Small and growing businesses are engines of economic growth in emerging markets, creating 70% of all formal jobs. Yet these businesses experience an annual estimated financing gap of $930B USD. Commercial banks in these markets rarely serve these businesses because of their size and risk profile — they’re too big for microfinance yet too small for traditional commercial lending. Because of this, these enterprises are often characterized as the “missing middle.”
Recent research commissioned by the Collaborative for Frontier Finance concludes that this “middle” is actually comprised of four types of companies, or “missing middles.” The research demonstrates that businesses falling through the financing gap often do so for different reasons and require different financing solutions. Investors must get creative to meet these varied needs.
In this Q&A, Dalberg Advisors’ Global Knowledge Lead Kusi Hornberger talks with Camilla Nestor, CEO of MCE Capital (MCE), a nonprofit impact investing firm that provides debt capital to small and growing businesses and financial service providers in emerging markets. Nestor speaks about the gaps she sees and how blended finance can make capital more accessible to high-impact enterprises.
Kusi Hornberger: Camilla, you’ve worked to ensure people have access to financial services throughout our entire career within various organizations. What are the biggest gaps you see?
Camilla Nestor: Of the roughly two billion people around the world who lack access to financial services, women and smallholder farmers are the two most underserved groups.
For over a decade, I worked in digital financial services and mobile money and I am deeply concerned that the technology revolution that shows so much promise has passed many women by. The data shows digital users are primarily men in cities, not women in low-income, rural communities — leaving a six percent gap between men’s and women’s access to financial services in emerging markets. It’s encouraging to see some progress in closing this gap in the 2021 Findex data. After being stuck at nine percent for years, we saw an incremental improvement to six percent, but this data point belies a mixed set of trends — dramatic improvements in some regions, and a worsening gender gap in others.
In terms of agriculture, only a fraction of the roughly 500 million smallholder farmers around the world have access to financial services. ISF Advisors estimates the gap to be $74 billion in Africa alone. This is a huge problem, especially considering farmers are primarily responsible for food security in their countries. If they don’t have access to capital, technical assistance, or markets, they cannot produce food.
KH: How does MCE’s model support efforts to bridge the financing gap for the “missing middle?”
CN: MCE uses a blended finance model. Our philanthropic Guarantors — more than 200 high-net-worth individuals and foundations — are the driving force behind this model. Guarantors leverage their established credit to back MCE’s portfolios, which enables us to borrow capital from U.S. and European financial institutions and accredited investors. MCE then strategically deploys that capital, focusing on investing in women and the environment, to two types of organizations: financial service providers and small and growing businesses.
We focus on small and growing businesses in agriculture, water and sanitation, and renewable energy. There are a growing number of impact-forward equity investors coming into emerging markets and investing in high impact, early stage enterprises. MCE plays a key role when these companies hit the growth stage and need working capital, trade finance, or support for capital expenditures. We often find that we’re one of the first lenders to make a bet on a company, given how tough it is to find lenders who are willing to take on more risk by coming in early and looking long term. Because of our unique model, MCE can invest much earlier in companies than traditional lenders. In fact, one early stage equity investor shared with me that when her companies are ready for debt investment, there are only a few impact investors she can recommend, and MCE is one of them.
In addition to our investments in small and growing businesses, we invest in financial service providers that create opportunities and improve the economic security of their micro- and small business clients by offering financial products such as loans, savings, and insurance. Whether these are microfinance institutions, leasing companies or fintechs, our focus is on selecting providers who have a demonstrated track record of ensuring their customers thrive.
Despite the risks of investing in emerging markets, our default rate is around 2%, which is largely due to the due diligence process that we’ve developed over the last 15 years and the long-term relationships we develop with portfolio companies. In terms of impact, enterprises in our portfolio have, in aggregate, supported 82,000 smallholder farmers and nearly 10 million end borrowers, 73% of which are female.
An example of a portfolio company that has benefited from this model is Uncommon Cacao. We were their first formal lender in March 2019 and we’ve progressively grown our exposure with them over the last few years from $40k to $1.25M, while also supporting them to attract other lenders.
KH: You mentioned that MCE strategically focuses on investing in women and the environment. How does MCE incorporate this focus?
CN: MCE is squarely an impact-first investor. For us, impact first means looking at the gaps we noted earlier — women and smallholder farmers — and ensuring our investment priorities serve these groups.
We invest in women on three different levels. The first level is our end stakeholders: female micro-entrepreneurs and smallholder farmers. Our investment decisions center on how we get capital and supporting services to those people. Not only does the research show that women are better credit risks than men, but they’re also more likely to invest their profits into their family’s future — for example, spending on education and health.
As one example from our Portfolio, Mali Shi is the first organization to develop a modern shea butter processing plant in Mali. It now provides an opportunity for local producers to increase their income by capturing additional export premiums. In 2021, Mali Shi purchased 5,647 tons of shea kernels from cooperatives reaching more than 22,000 kernel collectors, of which 98% are women. Unlike the revenues of most agricultural cash crops, shea-related revenues are traditionally retained by women, amplifying the impact on their families’ well-being.
The second level we invest in women is via our investees. We can make a difference by promoting female entrepreneurship and ensuring female control of capital. In 2021, 32.8% of our companies had women in senior leadership positions, 45% of their employees are women, and we’re reaching 860,000 women farmers and micro-entrepreneurs.
The third level is MCE itself. We’re examining our operations and thinking about how and where we can make improvements in terms of gender balance and diversity. We’re doing well in terms of women’s representation within our staff, leadership, and board. But we could improve in other areas. For example, we’ve recently made changes to bring more gender balance to the decision-making processes of our investment committees.
In terms of the environment, we know that smallholder farmers are one of the most vulnerable groups to climate change, and their most urgent challenge is adaptation. In many places we invest, the climate is changing so quickly that crop yields are falling, reversing many years of productivity increases. People need to adopt new farming technologies or adjust the mix of crops they grow to continue to thrive.
MCE’s environmentally sustainable approach to agriculture seeks to address the interlinked challenges of environmental degradation, climate change, and food security. We aim to increase farmer productivity, enhance resilience to climate change, and reduce emissions. We are bringing more rigor to the environmental assessment of our partners, and we’re proud that 82% of our small and growing business portfolio are incorporating regenerative or organic practices into their work.
As one example, Aldea Global was established in 1992 in northern Nicaragua to promote organic cultivation and improve the health and development of rural families. It has since grown to support more than 14,800 farmers. In 2021, Aldea provided technical assistance to 3,000+ farmers with a focus on improved productivity for coffee producers through agroforestry systems, environmental certifications, and the management of carbon bonds. As a result, Aldea has helped nearly half of its coffee suppliers to achieve Fair Trade, Organic, Rainforest Alliance, and UTZ certifications — resulting in a significant price premium and increased incomes.
KH: What’s next for MCE?
With this financing gap for small and growing businesses in mind, MCE is developing a new blended finance fund that will help us meet the demand and expand our lending to these entities. The focus will be on small and growing businesses operating in sustainable agriculture, particularly those that practice climate-smart agriculture, to help address the urgent adaptation challenges facing smallholder farmers. We’ll reach these entities both through direct investing in small and growing businesses, as well as lending through financial services providers serving rural markets. The capital we raise through this fund will allow us to continue to double down on our sweet spot, filling the gap for early stage debt financing, while complementing existing funds on the market.
MCE is a high-impact investor, but we’re a drop in the bucket in terms of this financing gap. Blended finance presents an incredible opportunity to help close that gap. We look forward to seeing how our impact grows as a result of the new fund and what our fellow investors do with blended finance moving forward.