Financing SMEs for sustainability

The African Guarantee Fund CEO, Jules Ngankam, sheds light on the critical role of Small and Medium Enterprises (SMEs) in driving economic growth, poverty alleviation, and local development in Africa. In a recent interview with CNBC Africa, Ngankam emphasized the pivotal position of SMEs in the transition towards a green economy and a decarbonized future. The conversation delves into the challenges faced by SMEs in accessing finance for sustainability initiatives and the role of development finance institutions in catalyzing traditional lenders to support green initiatives. Ngankam revealed that African Guarantee Fund has unlocked approximately $3.5 billion in financing over a decade. He highlighted the prevailing issue of risk perception, stating that many investors still view the African continent as highly risky, despite the actual risk levels being lower. Addressing SMEs seeking to transition towards sustainability, Ngankam emphasized the need for financial institutions to align with green finance principles. He noted the increasing trend of investors funding green asset classes, such as green bonds, presenting a significant opportunity for African financial institutions to tap into a growing market. One of the key challenges lies in ensuring that banks and financial institutions are willing to support SMEs in their green transitions. Ngankam stressed the importance of sharing risk through guarantee instruments to provide comfort to financial institutions venturing into unfamiliar territories. By bridging the perception gap surrounding risk, institutions can better support SMEs in their sustainability endeavors. When discussing the interplay between development finance and traditional lenders, Ngankam underscored the catalytic role of development finance in mobilizing private capital. He highlighted the importance of sharing risk and creating conditions conducive to traditional lenders engaging with SMEs. The conversation also touched upon the preference for SMEs to approach traditional finance over development finance, emphasizing the need for banks to allocate a more significant portion of their portfolios towards SME financing. Ngankam delved into the market-driven nature of banking decisions, pointing out that banks are primarily motivated by returns and risks. He emphasized the role of instruments that can help banks reduce risk perception, thereby enabling them to invest in SMEs confidently. By offering support and reducing risk exposure for financial institutions, African Guarantee Fund aims to facilitate greater access to finance for SMEs in the continent. In addressing the importance of conducting green credibility checks on SMEs, Ngankam highlighted the potential costs associated with such assessments. He noted that development finance institutions could play a crucial role in covering these additional costs to ensure that SMEs have access to affordable financing. By mitigating the financial burden on SMEs, development finance institutions can support the growth of green initiatives while maintaining the affordability of capital for small businesses. As Africa accelerates its journey towards sustainability and net-zero targets, unlocking green finance for SMEs emerges as a key driver of sustainable growth and economic development. Through collaborative efforts between development finance institutions, traditional lenders, and SMEs, the continent can pave the way for a greener, more resilient future.