World Bank approves financing for SMEs but is it enough?

World Bank approves financing for SMEs but is it enough?

Small and Medium Enterprise financing (SME Financing) has become a “hot topic” especially with many studies having revealed the tremendous contribution of SMEs to economic development.

However, one big challenge has been closing SME Financing gap which is highly linked to limited connections to networks of international mentors, angel investors, and venture capitalists all of which make it difficult for local startups and SMEs to grow and compete internationally.

This has now seen organizations like The World Bank come on board to offer funds that can help most African SMEs scale up. Recently The World Bank approved a $50 million International Development Association (IDA) credit to increase scale innovation and productivity among Kenya’s enterprises.

Dubbed as the Kenya Industry and Entrepreneurship project (KIEP), the project is expected to benefit some 33,050 individuals and 2,393 firms.

This will support the ambitious development targets outlined in Kenya’s Big Four development agenda and Vision 2030 that require significant growth in private sector jobs and overall productivity.

Highlighting some of the challenges Kenyan owned SMEs face, World Bank says that currently the SMEs lacks the adequate skills that can produce a solid pool of internationally competitive, technology enabled businesses.

SMEs, which are key drivers of the economy, also face difficulties in improving their productivity due to poor managerial practices and information failures around how to upgrade.

The World Bank’s International Development Association (IDA), established in 1960, helps the world’s poorest countries by providing grants and low to zero-interest loans for projects and programs that boost economic growth, reduce poverty, and improve poor people’s lives. IDA is one of the largest sources of assistance for the world’s 75 poorest countries, 39 of which are in Africa.

Resources from IDA bring positive change to the 1.5 billion people who live in IDA countries. Since 1960, IDA has supported development work in 113 countries. Annual commitments have averaged about $18 billion over the last three years, with about 54 percent going to Africa.

While we welcome the World Bank Funding, the question that lingers now is the position that Donor Funding places the Investor funding in the long-term. Investors are the people most committed to seeing to the long-term success of SMEs and are most likely to commit large dollars over time – both of which are key to a successful capital campaign.

The other issue with donor finding is that Its not clear whether donor-backed investment is actually harming the development of local investment players and instruments – its hard to compete with “free-money” afterall. But that is a larger topic for discussion.

However, despite them having huge chunks of funding allocated to SMEs, when it comes to DFI, where world bank falls, is it enough that funds are allocated? It is clear that the gaps in measurement of performance op0f SME funds emanate from a lack of standard indicators and benchmarks.

There are also limited efforts to promote transparency in reporting and breaking down how the funds are used. Most SME funds by DFIs do not even reach the smaller-end of the SME spectrum located in “frontier” markets.

The question around the role of DFI in supporting SME funds is whether or not should they play a stronger role as catalyst investors going beyond the provision of financing. DFIs should also try to reach more frontier markets and aid in the development of the venture capital or private equity sector in countries like Kenya as opposed to giving finances only.

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