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5.5 Energy access as market failure: Enterprise solutions to poverty

Written by: Shell Foundation

Article Overview: In sub-Saharan African countries as in other poor regions, development of the SME sector in energy and other segments is constrained by market failure.

5.5 Energy access as market failure: Enterprise solutions to poverty

In sub-Saharan African countries as in other poor
regions, development of the SME sector in energy
and other segments is constrained by market failure.
Figure 2 highlights the SME finance segment from
$50,000 to $1 million where the supply of enterprise
finance is extremely limited in sub-Saharan Africa.
It sits between the ‘relatively’ well served microfinance
segment (loans up to $10,000) and project
financing and venture capital (from $1m to $5m).
Again as in India, African banks view lending to
SMEs as high risk because entrepreneurs lack
business experience and acumen and have little or
nothing in the way of collateral or assets to secure
against a loan.

But some favourable conditions exist

There are, however, market, policy and business
drivers that make African banks interested, in
principal, in the SME energy sector. First, there’s
plenty of evidence that very poor segments of rural
Africa are willing and able to pay for energy
services and already can spend as much as 30–50%
of their disposable income on energy.

Next, governments want the overall SME sector
serviced with finance in order to trigger its growth
and so often require local banks to earmark funds
for this purpose. In parallel, international
development finance organisations also have SME
funds available to lend to African banks. Finally,
the banks themselves recognise that a vibrant and
expanding SME sector into which they can lend
with confidence represents a major growth
opportunity for their business.

But these positive preconditions have still not
given local African banks the confidence to actually
open their loan books to SMEs. This is because
small enterprise requires finance and very specific
kinds of development assistance']);"> business development assistance (BDA) at
both the pre-finance stage and during operation.

African banks have neither the ‘culture’ nor the
skills and experience to provide BDA to SMEs.
Banks know how to manage assets which means if
loans are not repaid, they know they can repossess
the assets used as collateral to recover their money.

They don’t know how to manage businesses,
especially start-up SMEs, to profit so the business
can pay off its loans. So the banks deploy their
own funds into lower risk sectors they do
understand and resist pressures to finance SMEs.

As a result, local and international finance
earmarked for the SME sector in Africa goes
unused or is invested elsewhere.

There have been other SME financing initiatives in
Africa (some focused on the energy sector) where
local capital has played only a small role and where
governments or non-profits accessed development
funding from abroad. But these initiatives have by
and large not been very successful.

Related Articles
  6.0 Propositions and conclusion: Enterprise solutions to poverty
  2.0 Introduction: Enterprise solutions to poverty
  Leveraging the Power of Markets with Microfranchising
  1.8 Making money work for poverty reduction: Working Out of Poverty
  6.3 Come Together: Enterprise solutions to poverty

Article Tags: Africa, African banks, business development, India African banks, international development, international finance, SME, SME sector, SMEs, sub Saharan Africa



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