A new partnership to address an old problem – why Oxfam is involved in SME impact investing
Nicholas Colloff Director of Innovation
28th Feb 2012
Why is Oxfam launching an SME impact investment fund? Nicholas Colloff on a new project which aims to tackle poverty by addressing a lack of SME finance in the global South.
New partnerships often lead to innovative solutions for old problems. An example is the use of mobile telephones as a flood warning system in Ethiopia. When rainfall levels can be communicated instantly by upland farmers to lowland pastoralists, cattle, livelihoods and people can be saved. In this example the unlikely partnership between local communities, a mobile phone company and an INGO thus created a positive development gain. In a similar vein, the new Small Enterprise Impact Investing Fund (SEIIF), launched by Oxfam and Symbiotics, is an example of an unlikely partnership addressing the longstanding impasse of SME (small and medium-sized enterprise) finance in developing countries.
For years, analysts have observed 'the missing middle' in many developing countries - a distinct lack of small and medium sized enterprises (SMEs) - in comparison to their developed world counterparts. These businesses typically deliver labour intensive pro-poor growth. However, while SMEs have been the engine of growth in developed economies, too often in the global south they have been starved of
capital; the consequence being the stagnation of a sector which has the potential to reduce poverty.
There has been an impasse; due to poor financial infrastructure, investors have not had a mechanism to connect them to those who need capital. Consequently, capital has been in short supply. On the other hand, high poverty rates have led many subsistence farmers to diversify their enterprises. Diversification of produce reduces risk as farmers are not over exposed to the collapse of one market. Unfortunately, one unintended outcome of diversification is the reduced ability of small businesses to scale up. Thus demand for growth capital is often extinguished by the necessity to
avoid financial and agricultural risk. As a sector then agriculture has typically been seen as a dichotomy between big winners and small losers.
Happily, things are changing. The impact investing sector has grown phenomenally in recent years, for example, JP Morgan anticipates up to $1trillion of investment by 2020 (whether this is overly optimistic or not remains to be seen). Investors previously had neither the inclination nor information to search out SMEs in Africa and south Asia (regions that SEIIF will target). Now
though, if properly nurtured, this emerging asset class can help the SME sector meet its potential. Why? African countries are now among the fastest growing economies in the world and harnessing this potential to align economic opportunity with social development is what the SEIIF project is all about. The massive poverty reduction potential of SME growth is too large for Oxfam to ignore; but, we are not asset managers; hence the partnership with Symbiotics.
Impact investment value chain
By bringing together a major INGO with a successful asset manager the old impasse of underdevelopment and SME capital constraints can be broken. The Small Enterprise Impact Investing Fund aims to be a bridge between developed world capital and increasing developing world demand. Simultaneously, working with businesses committed to positive social impacts; such as the enhancement of female employment and sustainable agriculture, huge development gains can be made. This new form of investment aims to move beyond a 'do no harm' approach and embed positive, social and environmental
impacts, at the heart of business.
All this sounds fine from a business perspective. Why though, if the impact investing space is growing of its own volition, is Oxfam involved? Our role as 'Impact Fulfilment Advisor' is to give the fund its developmental impetus. The unique combination of female empowerment, agricultural development and poverty reducing jobs, gives the fund a distinctive pitch. Also the reputational clout of one of the world's most respected INGOs will help shape both the SEIIF project and the impact investing space as a whole.
Impact investing is about the search for social, environmental and financial returns. While there is currently a strong microfinance industry dedicated to these goals, the SME sector is still 'missing'. Hopefully the new partnership of asset manager and INGO can overcome the impasse and in doing so address the old problem of chronic poverty. It is an experimental innovation worth pursuing.