In September 2014, a US drone strike killed Al-Shabaab’s most influential leader, Ahmed Abdi Godane. The immediate assumption was that Godane’s death would weaken the group and reduce its capacity to carry out further terrorist activities.
It’s not just about fresh capital for Africa: it is about deployment
There has been a drive to create new funding streams to arrest coronavirus impact on the continent. But delivery systems are critical to ensure the money gets to where it is needed.
Of the many aspects of the COVID-19 virus that unites the world’s developed and developing countries, including the world’s least developed countries (LDCs), one critical unifying aspect is the challenge of supporting and capitalizing small-and-medium sized enterprises (SMEs) to weather the storm.
Today, SMEs in developed and developing countries are contending with slowing domestic demand, with the collapse of economic activities due to the COVID-19 pandemic raising existential questions.
No matter the country or market, the overwhelming likelihood is that the majority of businesses are SMEs, that SMEs are the leading generator of all net new jobs, and that they are driving innovation in critical growth sectors. Of course, Africa is no exception.
African SMEs comprise 90% of privately-owned businesses, employ 70% of the continent’s workforce, and account for 45% of new jobs. Most importantly, African SMEs are advancing solutions in practically every sector—including financial inclusion, clean energy, digital tech, and mobile health.
But this is where the shared experience largely ends between developed and developing countries, including African developing countries and LDCs. SMEs in wealthier nations are substantially more likely to access the kind of capital that can serve as a lifeline in the context of COVID-19—from bridge loans, to emergency funding, to performance-based SME grants.
SMEs in developed markets are already the beneficiaries of, not only more capitalized local banks, but a larger proportion of those capitalized local banks. These SMEs are also more likely to be beneficiaries of national stimulus policies intended to inject liquidity precisely for SMEs.
The most critical difference, however, does not involve the existence of capital but the deployment of it. SMEs in developed markets are the beneficiaries of mature deployment systems, systems where financial institutions can deploy capital to businesses faster than the process of determining whether that business should receive capital at all.
This relies on robust digital payment systems where capital can be deployed right into business bank accounts—a system that is now at a premium given the importance of social distancing.
These advantages for SMEs in developed countries emerge as deficiencies for SMEs in LDCs, including those in Africa. As a result, these SMEs are now feeling the effects of the outbreak, with some having shuttered their doors, halted production, laid off most of their employees in response to the virus and instituted other changes in anticipation of an uncertain post-COVID-19 future.
The stakes become clearer when you consider the medium and long-term development impacts. For LDCs, SMEs are more than merely engines of economic empowerment for entrepreneurs. They are the leading platforms for financial inclusion in these countries, enabling members of underserved communities to have the kind of opportunities that can integrate them into formal economies—women, youth, smallholder farmers, and LDC communities as a whole.
And as we have seen at the United Nations Capital Development Fund (UNCDF), while SMEs that achieve scale possess the transformational potential to help ensure that local economies are stable, dynamic, and resilient, the reverse is the case when SMEs do not achieve scale.
To the point, COVID-19 will not only impact the sustainability of SMEs and the local economies they operate in. It could ensure that sustainable development will leapfrog LDCs as a whole.
There is a powerful symbolism in the fact that COVID-19 represents both a public health crisis and an economic crisis. As is the case on the public health side, the initial phase of a COVID-19 response operation is critical from the standpoint of capital. That is when the distribution of immediate capital relief to SMEs can support livelihoods and sustain economic activity, and typically, it is the period when there is a “resource gap” between donor pledges and receipt of funds.
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Unfortunately, even with an ecosystem of donors, financial institutions and other international finance actors that have deployable capital, this capital will not benefit SMEs if these actors do not have the tools or the human capital on the ground to support capital deployment.
This leads to an undeniable reality: that success and failure is determined, not by resources, but by deployment.
To take from the epidemiological world, the syringe can be just as, if not more important than, the vaccine. And in a period where social distancing has necessitated the increase of remote work and E-implementation of activities, it is abundantly clear that the syringe must be a digital one.
At UNCDF, our mission involves supporting, first and foremost, the LDCs, including Sub-Saharan African markets.
As the full reality of COVID-19 emerged, we had to move quickly to determine how we could develop a capability that can deliver capital to areas with sub-optimal digital financial infrastructure, and to do so in a matter of days versus weeks. As the swift deployment of funding is critical, UNCDF is getting involved during this immediate phase by accelerating emergency funding from donors and other partners into the bank accounts of SMEs.
The result is our Plug and Play e-grants capability, which has the main objective of producing a rapid lifeline for local businesses.
This is an approach that enables us to support the SMEs directly engaged in the response to COVID-19 and in scenarios where they have funding but encounter an unexpected short-term cash crunch by leveraging digital technology to deliver direct cash injections, while also advancing sustainable development and being good stewards of donor funding. And it is a capability that can deliver a lifeline of capital in days, not months.
In the proposal phase of Plug and Play, digital is leveraged from application to disbursement. This includes using digital publication capability to solicit grant applications and proposals, digital review and selection of SME applications for financing, and counterparties signing e-contracts. The approval process concludes with E-monitoring and disbursements, where successive financing tranches are transferred on the basis of a proposed, flexible work plan and monitoring of progress.
All the while, the digital capabilities ensure that this capital is going to the right recipient. Most importantly, from the initial E-publication to financial disbursement, the entire process can occur in as little as 14 days.
But digital does more than enable deployment under Plug and Play.
It ensures that this deployment can be done alongside a robust and transparent due diligence. Financing and milestones are digitally documented, as well as risk analysis and the impact return of a given opportunity—including the percentage of poor or marginal groups targeted in the investment, the duration of the impact, and whether there will be development additionality in the investment.
This level of digital transparency can enhance the confidence of donors that want their investment to support real impact.
Finally, Plug and Play relies on sound monitoring and analytics. We are leveraging analytics to take a portfolio approach of our grants.
By having visibility supplemented by data of the entire portfolio, we can make educated decisions regarding which impact sectors we want to support through SME grants. So, donors not only have confidence that we can make good individual choices on investments, but that we can take a strategic approach to the entire portfolio when circumstances call for it.
An essential reason why UNCDF is uniquely positioned to play this role, separate from our primary focus on LDCs and that we have the digital tools, is because of our experience in leveraging digital payments.
Among the 3 million clients served by financial products developed with UNCDF support, over 2 million benefited from digital payments. 62% of the pilot products we supported last year were digital.
And we can leverage the support of in-house partners; notably the Better Than Cash Alliance, an organization that works with private and public sector partners to advocate for the adoption of digital payments. On top of this, with our physical presence in Sub-Saharan Africa, we are complementing our digital capability with deep knowledge of African markets.
More than any other group of nations, the LDCs, including African nations, need a COVID-19 response that looks beyond the crisis itself.
That is because the virus has the potential to decimate the sustainable development future of any and all LDCs. No one would deny that the time to act is now. But UNCDF profoundly understands the “why” and the “how.” And that is the reason we can deliver value during this seismic moment in human history.