the next frontier of impact investing: missing middle finance
DESCRIPTION
Peter F. Hinton, Chief Executive Officer - Summit Development Group - United KingdomTRANSCRIPT
The Next Frontier of Impact Investing:
Missing Middle Finance
12 November 2009
Summary Summit Development Group
The Banking Sector in Africa
The ‘Missing Middle’ Opportunity
Missing Middle Finance vs. Microfinance
Development Returns of Missing Middle Finance
Missing Middle Finance as an Asset Class
Success Stories
2
Summit Development Group
Commercial returns, development impact
S - SMEs
U - Unbanked and
M - low cost Mortgage finance
M - together, the Missing Middle (MM).
I - Invests in suitable Financial Institutions ("FIs") across Africa and
T - Transforms FIs to build value and realize the MM opportunity
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Africa is under-banked
4
Source: World Bank Enterprise Surveys, 2008
Source: FinScope
Financing gap for Missing Middle
5
Unmet demand for
Missing Middle
Size of loans offered by FIs
Microfinance Customer
6Source: CGAP Microfinance Photography Competition, 2007The Transaction, Kampala, Uganda. Photo by Rolando Villanueva
Missing Middle Finance Customer
7Source: Photo by Rachel Maser, http://www.travelblog.org/Photos/344808.htmlZimbabwe
Missing Middle opportunity
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Micro finance
Over served
Emerging propositions
Neglectedopportunity
Donor focusMicro finance
MNCsCorporates
Micro finance
SMEs, Unbanked,
Home buyers
Affluent
Mid –lower income
Poor
Affluent
Middle income
Mid –lower income
Poor
Missing Middle
Missing Middle
Potential clients
Demographic Impact
Banking opportunity
Missing Middle Finance creates jobs
Microfinancea SME banksb
Investment size(US$ mn) 1 1Leverage (Deposits mobilized) 2x 8xTotal assets available (US$ mn) 2 8Portion of assets for lending, 75% (US$ mn) 1.5 6 Average loan (US$) 317 20,000Number of loans 4,732 300Jobs created per business over 5 yearsc 1 50Total jobs created 4,732 15,000Cost per job created (US$) 211 67Source: a Averages for Sub-Saharan Africa based on 159 institutions surveyed in MixMarket 2008 Microbanking Bulletinb SDG estimates based on 2008 financial reports for 4 institutions in E. Africa: Development Finance Corporation Uganda and Finabank Group in Kenya, Rwanda, UgandaC SEAF estimate 26% annual employment growth; These calculations assume SME average employment of 20 with annual growth rate of 20%
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$1 of SME finance creates 3 times more jobs than microfinance
Missing Middle Finance drives sustainable economic growth
Formal financial inclusion
Deepening of formal financial markets
Job creation and contribution to tax base
ESG multiplier effect
Every dollar invested in SME generates 12x more in the local economy
SME annual employment growth rate of 26% and wage growth rate of 25%
72% of new jobs generated go to unskilled or semi-skilled employees
Each SME supports an average of 331 other local businesses
10Source: SEAF 2007, From Poverty to Prosperity: Understanding the Impact of Investing in Small and Medium Enterprises
Missing Middle Finance generates higher returns
Microfinancea SME banksb ROA -3.2% 2.1%ROE -1.1% 16.5%Total invested in sector (US$ bn) 6 2Average loan (US$) 317 20,000Loan portfolio (US$ mn) 2.6 243.4Average outreach per institution 32,616 3,043Source: a Averages for Sub-Saharan Africa based on 159 institutions surveyed MixMarket 2008 Microbanking Bulletin; Deutsche Bank 2007 reportb SDG estimates based on 2008 financial reports for 4 institutions in E. Africa: Development Finance Corporation Uganda and Finabank Group in Kenya, Rwanda, Uganda; IFC 2007
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Missing Middle Bank:Success Story
Uganda – SME focus since 1999Uganda – SME focus since 1999
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SME Success Story: Modern Radiators
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Conclusions
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$6bn invested in microfinance sector vs. $2bn invested in Missing Middle
Microfinance may face absorption capacity issues in the near future
Development impact in job creation and sustainable enterprises
Investing $125mn in 13 entities can create 4 million jobs over 7 years
