Nicholas Biekpe All eyes on DFIs as Africa
Posted on 14 May 2021 by Nicholas Biekpe
Emerging Market Business

All eyes on DFIs as Africa looks to economic recovery

DFIs can be the catalysts for a stronger and more inclusive continent, but they need to expand their remit to include a focus on SMEs as a key priority.


DFIs can be the catalysts for a stronger and more inclusive continent, but they need to expand their remit to include a focus on SMEs as a key priority.

Options are rapidly running out for many of Africa’s entrepreneurs and small to medium enterprises (SMEs) as banks hold back on providing funding in response to the economic uncertainty wrought by COVID-19.

This is a classic catch-22 situation. Economies badly need the innovation and the energy of small business to kickstart recovery and boost job creation, but banks are waiting for a more stable economy before they give the SMEs the means they need to help the economy.

In periods of uncertainty, mainstream banks often cut back on lending and introduce tougher criteria, which invariably put entrepreneurs and small to medium enterprises at a disadvantage. We saw this in SA when government’s R200bn guarantee scheme to assist businesses, failed to take off largely because many entrepreneurs and small businesses couldn’t meet the strict lending criteria set by the major banks.

Yet, as seen in Germany and Japan after the world wars, it is often entrepreneurs and the small to medium enterprises that drive economic recovery following a major crisis.

With major banks holding back, the role of Development Finance Institutions (DFIs) will be central in driving Africa’s post-COVID economic recovery.

DFIs, such as the Development Bank of Southern Africa (DBSA) in SA and the African Development Bank, which focus on the entire continent, aim to have a developmental impact in the markets in which they invest, alongside the requirement for sustainable returns. They are in general majority-owned by national governments and source their capital from national or international development funds or benefit from government guarantees. Most DFIs are backed by governments, which guarantee their creditworthiness, by and large making it possible for them to raise significant amounts of money on international capital markets at low rates and provide financing on very competitive terms. The finance provided by the DFI is also intended to act as a catalyst to attract and mobilise the involvement of other private investors.

This all makes DFIs ideally positioned to help drive Africa’s big development aspirations, especially in the post-COVID era. But DFIs on the continent have historically struggled to have a noticeable impact amid governance challenges and a lack of emphasis on entrepreneurship and small businesses.

To ensure that DFIs function optimally at this critical time in the continent’s history, they need to consider changing gear in four key areas.

1. Focus on small players and communities

Often DFIs operating on the continent focus on building from the top. That is, they tend to support companies or projects that are already established and neglect the small enterprises that are looking for a break. This is largely because DFIs, much like major banks, are risk averse. But, in terms of their mandate, they are meant to be focusing on smaller players and the development of communities.

Ideally, DFIs should be investing in areas where commercial investors or banks would be reluctant to venture. A bricklayer in the township wanting to expand his or her business should be turning to DFIs for financial assistance.

In Germany, after World War 2, cooperative banks (similar to the modern day DFIs) were created to provide farmers and craftsmen with access to credit. This approach was the bedrock of entrepreneurship in the country, which has firmly established the nation as one of the industrial hubs of the world.

2. Improve access and visibility of DFIs

The four Asian Tigers (Hong Kong, Taiwan, Korea and Singapore) have been some of the fastest growing countries in the world in recent times. Some of the main factors driving their growth has been DFI-funded human capital development, including significantly upgrading the educational standards of the workforce and investing in research and development, to boost small businesses. This is a model that Africa, with the assistance of DFIs, should be looking to emulate. But to reach the people that need help most, DFIs need to make themselves more visible to poor communities on the ground. Very often, they have been criticised for being inaccessible. Improving access to DFIs will be crucial if we are to ensure that they remain useful tools to promote investment and growth in poor countries and communities.

3. Strengthen corporate governance standards

In the face of the huge developmental needs of the continent, there are strong reasons for strengthening corporate governance and modernising local DFIs, to ensure that they are better equipped to fulfil their policy mandates.

There is no question that African governments should not continue to depend on the Bretton Woods Institutions — the World Bank and the International Monetary Fund (IMF), which have their own agenda based on Western interests. But corporate governance has tended to be a major issue hampering the development of DFIs on the continent.

Ensuring that skilled professionals are appointed to run DFIs is a key first step. DFIs should be considered a crucial foundation of Africa’s development and thus skilled professionals should be at the helm of these institutions. 

4. Hold the hand of the organisations they are helping

We often think of DFIs only as providers of funding or capital. But it should be more than that. DFIs should also provide assistance after allocating funds. For example, how does a farmer access markets to expand his or her business? DFIs should be operating in that space to ensure that beneficiaries actually create sustainable enterprises. In other words, the whole DFI structure should change and include mentorship as a key performance indicator.

The pandemic has pushed most DFIs to reconsider their approach to driving economic growth in Africa. Now is the time for them to prove their worth and step up to play a leading role in charting a recovery course from the pandemic.  Entrepreneurship and small business could be the lifeblood of the economy in coming years and the role of DFIs will be more crucial than ever.

Professor Nicholas Biekpe is the director of the Development Finance Centre and convenor of the Development Finance programmes at the UCT Graduate School of Business.




MORE ON Emerging Market Business

Sharron McPherson Promises and Perils of Africa's
Emerging Market Business

The promises and perils of Africa's digital revolution

Exponential digital advancement across Africa, spurred on by the COVID-19 crisis, is indeed a game changer. But its impact – the good and the bad – requires a more nuanced and intelligent analysis if we really are to build back better.

Read Article
Posted on 15 September 2021 by Sharron McPherson
Cyber security: Professor Herman Singh
Emerging Market Business

Cyber security: a critical risk that’s only set to get worse

The Transnet cyber-attack should sound a warning bell to vulnerable State Owned Enterprises and private sector firms that have been slow to beef up their cyber security systems. The alarming rise in ransomware attacks means many are only one click away from disaster.

Read Article
Posted on 6 September 2021 by Herman Singh
Ralph Hamann
Emerging Market Business

Is the business community making environmental sustainability a priority in the wake of the pandemic?

National Environmental Awareness month is celebrated in June. We asked UCT GSB Prof Ralph Hamann to share his views on the role of business schools in addressing climate change, and whether COVID-19 has caused the business world to reprioritise environmental sustainability.

Read Article
Posted on 7 July 2021 by Ralph Hamann
Steven Kuo - Why AfCFTA
Emerging Market Business

Why AfCFTA will not put Africa at odds with China

While many worry the newly-launched African Continental Free Trade Area (AfCFTA) may harm Africa-China relations, more attention should be given to improving ease of doing business for local and Chinese businesses alike.

Read Article
Posted on 28 June 2021 by UCT GSB Press Office
Anton Eberhard - keeping SA in the dark
Emerging Market Business

Ministers are holding up energy reforms, keeping SA in the dark

A trillian rand needs to be invested in new power in South Africa over the next decade in order to restore energy security. Opening up the electricity sector to massive flows of private investment in generation capacity is now our only option, but key enabling reforms still have to be enacted.

Read Article
Posted on 27 May 2021 by Anton Eberhard
society and economy - MEDIA
Emerging Market Business

SA is running out of time to fix its society and economy

Freedom Day celebrations ring hollow when the vast majority of black people in this country remain economically and socially marginalised. To unlock our future, we must invest in our people — and fast — to build a new culture of innovation, proactiveness, and risk-taking.

Read Article
Posted on 29 April 2021 by UCT GSB Press Office
democracy in SA - MEDIA
Emerging Market Business

Is support for democracy in SA waning?

On 27 April each year South Africans celebrate Freedom Day in commemoration of the first democratic elections in 1994. We asked UCT GSB Professor Thomas Koelble to give us his thoughts on whether support for democracy in the country is waning, and how this system is being affected by globalisation.

Read Article
Posted on 27 April 2021 by Thomas Koelble
KURTAPRIL2021- MEDIA
Emerging Market Business

Social justice in South Africa is as much business’ crisis as it is government’s

Busisiwe Mavuso (CEO at Business Leadership SA) was the speaker at the quarterly Allan Gray Speaker Series event, hosted virtually by the UCT GSB in March. We asked Professor Kurt April, who led the discussion, to share some of the key takeouts.

Read Article
Posted on 29 March 2021 by UCT GSB Press Office
MEDIA - 345X345
Emerging Market Business

Vaccine roll-out woes put spotlight back on Africa’s power crisis

As African countries scramble to acquire and roll-out vaccines across the continent, the urgent need for reliable energy supply is once again in the spotlight.

Read Article
Posted on 18 March 2021 by Wikus Kruger
Health Kathusa  - media
Emerging Market Business

COVID-19 vaccination is the social justice challenge of our time

The first COVID-19 vaccines have arrived in South Africa amid much fanfare — drowning out the voices of those asking why we are paying double for them in the first place and why they are unlikely to help those who need them most.

Read Article
Posted on 4 February 2021 by Katusha De Villiers
SA film industry - media
Emerging Market Business

UCT GSB teaching case study on SA film industry wins top international award

Researchers from the UCT Graduate School of Business (GSB) have taken top honours in a prestigious international case writing competition, for their teaching case on the challenges of financing digital entertainment.

Read Article
Posted on 26 June 2020 by UCT GSB Press Office
IE_Media_gumede
Emerging Market Business

New coal and nuclear power proposals undermine prospects of a post-Covid-19 economic recovery

The Department of Mineral Resources and Energy’s attachment to ‘clean coal’ and new nuclear as immediate options for a post-Covid-19 economic recovery would be comical if they were not financially ruinous. Their fixation on these non-competitive, non-commercial technologies is now wasting scarce public resources.

Read Article
Posted on 17 June 2020 by Anton Eberhard
mundia mundia - media
Emerging Market Business

The role of development finance in rebuilding South Africa’s economy post-COVID-19

The global COVID-19 pandemic has set back developing countries especially, but it also offers an opportunity to rethink their development path.

Read Article
Posted on 15 June 2020 by Mundia Kabinga
Africa needs to embrace digitisation​ - media
Emerging Market Business

It's the 80s rewind - but with internet

South Africa needs to seize the opportunities for digitisation which have emerged as a result of the COVID-19 crisis, in order to thrive in the new global economy.

Read Article
Posted on 18 May 2020 by Herman Singh
Cape Talk logo - Media
Emerging Market Business

Q&A with Siwe Kuse about the Open Africa Power programme

Siwe Kuse, a researcher at the Power Futures Lab spoke with Cape Talk's Kieno Kammies about being a fellow on the Open Africa Power (OAP) Programme, an education initiative co-hosted hosted by the UCT GSB in partnership with Enel Foundation and the Nelson Mandela Foundation.

Read Article
Posted on 17 February 2020 by UCT GSB Press Office
Press Office
Emerging Market Business

Enel Foundation and UCT GSB host energy training in SA in celebration of Nelson Mandela

Enel Foundation, together with the UCT GSB as host, has inaugurated the third edition of Open Africa Power (OAP), aimed at empowering a new generation of leaders to drive Africa’s clean energy transition.

Read Article
Posted on 10 February 2020 by UCT GSB Press Office
time is running up - media
Emerging Market Business

Time is running out if we want to fix SA’s power crisis

Eskom’s new CEO Andre de Ruyter says it will take time to solve the South Africa energy situation. But as a new CSIR report chillingly points out - time is not on our side.

Read Article
Posted on 5 January 2020 by Wikus Kruger
Can the Coming Digital Tsunami Media
Emerging Market Business

Can the coming digital tsunami carry Africa to higher ground?

There is growing evidence that digitalisation could create new opportunities particularly for innovative entrepreneurs, and bring more inclusive growth through real job creation if the right choices are made.

Read Article
Posted on 18 July 2019 by Mignon Reyneke
Improving healthcare in MEDIA
Emerging Market Business

Improving healthcare in remote areas of Africa requires radical collaboration

While there are many innovative healthcare initiatives working to improve healthcare in rural Africa, the reality is that no one organisation can go it alone. Radical collaboration between organisations and with governments is needed to overhaul the system.

Read Article
Posted on 9 July 2019 by Katusha De Villiers
Three winning ways to tackle MEDIA
Emerging Market Business

Three winning ways to tackle youth unemployment through development finance

Development finance is an underutilised tool that can be directed towards tackling South Africa’s unacceptably high youth unemployment beyond the remit of mainstream finance.

Read Article
Posted on 1 June 2019 by Xolisa Dhlamini
4 March 2019 - Back to blackous energy pr
Emerging Market Business

Back to blackouts: SA's energy problems just the tip of the iceberg

Public-Private Partnerships, access to financing and targeted skills development will be crucial in addressing Africa’s chronic power shortage.

Read Article
Posted on 4 March 2019 by Wikus Kruger
DEVELOPMENT FINANCE INSTITUTIONS - MEDIA
Emerging Market Business

Development Finance Institutions (DFIs) can lead SA’s economic recovery

While government has identified DFIs as a key partner in delivering an economic turnaround — these institutions lack capacity and resources to do their jobs effectively. Fixing this will be a necessity.

Read Article
Posted on 4 November 2018 by Nicholas Biekpe