On July 1, 2020, UNCDF hosted a webinar titled “Financing for SMEs Impacted by the COVID-19 Crisis in LDCs.” The seminar explored challenges and approaches to provide financial and related support for LDC-based SMEs, with a particular focus on small enterprises, that are impacted by the COVID-19 crisis.

The discussion was moderated by Anders Berlin, Director for UNCDF’s Least Developed Countries Investment Platform. Panelists for the session were:

• Ms. Jennifer Bash, Co-founder and CEO, Alaska Tanzania, Tanzania
• Mr. Edward Isingoma Matsiko, Managing Partner, Pearl Capital Partners, East Africa
• Ms. Durreen Shahnaz, Founder, Impact Investment Exchange (IIX)
• Mr. Papa Demba Diallo, CEO of FONSIS S.A., Senegal
• Mr. Ashadul Islam, Senior Secretary, Financial Institution Division, Ministry of Finance, Bangladesh

Judith Karl, UNCDF’s Executive Secretary opened the webinar and set the stage for the discussion. She emphasized the critical importance of securing financing for SMEs to prevent soaring job losses, growing poverty rates and further SDG setbacks in LDCs. Ms. Karl also highlighted that women and youth entrepreneurs are especially vulnerable and face particular challenges in accessing finance and other types of support.

The panel reflected on the challenges that government-imposed closures and export restrictions are causing for SMEs. For example, supply and distribution chains have been severely impacted, making reaching both domestic and export markets and getting input supplies very challenging.

Tanzanian entrepreneur Jennifer Bash stressed that her main challenge is the crunch in liquidity. While she has granted buyers of her food supplies extended payment terms, she still has to continue to service her three loans. The Central Bank of Tanzania has offered some support to commercial banks, including discounted rates and easing of regulations to allow for loan restructuring, but this has not actually translated into relief for borrowing enterprises.

Not a single bank has offered restructuring of loans and this has put us in a liquidity crunch, which is very challenging. And I have not seen any support packages from international institutions. Jennifer Bash, Co-founder and CEO, Alaska Tanzania, Tanzania

Even in countries with specific stimulus packages targeted at SMEs, the panelists are seeing challenges in reaching smaller enterprises. The stimulus is mostly following the same paths as non-crisis finance and is not reaching last mile SMEs. Stimulus is primarily channeled through formal banking institutions, which do not have the necessary regulations, capacities and systems to reach impacted SMEs quickly.

The Government of Bangladesh is providing over $2 billion in liquidity support for small enterprises through the banking system and is also subsidizing interest rate payments. But the banks are not able to reach the enterprises most in need due to formal rules and requirements. Mr. Ashadul Islam, Senior Secretary, Financial Institution Division, Ministry of Finance, Bangladesh

COVID-19 has shown the limitations of both development finance and capitalism. Donors, multilateral institutions and the private sector are falling into the same old habits of how to solve this humanitarian challenge. The large amounts of stimulus funding we hear about go to existing clients and partners and there is no trickle down to small businesses and to women. We need to think of more inclusive solutions. Durreen Shahnaz, Founder, Impact Investment Exchange (IIX)

FONSIS in Senegal is looking at alternative and more effective models for investment and provision of crisis SME funding, such as through fund structures (e.g. mezzanine) rather than through banks.

Channeling funds through the banking system is a solution of the past. We have to think out of the box. The best way to fund SMEs during the crisis is to go through structures like debt funds. This also allows for provision of technical assistance, which is critical. Demba Diallo, CEO of FONSIS S.A., Senegal

Edward Isingoma of Pearl Capital Partners (PCP) indicated that some 70% of the portfolio companies they invest in have been severely impacted by the crisis and are struggling, especially export-oriented companies. To support them, PCP is restructuring some of its debt investments and allow investees more flexibility. They are also making additional investments into companies that require follow-on capital and are inviting other impact investors to come in and make investments, using PCP’s diligence to speed up the process.

PCP is also supporting their investees to move from a growth strategy to survival strategy. All the panelists emphasized the importance of technical assistance (TA) for SMEs to manage the crisis, as it helps improve business management, financial literacy and digital solutions.

Technical assistance is very, very important, our SME investees don’t have the capacity to stabilize and grow in times like these. Edward Isingoma, Managing Partner, Pearl Capital Partners, East Africa

In many cases entrepreneurs have also turned to digital solutions in order to market and sell their products, but challenges remain.

We tried to digitize our distribution and move from wholesale B2B to B2C, but it is not yet in the culture here. It is too low volume at too high cost. Our B2C experiment failed. Jennifer Bash

If the crisis continues, many SMEs will be forced to go the digital route, they won’t have a choice. Adaptation may be slow but it will be the new normal. Edward Isingoma

Impact Investment Exchange (IIX) emphasized the need to expand the use of de-risking capital to help mobilize widely available private capital for small businesses. IIX is putting in place an emergency facility to mobilize private sector investments though a blended finance mechanism that offers first loss donors leverage of 20 times in private sector capital.

Donors who want more bang for their money should work with blended finance organizations that can give them leverage and get the dollars to the last mile. Durreen Shahnaz

Each of the panelists finished the webinar by leaving the attendees with one positive issue that they see coming out of this time of crisis.

Click here to listen to the full webinar recording.