How Does Blended Finance Support Emerging Markets in Africa?

By Renew Capital Marketing and Communications Team | Mon Jan 16 2023

Small and medium-size enterprises (SMEs) are vital to the economy of Africa, providing an estimated 80% of jobs across the continent. According to the World Bank, SMEs account for up to 90% of businesses and remain one of the primary sources of employment for much of the world, including emerging markets in Africa and the like.

The World Economic Forum estimates that the African workforce will increase by a staggering 910 million people between 2010 and 2050, of which 830 million will be in Sub-Saharan Africa. This means there are ample opportunities for a small business in Africa to thrive and scale, yet they face significant challenges.

Small businesses in Africa often lack the necessary access to capital and financing. This lack of liquidity can severely hamper their ability to grow and develop. Fortunately, there are a number of initiatives that are helping to mitigate this problem.

So, what is blended finance, what does it mean to leverage funds and how can investors grow emerging markets in Africa? Let’s discuss.

What Is Blended Finance and How Can It Support a Small Business in Africa?

Blended finance combines public and private funds to support development projects with a clear social or environmental impact. Blended finance structured deals have become increasingly popular in recent years as they allow for a more sustainable and risk-mitigated way to support development projects.

What does it mean to leverage funds? In short, leveraging funds means strategically utilizing other people's money - usually in the form of debt or equity - to finance a project or venture.

By pulling together the power of multiple sources of capital, a blended finance model can help de-risk projects and attract a wider range of private investments. Blended finance could be essential to help small African businesses access the capital they need to grow and thrive.

Working with impact investors, development finance institutions and other donors enables small businesses to get the support they require. Not only can this financing provide much-needed support for small businesses in Africa, but it can also help attract additional private investment. What Is a Blended Fund Investment?

What Is a Blended Fund Investment?

Before looking at how African economies can be impacted by this style of investment, we must answer the question: What is a blended fund investment?

According to the World Economic Forum, blended finance can be defined as, "the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets."

There are three primary aspects to blended finance:

1. Leverage

Financial leverage is the idea of spending (or borrowing) money to make money. Leverage, a fundamental concept in blended finance, is the use of development finance and philanthropic funds to attract and catalyze private capital.

2. Impact

For an investment to be classified as blended finance, it must be rooted in a local context and offer strategic, impactful partnerships for those the investments engage. It should generate social, environmental and economic progress for all those targeted with capital.

3. Returns

For private investors to be interested in blended finance, they must see the possibility for a financial return on their investment that aligns with market expectations. Working with transparency and evidence-backed results makes it easier to attract new investors to development projects.

These three elements make up the essence of blended finance. Not only does it provide much-needed capital to Africa SMEs and the like, but it strives to do so sustainably and to positively impact society.

3 Ways Blended Finance Helps Grow Emerging Markets in Africa

Africa’s emerging economies could stand to gain a great deal from the use of blended finance. Here are three ways in which it can help:

1. Reduce Risk and Uncertainty

One of the main benefits of blended finance is that it may help reduce risk, and the uncertainty associated with it, when investing in developing countries. Using a combination of public and private funds, investors can spread their risk across many projects. This makes it a more attractive option for those who may not have an appetite for high-risk investments.

2. Expand Access to Private Capital

One of the main challenges small businesses in Africa face is access to financing. This is especially true for SMEs looking to grow their businesses. The cost of capital for these businesses is generally cumbersome to grow, making it difficult for them to obtain the funding they need.

Blended finance can help to overcome this challenge by providing a more sustainable and risk-mitigated way for investors to support development projects. By engaging in blended finance, investors can help to expand access to private capital, thus allowing small businesses in Africa’s emerging economies to grow and thrive.

3. Achieve Impact Targets

When investment aims to generate positive social and environmental outcomes in addition to financial returns, it is known as impact investing. Impact investing is becoming increasingly popular as more investors look to support companies that are making a positive impact on the world.

However, due to the nature of their business models, many Africa SMEs have difficulty attracting investors. Blended finance can help to overcome this challenge by providing a way for impact investors to support these businesses.

By engaging in blended finance, investors can support their impact targets while also having the potential to receive a financial return on their investment, benefitting all parties involved.

Partner With Renew Capital to Grow Emerging Markets in Africa

Blended finance is a powerful tool that can help to support Africa SMEs and expand access to public and private capital. By working to reduce the risk and uncertainty associated with investing in developing countries, blended finance can attract new investors and help to grow Africa's emerging economies.

Renew Capital is committed to connecting investors with growing African SMEs through targeted and strategic blended finance investments. If you’re an accredited investor wondering what can be done to help grow emerging markets in Africa, contact us today to learn more.

This blog should not be viewed as investment advice, or as a solicitation of an offer to buy or sell securities or to adopt any particular investment strategy. Impact investing, and investing in frontier markets specifically, is speculative in nature and involves a high degree of risk. The Renew Capital Angels invest in companies located and doing business in sub-Saharan Africa. Investors should understand and be willing and able to handle the risks of investing in such frontier markets, which are more significant than the risks associated with investing in securities of U.S. companies or in other developed countries. Risks include the risk of total loss of an investor’s entire investment. Investors should fully understand all risks and consult with their independent financial, legal and tax advisors to determine whether any particular investment or investment strategy is appropriate for them. Renew Capital does not make any recommendation regarding the appropriateness of any specific investment opportunity for any specific investor.