Expert views

Using European funds to leverage private finance for sustainable development

25 septembre 2019
Stefano Manservisi, European Commission

How is the EU enabling small businesses in Africa and the European neighbourhood to flourish, and societies to reap the benefits?

Micro, small and medium-sized enterprises (MSMEs) are the engines of growth, jobs and innovation in all economies. They have vision. They generate new business ideas. And they are the lifeblood of communities. In the European Union (EU), they account for 99% of all businesses, and 85% of all jobs. In Africa, they make up 90% of companies and 50% of output. MSMEs play an invaluable role in attaining the Sustainable Development Goals and tackling inequality.

Building on success in Europe every year, the EU makes funding available to more than 200,000 businesses in Europe, including entrepreneurs, start-ups, micro-companies, and small and medium-sized enterprises (SMEs). One such funding programme is COSME. It gives SMEs easier access to guarantees, loans and equity capital by channelling EU financing through local financial institutions such as banks, venture capitalists or angel investors. These institutions decide whether to provide EU financing and determine the terms on which it is offered, such as amount, duration and interest rates and fees. Now the EU is applying this successful model in sub-Saharan Africa and the European Neighbourhood, through the European External Investment Plan, or EIP. One of our main goals is to channel private sector finance from developed countries to small businesses. With an initial input of $4.5 billion, the EIP should leverage $44 billion in total investments by 2020. This includes 28 innovative guarantees, amounting to $1.5 billion. These will attract initial financing for projects and share the investment risk with other public and private investors. The EIP also comprises $3 billion in ‘blended projects’. These use public money to cover a part of the costs of development projects. They combine EU grants with loans and other financing from development banks and private investors.


Much of this financing will benefit MSMEs, enabling them to contribute more effectively to sustainable development. Of the 28 EIP guarantees approved, 13 target small firms, accounting for almost a quarter of the EIP’s guarantee financing. They are expected to create or support some 2.7 million jobs, many in countries affected by irregular migration.

These investments will also target businesses led by women, young people and members of countries’ poorest communities. One such guarantee is the Nasira Risk-Sharing Facility, for which the EU has allocated €75 million. The lead financial institution for this guarantee, the Dutch Development Bank FMO, estimates that it could create and support up to 800,000 jobs, especially for internally displaced people, refugees, returnees, women and young people. Many EIP blending projects also focus on small businesses. For example, the €180 million Boost Africa project invests in funds spanning start-ups to growing companies, from seed funds, accelerators’ follow-on funds and business angel funds to venture capital growth funds. The final beneficiaries are start-ups and innovative small firms that use novel technology and have the potential to grow fast and create jobs.


Of course, investment must also be effective. Hence, other challenges that small firms face need to be addressed. Too often MSMEs face stifling red tape, have to adapt to ever-changing regulations or make informal payments. And they must manage without reliable electricity supplies or other infrastructure. The EIP supports government reforms aimed at making it easier to do business and improve the investment climate. It facilitates regular dialogue between the business community and government. It funds studies to identify growth opportunities for companies in partner countries. The EU is building on its longstanding partnerships with countries in Africa and the European Neighbourhood – in areas from trade and investment to humanitarian and development assistance – to enable small businesses to flourish, and societies to reap the benefits.


Accelerators are heavily dependent on other business support organizations. Although they offer start-ups a range of services, these are often outsourced to third parties. Thus, business management training is often provided by the nearest business school. Alumni may offer pitching classes. Technical expertise for specific enterprises is brought in from local universities. Grants and prizes may be funded by the state. These organizations, along with many others, make up a business ecosystem that is essential to the accelerator. The ecosystem helps the accelerator provide start-ups with the knowledge and tools they need to become a viable business, allowing the accelerator to focus on its mentoring and matching activities. Capacity building from other institutions can help accelerators improve their ability to pick winners, add significant value and enable their firms to contribute to economic development.

Online investment platforms: Tradi­tionally, SME managers and investors had to meet in person to establish contact and exchange company information ahead of reaching an agreement. This meant that the greater the distance between the firm and financer, the lower the likelihood of a deal. Geography led to a pattern of financial exclusion that had a particularly adverse effect on SMEs in developing countries and remote regions. Online investment platforms help to address this problem by making it easier to search and connect via the internet in pursuit of tailored investment opportunities around the globe. Since the first online crowdfunding platform was launched in 2003, companies can provide their basic information online and be connected with interested investors regardless of their location. While there are a variety of online investment platforms, they function in a similar way to dating websites. Entrepreneurs and investors create profiles on the online platform, and the website selects SMEs that match the investor’s interests and proposes a few of them each day to the investor via email or an online news feed. Investors choose the projects they are interested in and transfer the amount they wish to the online platform, which then transfers the amount to the SME. Some platforms provide additional services, such as managing loan repayments, but the emphasis is on identifying matches and connecting investors and investees.

There are four main types of online investment platforms (also known as crowdfunding):

Donation-based: Individuals give money to a project they believe in, often for humanitarian or philanthropic reasons, without any material return expected. Examples include Kickstarter.

Reward-based: Supporters provide funds on an online platform at an early stage of the project in return for a gift, such as a handwritten note or the product (once it has been made). Examples include Indiegogo and Thundafund.

Equity-based: Funds invested through the platform are funnelled towards efforts to create long-term value for the investors, which are rewarded through equity (shares in the SME). Examples include Crowdfunder.

Loans-based: Many individuals lend small amounts, which are put together in a total that is loaned to the SME by a peer-to-peer (P2P) platform. Examples include Kiva and BlueBees. Online investment platforms generate revenue from fees charged to borrowers and from a portion of the interest payments to investors. Most operate across borders, connecting firms and investors in different countries. Crowdfunding campaigns tend to run 30 to 45 days, and most use an ‘all or nothing’ approach. If the initiator does not achieve the funding goal it identified online at the beginning of the campaign, no money is paid.


Data suggest that crowdfunding has grown substantially, from $1 billion in 2011 to $34 billion in 2015, of which $430 million went to developing countries. The bulk of the investment is mobilized through peer-to-peer lending ($25 billion). Other forms of crowdfunding are also mobilizing funds: donation accounts for $2.9 billion, rewards $2.7 billion and equity $2.5 billion. Equity and lending-based platforms are expanding most rapidly. Growth is particularly high in Asia, Africa and Europe, although in Africa this is from a very low base.

The World Bank estimates that the crowdfunding market in the developing world will total $96 billion a year by 2025. Although most crowdfunding platforms established to date have been based in developed countries, online investment platforms could be most useful in developing countries where start-ups and SMEs tend to need smaller amounts of capital, strong business support organizations are relatively scarce and face-to-face meetings can be difficult to arrange for geographical reasons. In developing countries, crowdfunding flows are dominated by donation-based investments, which accounted for 43% of finance mobilized through online investment platforms in developing countries in 2015, while loans-based crowdfunding (also known as crowdlending) accounted for 38% of funds. However, in developed countries crowdlending accounts for the majority of funds mobilized, suggesting there is scope for an expansion in online lending in developing countries. Similarly, equity-based crowdfunding accounted for just 11% of developing country flows in 2015 (alongside 7% that was reward-based), but was considerably higher globally, suggesting that if regulatory obstacles are addressed, it could expand in developing countries. Online investment platforms have a low monetary threshold that allows small investors to take part. This allows platforms to create a broad and diversified investor base that pools the risks entailed in early-stage SME investment. New financial technologies could allow online investment platforms to use big data to gather non-traditional financial information to assess creditworthiness. For example, in the United States, online credit scores of borrowers are gathered on platforms and shared among financial actors. Social network data can be used to shed light on demographics, as well as the entrepreneur’s ability to connect to counterparts and survive. Through deep learning algorithms, it is possible to gather and analyse this data to provide an accurate prediction of repayment ability. These predictions could be used by crowdfunding websites to reduce information asymmetries, particularly in regions where the formal banking sector is underdeveloped. Such information can be crucial to facilitating deals. Furthermore, online matchmaking holds promise in reducing discrimination. Evidence suggests that it is more difficult for women to access finance for export, and there is considerable research showing that some social groups face financial exclusion due to prejudice among traditional investors. The probability of such discrimination should be much lower on online platforms, where it is not necessary to provide the entrepreneur’s full name or gender and hold a personal meeting.