Financing for the ‘Missing Middle’ in South Africa

Mirko Zuerker
By on January 26, 2016

Financing! 20k-200k USD is needed for the ‘missing middle’ is one of ten critical aspects that IBA’s partner SEED emphasises as crucial for the growth of SMMEs. Especially for the South African economy, which is the second-largest in Africa, the value of small, micro and medium enterprises to combat unemployment and wealth inequalities as well as to foster economic growth and innovation is undeniable.

SMMEs make up around 91 per cent of all formalized businesses. A study of World Wide Worx in 2012 observed that they provide around 7.8 million jobs, offering important employment opportunities especially for the large unskilled workforce. An even greater role can be attributed to social and environmental SMMEs, which are the focus of SEED. Following the triple bottom line approach, these not only strive for economic success but also tackle social inequalities as well as the challenges of climate change and environmental degradation.

Barriers to success – South African SMMEs struggle for financial support

However, the South African SMME engine lacks fuel – the financial support to prosper. Markets in general, but the South African market in particular, have not yet succeeded in creating an enabling environment for SMMEs. Although their value is recognized and studies show their profitability; they often fail because finance does not reach them in an effective way. A lack of knowledge on the investor side as well as from the enterprise perspective adds barriers.

Smaller South African enterprises often cannot meet the requirements of investors in terms of, for example, transparency; thus seeming as a too risky investment. Also, endeavours often fail before they have even begun because investors struggle to find matching ventures in the first place; research, due diligence and monitoring costs are often too high. This is especially true for social and environmental businesses, which have the additional challenge of finding investors who put an equal value to social and environmental returns as to financial profit.

On the other hand many South African SMMEs have only limited knowledge of the existing different forms of finance, let alone understand which of those could be appropriate for their businesses. Even if the small enterprises conquer this first step, they still struggle to comprehend and comply with the processes and regulatory requirements connected to funding. The lack of trust put in the financial sector in South Africa additionally complicates the situation.

This financing gap for SMMEs, the so called ‘missing middle’, is not a new one and small steps are being taken in the right direction. The South African government, in particular the Departments of Trade and Industry and of Economic Development, aim to promote the growth of small businesses with according legislation and policies, however, their implementation remains poor. A sturdy financial net for South African SMMEs is still missing as the ecosystem is still too dispersed and the demands of potential funders often too high for SMMEs to be able to meet them.

Impact Investment in South Africa

Impact Investment has emerged in the past decade as a potential answer to this struggle for the missing middle. These investments are designed specifically to address social and environmental SMMEs. However, as a relatively new tool in the South African market, many questions and also scepticism accompany impact investment. Investors often view it as too risky while social entrepreneurs are still faced with the knowledge hurdle, lacking information or having difficulties to fulfil regulatory requirements.

2015 could have been a turning point, as the South African market is starting to answer the demands for more information and activism. Two large conferences were held in 2015 by the South African Impact Investing Network (SAIIN) and the Africa Finance & Investment Forum (AFIF), which put the focus on discussing the trending issues around Impact Investing. But also the Post-2015 Agenda and Climate Conference have turned the spotlight on these topics, as comprehensive climate financing has been decided to help emerging and developing countries adapt to climate change and build up renewable energy.

Making the next step from paper to implementation, the best channels for the development money need to be evaluated, making sure that it arrives in the right hands and serves its purpose, to create green and inclusive growth. The vital role of social and environmental SMMEs in this endeavour is undeniable and all things considered, the heightened attention should become a springboard for impact investment and financing for the missing middle.

Unlocking Capital, Boosting Support – the SEED South African Symposium 2016

Having worked with social and environmental enterprises in South Africa for more than ten years SEED decided to dedicate the topic of this year’s SEED South African Symposium to two pressing issues: unlocking capital and boosting support for eco-entrepreneurship in South Africa. Eco-entrepreneurship has the capacity to intertwine economic, social and environmental impacts and contributes significantly to solving sustainable development challenges. Social and environmental enterprises are however in need of an enabling environment and financial support systems that cater to their specific needs. Currently such enterprises still face a significant lack of capacity and skills in the ecosystem, as well as a shortage of investment capital.

Over two days, the SEED South Africa Symposium will bring together around 150 entrepreneurs, practitioners, investors and policy makers to discuss and explore concrete actions on how to overcome these two key challenges. After its very successful pilot at the Africa Symposium 2015 in Nairobi, Kenya; the SEED-IBA Investor Forum will also take place again, bringing selected social and environmental enterprises together with investors; allowing for exchange, networking and possible investment opportunities.

The SEED South African Symposium 2016 will take place from 15-16 March 2016 in Pretoria, South Africa. To learn more please visit https://www.seed.uno/seedsas16/ or read about the outcomes of last year’s event here.

For further information you can also contact us at: symposium@seed.uno.