The Missing Middle in Africa: funding models for enterprises with growth potential
Africa is the least developed region in the world. The strategy to lift the continent out of poverty remains elusive. The various strands of economic development strategies put different emphasis on the role of governments and the private sector; the functions of the State and that of the market. As the banking sector remains largely underdeveloped, over the past decades a lot of emphasis has been put on the creation of a new set of players, like microcredit and microfinance institutions, leveraged on the idea that the poor are “natural-born entrepreneurs”. The microcredit lending model has been effective in reaching the poor but not in supporting businesses with growth potential; at the same time, the traditional banking sector focuses on larger and formal businesses, through the traditional lending model. The focus of this paper is the “missing middle”: more impressionistic than a statistical concept, it refers to that segment of enterprises whose demand for credit remains largely unmet. The Paper argues that this segment needs an integrated approach, assisting informal enterprises to become formal and following up through their growth process. Being formal is a prerequisite to access various forms of funding, but it is not costless. Enterprises must be assisted throughout their lifecycle with a combination of technical assistance and various forms funding. Financial tools need to be adapted as firms in this segment rarely have a financial track record or adequate collaterals. A new credit model must be developed to support financial decisions based on cash-flow approach. In turn, this requires continued technical assistance to the enterprise. The costs of reaching the “missing middle” will be relatively high, both in terms of risk-premium and administrative costs. Development Finance, Impact Investment and other forms of financial support must hold realistic rate-of-return expectations. The “missing middle” creates opportunities for modern jobs and contributes to the State revenue. This must enter into the cost-benefit metrics.