Why DFIs are key to post-Covid-19 economic revival

The last few months have been extremely challenging for businesses and individuals alike, but there are positive signs Africa may have passed its Covid-19 peak, according to the World Health Organisation.

It’s been incredibly encouraging to see stakeholders — big and small, local and international — come together and collaborate to provide a buffer for both the private sector and the most vulnerable.

The government and the Central Bank of Kenya responded decisively — faster than in many developed countries, to protect the country’s dynamic and diversified economy. Development Finance Institutions (DFIs) like CDC, Norfund and FMO also played a key role in shoring up the private sector in Kenya and further afield during this turbulent period.

Despite this, more than 1.7 million jobs in Kenya were lost in between March and August due to disrupted supply chains, currency volatility, a reduction in remittances and the general downturn in domestic activity. What lessons have DFIs learnt from the pandemic? And what more can we do to protect vital jobs and livelihoods?

First, while DFIs will never be first responders during times of crisis — governments and development agencies are best suited to this — the speed with which they reacted has been critical to building economic resilience and restoring confidence.

Many in the DFI community prioritised their Covid-19 response measures and fast-tracked decision-making while also providing technical and financial aid to where it is most needed. DFIs focused both on direct investments but also broadened their support to fund managers and their portfolio of SMEs. I would like to see DFIs continue to embed this agility as a core principle and practice going forward.

Second, tried and tested solutions often form the best response. The International Finance Corporation (IFC) — the world’s largest DFI — provided $4 billion in additional capacity for its Global Trade Finance Programme and Global Trade Liquidity Programme in response to the crisis. CDC echoed this approach by focusing on injecting trade finance liquidity into Africa’s financial system via existing partner banks and intermediaries. Trade finance is one of the most effective ways of supporting local economies, businesses and crucially protecting employment.

This proved to be one of the quickest and scalable tools at DFIs’ disposal. One that didn’t involve businesses taking on additional debt or having to dilute ownership. Our trade finance commitments with partners including Absa and Societe Generale will amount to some $300 million, enabling local banks in Kenya and many others in the continent to extend credit to those who need it during these challenging times.

Similarly, DFI loans to financial institutions — such as the IFC’s $50 million loan to Equity Bank to increase working capital and trade-related lending to SMEs — have also been key. Having spoken to the CEOs of some of Kenya’s largest banks, it’s clear that these countercyclical investments are a vital lifeline for local businesses, particularly as international banks have reduced their exposure to Africa.

By incentivising partner institutions to focus on essential sectors such as health, manufacturing and food security, DFIs have been able to protect vital supply chains that underpin basic human needs and support thousands of jobs, an important source of economic activity and tax revenue. However, more remains to be done in overcoming Africa’s sizeable trade finance gap of $81 billion, particularly in the post-Covid-19 context. DFIs will continue to play an important long-term role in narrowing the gap, though we will not be able to overcome it alone.

Other impact investors, particularly those focusing on the SME segment, could and should play a growing role in underpinning trade in Africa. Doing so would help them achieve their objectives of protecting and creating jobs, supporting livelihoods and contributing to poverty reduction.

Third, the last few months have also shown us the importance of thinking creatively and flexibly about how we invest during crises.

DFIs must invest behind the private sector’s evolving needs and may have to consider smaller size investments in such scenarios as opportunities for larger deals become rarer.

Building long-term relationships with investees and helping them grow into national or regional players is now more important than ever.

Credit funds that support microfinance and tier-three banking institutions in Kenya are also a promising area where DFI investment can boost financial inclusion.

Looking to the future, the pandemic has laid bare the fundamental structural weaknesses and inequalities within our societies. I see this as a clarion call for the investment community and policymakers to work hand-in-hand towards a “build back better” agenda.

By channelling resources into key areas — education, health and green industries — we can help build more inclusive, resilient and just societies that are better equipped to overcome future crises. Similarly, improving digital skills and equipping portfolio companies to embrace digital business models will allow them to pivot to new areas of growth and become more resilient to shocks.

From where I live and work in Nairobi, the pandemic has highlighted the vital role of countercyclical finance provided by DFIs. Our unshakeable commitment to continue investing — and devising innovative solutions in a fast-evolving world — to protect and deepen impact is more evident than ever before.

Seema Dhanani is the Head of Office & Coverage Director for Kenya, CDC Group.