Impact Investing Ghana (IIGh) and Ashesi University have launched a comprehensive report on Catalytic Capital and its role in increasing financing for Small and Medium Enterprises (SMEs), as part of their commitment to promoting sustainable development and increasing appropriate patient capital for SMEs to transform Ghana’s economy.
The research funded by the Catalytic Capital Consortium offers a broad overview of the landscape for SME financing from 2004 to 2021, and provides insights and guidance for both current and prospective impact-oriented institutions and practitioners working in a developing economy like Ghana. The report launch brought together major stakeholders to discuss the strategies, hurdles and outcomes in generating such capital for Ghanaian SMEs.
Catalytic capital refers to capital that is willing to accept disproportionate risk and/or concessionary return to generate a positive impact and enable third-party investments which otherwise would not be possible. The report identified US$989million of catalytic financing deployed in Ghana between 2004 and 2021 in SMEs, and analysed these to provide a framework for accelerating the mobilisation of catalytic capital to fill the US$4.8billion financing gap SMEs in Ghana face. It found that catalytic capital schemes enabled 3rd party investments that were 3 to 7 times the initial investment in the SME – an important and promising key to closing the SME financing gap in Ghana.
Actionable recommendations include:
- Support for efforts in Ghana to increase the supply of catalytic capital – including supporting innovative financing vehicles designed to deliver appropriate finance for SMEs; action by philanthropic foundations to include catalytic capital in their programme activities; private sector actors to partner with catalytic capital providers; and by government disbursing funding in ways which are catalytic, transparent and unlock additional third-party investments.
- Commitment by Development Finance Institutions (DFIs) to take on more risk and be truly catalytic; for example, by working with emerging fund managers and financing innovative funding vehicles.
- Action by International Development Agencies (IDAs) to participate in blended finance vehicles and use structures such as pay-for-performance incentives to crowd-in private sector funding.
- A commensurate increase in funding for technical assistance and transaction advisory work, including increasing the number of capital-raise service providers and strengthening the quality of enterprise support to increase the demand for catalytic capital and effectiveness of SMEs.
- Creation of affordable currency hedging solutions, and for government to put in more effort to stabilise the currency.
Addressing impacts the report could have, Amma Lartey, CEO-IIGh, shared that SMEs in Ghana and across sub-Saharan Africa are simply not getting the money they need to grow. Conventional capital has not been an effective way to bridge the massive financing gap, because SMEs are generally perceived as too small and too risky. Impact investors – investors that target enterprises seeking to make a social impact – mostly require market rate returns, and are often not willing to make concessions that enable innovative models to launch and scale.
What’s needed is for catalytic capital providers with the vision and the willingness to take on more risk in order to enable the exponential impact, growth and, ultimately, the returns expected. Impact Investing Ghana and its partners will be advocating for implementing recommendations from the report and coordinating collaborative action to unlock financing for SMEs. One example is an innovative fund of funds under development to unlock local pension funding for SMEs in Ghana.
Gordon Adomdza, Principal Investigator at Ashesi University, shared that it is important as we seek to transform Ghana’s economy for us to provide data and insights which help in the design of stronger financial institutions, products and investments. He gave participants a preview of an online Ghana Investing Map that will provide data to researchers and investors for guiding decisions, and invited the report’s readers to sign up to be notified when the map goes live
Speaking at the event, UN Resident Coordinator for Ghana, Charles Abani, lauded IIGh for the seminal report and reiterated the UN’s commitment to supporting locally-led initiatives to increase financing for SMEs and building beneficial relationships between SMEs and private investors. He emphasised MSMEs’ contributions to Ghana achieving self-reliance and the Sustainable Development Goals (SDGs).
The event was attended by key ecosystem players – with addresses from Mirabelle Moreaux, board member of Impact Investing Ghana; Sangu Dele, board member of Ashesi University; Nana Osei Bonsu, CEO-Private Enterprise Federation; and Hamdiya Ismaila, General Manager-Venture Capital Trust Fund – and addressed a wide range of issues: such as increasing SME funding for women; how to grow financing in an economic downturn; and the need for more cedi-denominated investment vehicles.