- Innovative models for the provision of finance and technical assistance to rural MSMEs
- Scalable commercial agribusiness models focused on smallholder farmers
- Collective impact initiatives.