Problem

Poverty and its effects are both devastating and seemingly intractable. The statistics are becoming all too familiar:

  • 1.2 billion people live on less than $1/day
  • Every 3 seconds a child dies from the effects of poverty
  • 100 million children live in the streets
  • There are more than 25 million slaves today, two hundred years after abolition

Aid Isn’t the Answer

Such a scandalous situation cannot be successfully addressed by public aid or private philanthropy. Africa has received nearly $4 trillion in development assistance since 1950 - the equivalent of four Marshall Plans - yet the continent is little better off today than it was 50 years ago. The chart [left] shows conclusively that aid cannot buy development.

While there is no doubt a role for grant assistance, aid too often fosters dependency, distorts markets, misaligns incentives and rarely yields scalable, sustainable impact. By contrast, the recent examples we do have of sustained economic development - think the “Asian Tigers”, China, India - all share at least two things in common: 1. they received little or no development aid; and 2. their economic growth was fueled by local entrepreneurship. So the evidence leads us to encourage private enterprise.

The Missing Middle

The global capital market efficiently fuels large-scale enterprise at the top of the economic ladder in developing countries. Abundant international investment is flowing into the utility, telecom, natural resource and infrastructure sectors of many African economies.

At the other end of the economic ladder, microfinance has become very popular - first as a poverty intervention and, latterly, as a commercial venture. Providing high quality financial services for the poor can be beneficial. It seems to work. Loan repayment rates are typically very high (98%) and microfinance helps poor households smooth tenuous cash flows.

But most people are not entrepreneurs; they need jobs. Most micro-enterprises will remain micro. Microfinance is best-suited to family enterprises operating a cash charging business. These businesses turn over their capital daily or weekly, passing interest costs along to cash-paying customers in order to make weekly repayments.

Those micro-businesses that grow eventually bump up against the dearth of “mid-finance.” In developed economies, small and medium-sized businesses supply the vast majority of jobs. Yet in the frontier markets of Africa, SME finance is scarce and/or very high priced. The SME entrepreneurs’ options are typically limited to small denomination debt instruments with high rates, short amortization periods, and a requirement to pledge assets as security.  Growth capital is therefore too expensive or just too risky. Flexible SME finance is the “missing middle.”