In June, the DCED’s in-person global seminar, supported by the Netherlands’ Ministry of Foreign Affairs and FMO, brought together stakeholders in Nairobi, Kenya, where conversations reflected a broader shift across the sector towards more tailored and market-driven approaches to SME finance. This is an area where DGGF – Financing Local SMEs is actively contributing.
Shifting approaches in supporting SMEs
Donor Committee for Enterprise Development (DCED), established in 1979, brings together donors, foundations and UN agencies to advance private sector development. It has grown into a leading knowledge hub, increasingly focused on SME finance and engaging DFIs, investors and fund managers.
As a community that has been mostly deploying overseas development aid (ODA) through grants, the community now faces shrinking budgets and rising uncertainty, facing a shift towards new, more market-based approaches. This made it a valuable forum for the DGGF, whose experience contributed to three key discussions at the seminar.
(1) The SME finance market: an ever increasing missing middle?
It was helpful to move beyond the concept of the “missing middle” and instead focus on SME segments, recognizing the diversity of SMEs and their varying financing needs, from early-stage growth and working capital to expansion and asset acquisition, requiring a range of financial and non-financial services. The SME segmentation first published in 2018 was used as the reference to deepen exchanges.
Although the MSME finance gap remains - estimated by the World Bank at USD 5.7 trillion - it would be incorrect to say that little has changed. From the banks being able to lend to SMEs thanks to toolkits such as INVEST to mobilizing local pension capital in a Fund of Funds dedicated to SMEs in Ghana, to enabling innovative models and new SME finance providers to provide anything between pure debt and straight equity; SME finance ecosystems in emerging markets have become more diverse, better serving previously underserved SMEs. While scaling remains a challenge, there is growing evidence that the missing middle can be further reduced
(2) Can we build markets for sustainable and effective Business Development Services (BDS)?
The essence is about providing quality services that nurture local SMEs to grow (in terms of turnover, employee base and access to external finance), while enabling BDS providers to monetize their core service offering, enhancing cost effectiveness and diversifying revenue streams. In this respect, applying a systems change approach like the DCED has been doing for many years, has proven helpful, notably in designing new ways to interact with BDS providers, deploying some innovative grant funding. Outcomes of the first results-based financing instruments deployed in BDS providers were shared. A report will be published later in the month, and DGGF team and partners are eager to keep engaging with BDS providers and their funders to bring the system to perform better.
(3) Who Does Finance Work For?
Do we still need to make the business case for supporting women led SMEs? The answer is simply no, the evidence is already there. Exchanging on gender-smart intermediation to serve women-led enterprises was the core of the discussion. It all starts with segmenting again. With the “What Enables her business to grow” segmentation framework and toolkit, financial service providers, BDS providers, their funders and financial regulators now have the tools to develop segment-specific value propositions for women-les SMEs in emerging markets. This leads to deepening the conversation and to understand the women entrepreneurs and their businesses in depth all the way to whether they have dependents to care for and the impact it can have on the business. With this understanding, opportunities of serving women-led businesses in emerging markets can be further unlocked