Building the Funding Continuum: A Case for Supporting Micro, Small, and Medium Enterprises in Fragile Contexts

Sub-Saharan Africa is a region full of unrealized potential, with boundless opportunities yet equated to an ecosystem characterized by considerable fragility on many fronts. This blend of contrasts presents a special set of challenges for Micro, Small, and Medium Enterprises (MSMEs) as well as great opportunities. The MSME sector is generally cited as the backbone of economic development in the region. In many parts of sub-Saharan Africa, MSMEs barely manage to survive, often not attaining any kind of sustainable growth and prosperity. During the last couple of years, however, this trend began to shift. Development funding institutions are coming in to address these challenges facing MSMEs and the economies in general. These institutions have provided catalytic capital, strategic support (read technical assistance), and targeted interventions that have enabled the MSMEs to successfully navigate and operate to enhance broader economic resilience and development.

Nature of Fragile Contexts: Complexity of Challenges

A scan through the African continent, you quickly read a “tale of two cities”. On one side, we have countries riding the fast-paced growth curve spurred by technology, from building futuristic smart cities and advancements in e-mobility to new-age robotics in health sciences. On the other side, some countries are reeling in drought, war, social unrest, gendered segregation, and inequalities: the Fragile Contexts.

Precariously fragile within sub-Saharan Africa, such contextual entanglement of political and economic instability further combines with prevailing social challenges, including but not limited to high levels of poverty, inequality, and lack of access to basic services such as education and healthcare. These mutually cause an environment, a priori hostile to corporate operations. Concretely, political instability appears in the form of weak governance, corruption, and even sometimes active conflict, which undermines the rule of law or creates a completely non-predictable operating environment. Economic volatility is characterized by fluctuating commodity prices, inflation, and limited access to both local and global markets, further worsening the situation.

In these fragile settings, the MSMEs are confronted by an endless set of challenges ranging from; shallow markets to small-scale infrastructure, which is almost devoid of any funding opportunities to weakened local institutional frameworks and the potential lack of traditional support mechanisms. In fragile contexts, MSMEs therefore find themselves in the unenviable position of having to perpetually operate under uncertainty amidst a risk- and barrier-ridden landscape that is hardly conducive to growth and prosperity.

Catalytic Funding: The Spark That Ignites Growth

With these challenges in mind, catalytic funding has emerged as a strong, innovative tool for jumpstarting MSMEs in such fragile contexts. Catalytic funding comes mainly in the form of seed capital, grants, or risk-tolerant loans provided at critical stages in the development of MSMEs. Unlike other financing mechanisms that were designed to prioritize commercial and financial returns, catalytic funding focuses on generating positive social and environmental impact alongside financial sustainability. It is worth noting that businesses in fragile contexts are viable, innovatively ideated, and offering real, practical, and impactful solutions; the main challenge is the operating environment to which they are exposed.

Development funding institutions catalyze innovation, job creation, and economic growth through this type of financing. Examples of how catalytic funding has been instrumental include supporting MSMEs working with small-holder farmers in South Sudan in accessing resources that improve productivity and market access. Catalytic capital has also financed various renewable energy projects in remote communities in Somalia, unlocking new economic opportunities with clean and more affordable energy solutions. The transformative power of catalytic funding can be read within many case studies from across sub-Saharan Africa, but there is more beyond the capital. Often, without guided support to MSMEs in these contexts, mere capital can be less effective. Because of this fact, as an addition to funding, technical assistance accelerates impact. Read More here about the work AECF is doing in catalytic funding space in Sub-Saharan Africa.

The Importance of Technical Assistance: Complementing Financial Support

Technical assistance has been quite instrumental in complementing catalytic funding coupled with focused guidance, mentorship, and capacity-building initiatives for the MSMEs. It is even more important in fragile contexts, where businesses are often lacking in the skills, knowledge, and experience to negotiate the intricacies of their operating environment.

Technical assistance, among other activities, involves developing business strategies, reviewing business models, training on financial management, researching market demands, supporting product development, enhancing governance and mapping out the financial viability of the MSMEs. By giving them these fundamental skills and information, MSMEs are able to grasp opportunities to build viable enterprises that offer positive changes within and around their communities. For instance, in South Sudan, agri-MSMEs, leveraging technical assistance, are able to ensure they avail better-quality products to the local and global market. These MSMEs are improving their production processes by applying better farming practices, reducing post-harvest losses, managing the quality of agricultural output, and reaching out to new markets, hence increasing profitability. Moreover, they are benefitting from tailored support in product certification which in turn allows them to sell in international markets. In Somalia, catalytic funding has gone into building mini-grids that connect remote communities to power. MSMEs have received not only financial but also technical assistance in the design and implementation of innovative power distribution solutions tailored to meet the needs of their communities. Technical assistance thus enables MSMEs not only to survive in fragile contexts but also to thrive and contribute to broader economic development.

Investment Facilitation: Building (and Bridging) the Funding Continuum

Equally important is that catalytic funding and technical support are complemented by investment facilitation, which is essential in supporting MSMEs within fragile contexts. Investment facilitation involves linking the MSMEs with investors, financial institutions, or other sources of commercial capital. This is with a view to creating access to growth capital necessary for scaling and expanding operations-especially in fragile contexts where there are significant obstacles to accessing more traditional forms of financing. Investment facilitation comes in many forms, including investor matchmaking events, pitch competitions, and market intelligence initiatives.

Investment facilitation offers a platform for MSMEs to prove their potential and match them with investors of similar vision and values. Investor matchmaking provides the actual avenue through which MSMEs can showcase their business ideas to interested investors; pitch competitions form avenues that allow MSMEs to compete for funding and recognition. Market intelligence activities offer MSMEs the needed insights and intelligence that will facilitate their making appropriate investment decisions. These activities enhance development funding institutions’ efforts toward lowering barriers for MSMEs to access much-needed capital. These efforts go a long way towards creating a sustained funding continuum that is supportive at each stage of the MSMEs’ journeys.

Ensuring a Sustainable Funding Continuum: A Holistic Approach

The continuum of sustainable funding is important for the long-term maintenance of the growth momentum created through catalytic funding, technical assistance, and investment facilitation. A continuum of funding would mean the sustained provision of support needed by MSMEs to grow and prosper, as well as follow-on financing, technical assistance, and market access. This holistic approach recognizes that the challenges faced by MSMEs in fragile contexts are complex and require comprehensive and integrated solutions.

The case for building the funding continuum is thus crystal clear. This is not only economically indispensable but also a moral obligation. MSMEs form the lifeblood of economies in fragile contexts, and their success is vital to achieving wider development goals. In supporting the funding continuum, development finance institutions have an opportunity to unlock the potential of MSMEs, trigger economic growth, and build a resilient and prosperous future for sub-Saharan Africa.