Recent World Bank investment climate surveys find that the top two constraints for small and medium enterprises (SMEs) in Africa are access to finance and access to energy. Given that SMEs contribute disproportionately to boosting job creation, GDP, and exports, addressing these two constraints is critical to promoting economic development on the continent.
A new project combining skills across the World Bank Group and IFC is taking advantage of disruptive advances in the energy and finance sectors to address these longstanding challenges for SMEs.
Current access to electricity remains woefully low and is a major impediment to economic growth. More than half of Africa’s population isn’t connected to the energy grid and has no access to reliable power. At the same time, fewer than 50% of adults have an account with a formal financial institution.
In recent years, however, two important developments have made it possible to begin addressing these challenges:
- Off-grid energy solutions—notably solar power—have fallen dramatically in price with new business models working to scale them
- New digital-based financing mechanisms, such as crowdfunding, cryptocurrencies, peer-to-peer lending, psychometric testing, big data, and blockchain have emerged as tools for under-served finance markets.
There are strong parallels in these advances for both sectors. Whereas both energy and finance are traditionally provided by large-scale, centralized service providers—state-owned electricity utilities and large commercial banks, respectively—new solutions have effectively decentralized and democratized the provision of these services. Now a range of smaller,
Insufficient access to finance has impeded scaling the advances in off-grid energy access; combining the technological advances in the financial and off-grid energy sectors can open possibilities previously deemed improbable.
A group of staff from the energy and finance sectors within the institution are leveraging technological breakthroughs in both sectors to explore how to promote these innovative solutions. This effort is supported by SME Launchpad—an internal World Bank Group competition that promotes innovative ideas for SME development.
This combined team is currently mapping off-grid solar finance needs across the venture cycle and target markets to understand where the private sector, IFC, and the Bank can facilitate access to capital. The development of new financial tools for the off-grid solar market must recognize the full range of potential investors, in what circumstances their financing is most appropriate and the need to maximize commercial funding.
Steve Jobs once noted that some of the biggest breakthroughs in innovation come at the intersection of the most disparate fields. He accredited the combination of “computer engineering” with “design” for the ubiquitous iPhone (or variant thereof). Similarly, potentially ground-breaking solutions in economic development could be found at the intersection of the most disparate fields, provided that effective collaboration can be engendered between the teams involved.
Some innovative models have already been developed and are now being scaled across the continent. For example, M-Kopa and other companies have pioneered a pay-as-you-go model that combines the leasing of solar panels with digital M-Pesa advance payments. And the World Bank has supported the spread of energy access through its loans and by providing credit to solar companies.
However, many other innovations could also exist in crowdfunding, impact investing, and possibly even blockchain solutions. The small transaction sizes, the decentralized provider and customer base, the need for guarantees to leverage private capital, and the ready availability of data all make the off-grid solar sector well-suited for these finance advances. The challenge going forward will be to catalog the relevant alternative finance solution and adapt them to the off-grid solar market.
If access to finance and energy can be addressed in a meaningful way—as these new technological advances suggest—then we stand on the cusp of a very exciting new era for Africa. Not only will, but non-energy SME enterprises will also be able to power up and create jobs, compete with imports, and increase GDP.