Anyone who watches New Nollywood will notice how frequently the word "start-up" comes up. A personal favourite of mine, Dolapo from ‘Rumour Has it’ owns a social enterprise that provides life skills to misplaced girls in the North and is funded by investors. Her business is an example of an enterprise that provides a positive benefit to society, while gaining profitable returns on her investment. This type of investment known as Impact Investing.
‘Impact Investing’ has become a hot topic in both the development and finance space- two worlds with traditionally different objectives. Investing in financial markets rewards efficiency and good performance with profits, while aid and subsidies have been used for development but at the cost of efficiency.
Impact Investing marries these two worlds by giving capital to enterprises with a positive societal impact and making these enterprises accountable to shareholders. What’s more attractive is that investors also receive returns from their investments, giving them the best of both worlds.
What does Impact Investing in Nigeria look like?
A Global Impact Investing Network and Dalberg report highlights some key features in Nigeria. In 2015, impact investments in Nigeria amounted to $1.9 billion with a recorded 181 deals, making Nigeria the largest recipient of impact investments in West Africa. Each deal had an average value of $1-5 million with an expected return of 13% to 17%. Agriculture, Technology and Financial Services were the biggest recipients of investments, with a focus on Fintech and getting access to the ‘unbanked’.
It all paints a good picture of an already booming environment, but there’s more to the story. The community of investors is still small relative to the size of the market, with only 28 Impact Investors recorded. Most investors are fund managers who invest on behalf of foreign investors ranging from International Development Finance Institutions such as the Commonwealth Development Corporation (CDC Investments) to Silicon Valley venture capitalists.
The Tony Elumelu Foundation was the only identified local investor. Nigerian Investors seem to be wary of this kind of investments, due to the misconception that it is a form of philanthropy with little room for financial returns.
Why should Impact Investing matter in Nigeria?
One unique feature that amplifies the potential of Impact Investing in Nigeria is the massive supply of SMEs who are significant contributors to economic growth and development. Entrepreneurs are becoming aware of social and environmental challenges, and innovating ways to tackle them. Examples include LifeBank, which helps hospitals source blood and medical products, Wecyclers - a company which uses cargo bikes to help Lagosians earn money by recycling and the popular Andela, which seeks to find “genius-level” software developers who then work remotely for US and European companies. Companies like Andela create the chance to generate thousands of jobs in Nigeria.
Providing funds to SMEs create several positive development effects. Firstly, by establishing a middle class which is known to be the backbone of most successful economies. And secondly, because SMEs account for 96% of all Nigerian businesses. Fortifying them will lead to improvements in growth and job opportunities in Nigeria, which is dealing with unemployment at 14.2%, and youth unemployment at an alarming 33.1%.
Unfortunately, like many things in Nigeria, there are several barriers to the magic of impact investing. The industry lacks established standards and processes to track the success of impact and returns credibly. Additionally, the 2008 financial crisis left people wary of capital markets in the country. Nigeria has since struggled to build confidence in the business environment.
We also need more local investors to get involved, investors with a unique insight into Nigeria's problems and with a knack for identifying potential solutions. There are returns to be made for both self and country. This principle moves impact investing from being a purely ‘philanthropic’ gesture to a financially savvy decision. Not only is it a good financial move, but it also reduces our reliance on the public sector to develop a country with so much potential in the private sector. With proper impact investment, we can develop a country worthy of the talent and creativity it provides.