Q&A: EIB's Ruettgers on the risks and rewards of impact financing in Africa

ABIDJAN — Impact investing has gained popularity in recent years as some investors increasingly consider the social and environmental impact of projects, along with an intended financial return, when financing projects. In places such as sub-Saharan Africa, impact finance is often a solution that bridges a financial gap and provides a borrowing response for entrepreneurs and startups, where traditional financial instruments lack the capacity to take on riskier ventures. Since 2014, the European Investment Bank has explored innovative financing through the creation of an impact financing envelope, or IFE, specifically for African Caribbean and Pacific countries to support the sustainability of SMEs. The IFE division is a part of the EIB’s ACP Investment Facility, which has channeled more than 4.5 billion euros to 230 projects since 2003, primarily stimulating jobs in the private sector and increasing access to finance for small businesses. The newer envelope expands the support to ACP countries in areas of food security, access to basic resources, and the economic and social integration of women and young people. The bank justifies these investments with the above average impact to surrounding communities. Devex spoke with Heike Ruettgers, division head of development and impact finance at the European Investment Bank about how this financing tool might focus on startups and innovation in sub-Saharan Africa, and how the bank is crowding in support around traditionally high-risk investments. The conversation has been edited for length and clarity. Can you discuss how the bank is looking at the risks involved with impact finance and how the bank plans to use this financial tool in the development space? At the EIB, we are trying to operate as a catalytic anchor investor that enters into new segments and crowds others in. In order to crowd in as many [investors] as possible and to be as inclusive as possible for others, we try to de-risk the investments we do in the areas in which we operate. And in that sense, since 2014 we were trusted with a special envelope to do so for the ACP countries [Africa, Caribbean, and Pacific nations], where we have a total envelope of up to 800 million euros. We can take a higher level of risk, albeit with local currency lending, in the sense of going into more risky sectors — as in the area of agriculture, for example — or pushing impact by going into microenterprises, startups, and the like. What type of projects has EIB already financed under this envelope and can you share some of the future impact financing plans for sub-Saharan Africa? I would say the most recent initiative, which is now really taking off, is what we have created together with the African Development Bank, which is called Boost Africa. We really wanted to push into a new area, which is really focusing on startups and innovation in sub-Saharan Africa and we have been able to mobilize funding from the European Commission in order to de-risk and to crowd in other partners into the fold. This initiative has three pillars: the investment pillar where we will, and are already, investing. We have already signed two operations where we are investing end funds, venture capital funds, seed funds, and the like, which then we’ll invest in startups in sub-Saharan Africa. We are combining that with two other pillars: one is capacity-building for fund managers and investing company startups, and then an entrepreneurship lab where we want to also focus and develop networking within Africa. Entrepreneurs of micro-enterprises and startups often complain of difficulties accessing finance. In which ways can other financial institutions incorporate impact financing more into their portfolios? Can you share any lessons learned or dispel any misconceptions? It is very important that we take a much broader view across the continent, and that’s why we thought of the approach with the Boost Africa initiative. We can much better manage the risk on a portfolio level. So spread the risk, diversify in terms of geographies as well as sectors. This allows us to go a step further in what we do. We bring into this initiative a de-risking factor with the blended funds we have mobilized from the European Union so that the risk for any other investor — and the level of the investment funds — becomes lower because we take the first “hits.” We really invite others, mobilize others to demonstrate also that investing in this area can be a sustainable activity. We are also seeing quite promising results and so we want to attract many more to invest into these things. Can you say any more about those “promising results” and other opportunities that you see? We see already very promising results in the sense that investee companies are very successful. For example Andela — one of the first investments of one of our funds, which promotes decoders across Africa — has already generated some 500 jobs. We want to multiply these efforts even further. We also see a lot of opportunities around innovation and technology rising on this continent and that is really where we see opportunities for external investors to come in and so we see our role as catalytic there to make the case for investments in Africa in this sense. Read more Devex coverage on impact investing.