Amid the lasting impacts of the COVID-19 pandemic, coupled with the triple planetary crisis in Africa, entrepreneurs are faced with an urgent need to adopt eco-innovative and sustainable practices that improve resource efficiency across the different value chains. Not only are such sustainable consumption and production approaches key to more climate-aligned business operations, but so is active mobilization of the potential of African businesses to reduce poverty and foster economic growth.
The impetus lies in the fact that small and medium-sized enterprises (SMEs) account for almost 90% of all businesses and 80% of jobs throughout Africa. Despite their centrality to the African economy and growth, their access to financing to foster a green transition has always been met with multiple barriers – whether that would be lack of sufficient risks analysis or SME capacity – often systemically entrenched.
Because of the wide range of existing inhibitions to SME financing in Africa, embedding sustainability, particularly Resource Efficient and Cleaner Production (RECP) practices, in African SMEs is yet to reach its full potential. RECP is the continuous application of an integrated preventive environmental strategy to processes, products and services to increase efficiency and reduce risks to humans and the environment. Unfortunately, there have not been many formal commitments made to adopt RECP in sub-Saharan Africa.
Unfortunately, there have not been many formal commitments made to adopt RECP in sub-Saharan Africa.
In response, UNEP has launched a pilot project – An Ecosystem Approach to Financing Sustainability in large value chain SMEs – aiming to bring together the various stakeholders, including finance and RECP experts, commercial banks, large value chain owners and development partners, establishing a 'captive audience' approach. Through the Green Industry Platform and Global Opportunities for Sustainable Development Goals (GO4SDGs), and together with the African Guarantee Fund (AGF) and Absa Bank Kenya PLC, the pilot will implement an ecosystem approach to lending, starting with two value chains in Kenya’s agrifood value chains – the Meru Dairy Co-operative Union and Kenya Tea Development Agency Holdings Limited.
This project will aim to locate and counteract some of the most common barriers arising from the lack of SME tailored measures. They include prohibitive interest rates, lack of adequate collateral to support SME borrowing, absence of risk assessment methodology within finance institutions that properly account for environmental and social impact, low affinity among finance institutions to appropriately respond to Africa’s small entrepreneurs, and the lack of customized financial products. It also intends to address knowledge and capacity-related challenges, such as the lack of skills and know-how in accessing finance among SMEs and low SME visibility to finance institutions.
The project also hopes to highlight how the impacts of such barriers exacerbate when applied to youth and women-led SMEs due to the regional context, such as land ownership cultures and legal and regulatory frameworks that hinder active economic participation.
The pilot will support an RECP expert, the Kenya National Cleaner Production Centre (KNCPC), to evaluate the two value chain ecosystems to identify the existing gaps in resource efficiency. From the evaluation, and working with the finance experts of Fintech Frontiers Limited and Absa Bank, it will devise RECP solutions and customized finance mechanisms through which Absa Bank can intervene to finance RECP upgrades in the value chain SMEs.
The process will actively leverage knowledge bases in ongoing initiatives such as the Intergovernmental Group (IGG) on Tea and the Switch Africa Green to establish close collaboration with the project team comprised of GGKP, UNIDO, UNEP, AGF, Absa Bank and other selected finance experts.
The pilot has officially kicked-off through its inception meeting in December 2022, with the key stakeholders present. Ultimately, the pilot plans to demonstrate a deeper understanding of how RECP practices can stimulate the African economic growth by unveiling sustainable investment opportunities, which in turn can catalyze the uptake of commercial SME financing measures. Furthermore, this SME supply chain approach is sought to help enhance confidence in banks and their loans services based on the large supply chains unloading risks from SMEs and with the banks’ strengthened understanding of RECP in future financing strategies.