Rwanda Journal: Funds for East Africa’s SMEs
Editor’s note: NextBillion staff writer Courtland Walker recently returned from a 10-day trip to Rwanda. Over the next week, he will post reflections on his trip as part of the Rwanda Journal series. This is the third post in the series; read the first two here and here.
In high-income countries, the SME sector has been estimated to contribute more than 50% to gross GDP, not to mention being the engine of new job creation and a source of as much as half of the innovation in these economies. In low-income countries, however, the contribution of the SME sector to gross GDP has been estimated at 16% and, in most African countries the SME sector has been estimated at less than 10%.
I read the above quote, over a year ago, in “Venture Capital for Development,” a paper by Alan Patricof and Julie E. Sunderland.
While the growth of the SME sector is crucial to the future of developing country economies, there are tremendous difficulties inherent in fully private sector investments in smaller firms. While there are a handful of groups – namely SEAF, GroFin, and Aureos – that are operating fully private sector SME-targeted funds, many, including Patricof and Sunderland have called for the participation of the development institutions to help mitigate the risk faced by the private sector.
During my brief time in Rwanda, it was welcome news, reading the New Times, to come across an article reporting on a 25 million Euro Credit line agreement between the European Investment Bank (EIB) and the East African Development Bank (EADB). Having been recently welcomed to the East African bloc, Rwanda is set to benefit from the funds, to be targeted at SME investment projects.
According to the press release:
The EIB’s credit line provides EADB with the resources required to provide long-term loans in EUR or USD with a variety of lending conditions to small and medium sized enterprises in East Africa. The availability of loans with an interst rate fixed for a longer term than five years is limited on the East African financial markets. The EIB’s line of credit will help EADB expanding the offer of this product. Borrowers may benefit from these longer maturities and from protection against interest rate volatility.
This is the EIB’s first credit line to EADB in the framework of the Cotonou Agreement, under which the EIB finances investment and provides long-term finance to the financial sector. It marks an important step in the building of a strategic partnership between EIB and EADB to support economic development in East Africa.