Here’s how Kenya can unlock $6b impact capital to finance Big Four, SDG projects

By putting in place investor-friendly policies and establishing a national advisory board to catalyse impact investment, Kenya can unlock $6 billion of capital to finance programmes aligned to the United Nations Sustainable Development Goals.

This was the conclusion reached at the inaugural Global Steering Group for Impact Investment, Kenya Impact Dialogue on December 10. More than 200 investors, entrepreneurs, policy-makers and development finance professionals convened in Nairobi for the summit. Impact investing is made into companies or organisations that have a social and environmental impact, and also yield financial returns.

An advisory board will work closely with the existing SDG Partnership Platform, a collaboration between the UN and Kenya’s government in support of its “Big Four Agenda — food security, manufacturing, affordable housing and healthcare — which also forms part of the 17 SDGs. The UN has already done extensive groundwork in relation to SDG3 on healthcare — work the board will be building on.

Working with investors and social entrepreneurs, we have launched 22 national advisory boards globally. They serve as platforms for private, public, and civil society actors to jointly create an enabling environment for impact investing.

One major success has been the establishment of wholesale funds to direct capital efficiently and productively to projects.

Wholesale funding occurs when a financial institution receives deposits from larger entities outside of traditional consumer and retail deposits such as governments or other financial institutions.

Inspired by the UK’s Big Society Capital, the $950 million impact wholesaler founded by GSG chair Sir Ronald Cohen, Japan is channelling $620 million per annum into a wholesaler, Canada is building a $560 million wholesaler, Australia and South Korea are each building $300 million wholesalers, Portugal is building a $65 million social innovation fund and South Africa’s wholesaler fund is expected to total $140 million.

A Kenya advisory board could work with the government to create a similar impact investment wholesale fund to boost the supply of capital.

One key recommendation contained in the Kenya State of Impact Investing Report, which we launched at the Kenya Impact Dialogue, is that the government should make the regulatory environment more investor-friendly. For example, policymakers should encourage foreign funds to register in Kenya, rather than abroad in countries such as South Africa or Mauritius, where tax incentives are more favourable.

Social enterprises

Another action the government could take would be to recognise and define social enterprises. Currently, there is no recognition or definition of social enterprises, which have the option to register themselves as limited liability companies, sole proprietorships, not-for-profit organisations, co-operative societies and corporations.

In the absence of a separate registration category for social enterprises, they prefer to register as limited liability companies as it gives them the opportunity to be listed on the national stock exchange in later stages of growth.

However, it also imposes an obligation on them to abide by same tax and regulations as other established businesses, which often creates additional financial burdens for these early stage enterprises.

Investors have the wherewithal to improve market fundamentals by combining different forms of capital and instruments. The majority of existing funds focus on equity, notwithstanding the increasing number of enterprises and deal closures are low; averaging around 20 for past five years.

Meanwhile, the current structure of investment, which is akin to the Silicon Valley model, needs to be adapted for Kenya. Different funding structures and instruments, including debt, mezzanine, guarantees and more patient risk-taking capital are required in this market. A mezzanine loan can be converted into equity if the borrower fails to repay. A financial guarantee is a promise to take responsibility for another company’s financial obligation if that company fails to meet its obligation.

Impact investors in Kenya are increasingly investing in the same companies, so much so that over 70 per cent of the capital deployed in the country in 2017 went to just five companies. There is a need for impact investors to widen their horizon and invest in companies outside of their usual network and outside of the major cities.

On the demand side, there is a need for increased awareness among social enterprises on the different instruments and mechanisms of impact investments. Many social enterprises are not aware of how they can benefit from the different instruments available on the market. As
a result, they end up only absorbing grants or traditional debt funding.

At the Kenya Impact Dialogue, we learned that the Kenya Private Sector Alliance, is already working on a social enterprise policy and legal framework. Kepsa has brought on board and formed a national committee consisting of Ashoka East Africa, British Council, ActionAid, GIZ, Academia, Thomson Reuters Foundation, Trust Law and others.

We therefore believe Kenya has a unique opportunity to support and attract more impact investment for local social enterprises and the larger regional impact sector capturing emerging impact investors, social enterprises, incubators and support providers.

But the demand far exceeds the support needed by entrepreneurs. With a national advisory board and investor-friendly measures firmly in place, Kenya could unlock capital at sufficient scale to drive an impact investment revolution, representing a win for investors and for its people.

Krisztina Tora is a market development director at the Global Steering Group for Impact Investment in England.