Despite numerous global initiatives aimed at easing financing constraints for small businesses, a significant segment of SMEs —categorised as high-impact businesses—remain underserved.
These enterprises, which operate within complex and far-reaching supply chains, are critical to economic development as they source, process, and market products from low-income areas, providing essential goods and services to underserved communities.
Traditional financing mechanisms, such as bank loans, often impose prohibitive collateral requirements, while venture capital investors shy away due to the relatively small investment sizes, extended time horizons, and uncertain exit pathways.
As a result, these businesses fall into a financial gap—too large for microfinance but too small or complex for mainstream private equity. This creates a paradox: businesses with high social and economic impact struggle to attract the funding they need to thrive.
Impact investing, defined as the deployment of funds into investments that generate a measurable and beneficial social or environmental impact alongside a financial return on investment, has been used in more advanced economies to address this gap.
Research estimates indicate that the impact investing industry could grow from around Sh6.5 trillion in assets to Sh64.9 trillion in assets within the next decade.
Such capital may be deployed using a wide range of investment instruments in Africa, which include private equity, patient capital, hedge funds, loan guarantees and real assets, among others.
Investors may take an active role mentoring or leading the growth of the companies they invest in, similar to how venture capital firms assist in the growth of early-stage startups.
Most impact investors are nonprofits, raising grants from donors to pay for business development services, although commercially orientated investors providing capital-raising advisory services are emerging.
Blended finance also, which refers to the strategic use of capital mobilised from philanthropic sources, can be adopted to increase investment in businesses that have a positive impact on society.
To date, it is estimated that blended finance has mobilised approximately Sh26 trillion, resulting in positive results for both investors and communities in frontier markets.
Blended finance solutions can also be performance-based, and can be structured as debt, equity, risk-sharing, or guarantee products with different rates, tenor, security, or rank.
By leveraging innovative financing structures, investors can support economic development while achieving long-term financial gains.
Policymakers can also play a role by incentivising investments in high-impact enterprises through regulatory frameworks that de-risk such ventures.
By rethinking traditional investment models, we can unlock the untapped potential of these high impact enterprises, fostering broader economic development and resilience in emerging markets.
The writer is the Chief Investment Officer/Chief Operating Officer at Grassroots Business Fund.
