The Impact Investing Landscape in West Africa

> Posted by Saran Sidime, Operations Assistant, the Smart Campaign

West Africa is the second-fastest growing regional economy in Africa. Its GDP is more than double that of East Africa. However, its impact investing landscape doesn’t reflect this.

There are currently 45 impact investors active in the region, including 14 development finance institutions (DFIs) and 31 non-DFIs. Direct impact investments deployed in the region totaled $6.8 billion between 2005 and 2015. This is small relative to East Africa, which has over 150 investors and $9.3 billion in deployments on the books for roughly that same time period. Nevertheless, the investing trends in West Africa are encouraging, according to The Landscape for Impact Investing in West Africa, the third in a series of regional market landscaping studies published by the Global Impact Investing Network (GIIN).

The main barriers to impact investment in the region, according to the GIIN, include a lack of investment readiness among entrepreneurs and investees (in part due to difficulty obtaining bank financing), unpredictable policy environments, difficulty raising capital locally (among fund managers) compared to global standards, few exit examples, and macroeconomic and political instability. That is a truly daunting array of challenges. While in recent years there has been strong growth and investment in ecosystem actors such as incubators, accelerators, associations, and technical assistance providers, the ecosystem is not at sufficient scale to service the needs of the region.

However, DFI investment in the region has increased at a compound annual growth rate of 18 percent, from $190 million in 2005 to $852 million in 2014. DFIs have deployed about 97 percent of West Africa’s total impact investing capital. Nigeria and Ghana dominate impact investing in the region, with Nigeria, which accounts for 80 percent of the region’s GDP, accounting for 29 percent and Ghana 25 percent. Investment in Nigeria may be held back in part because of security concerns surrounding the country’s ongoing conflict with the terrorist group Boko Haram. Cote d’Ivoire and Senegal, thanks to greater political stability and economic growth, are likely to be bigger recipients of investment attention in the near future.

The challenges facing impact investing in West Africa aren’t unique to the region, and resemble those of an industry in its early days. In East Africa, some of the biggest barriers are also insufficient investment-ready opportunities, difficulty of entrepreneurs accessing bank financing, and few exit examples. An additional hindrance to investing in West Africa is perception. Among investors in the region there is skepticism currently surrounding new investment platforms. Driven by a lack of understanding and trust in its potential and aims, impact investing is struggling to gain credibility.

Impact investing, by the numbers, doesn’t appear to be going away anytime soon. According to a separate GIIN study, 69 percent of impact investing funds were launched after 2009, while just 13 percent were launched before 2006. It’s a young movement. For Africa’s part, direct foreign investment in the continent is dramatically increasing.

As for West Africa, only time will tell if it is able to harness its strong economic growth rate and continue to build the impact investing industry in the region.

Image credit: Accion

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