This report examines the financing of inclusive businesses, which are emerging as an effective response to socio-economic and environmental challenges. By enabling the poor to engage more fully in economic activity and participate in supply chains and value chains, inclusive businesses can reduce poverty and inequality. The report focuses on two main conduits for financing inclusive businesses: bank debt and private equity.

Definition of inclusive business financing

The report defines inclusive business as a private sector approach to providing goods, services, and livelihood opportunities to marginalised populations, whilst generating revenue and profit. Inclusive businesses have a social impact mission aligned with their business strategy. They are large enough to require access to finance from formal sources, but may not meet the eligibility criteria of traditional financial institutions.

Characteristics and challenges of inclusive business financing

The report highlights some characteristics and challenges of inclusive businesses. For instance, many inclusive businesses operate with low margins in markets that are underdeveloped and fragmented. They also often require patient capital and technical assistance to scale.

Main conduits for financing inclusive businesses

The report examines bank debt and private equity as the two primary conduits for financing inclusive businesses. Banks can provide inclusive businesses with working capital, trade finance, and term finance. Private equity funds can provide long-term equity capital or mezzanine debt to inclusive businesses. However, access to finance remains a challenge for many inclusive businesses due to a lack of collateral, credit history, financial literacy, and inadequate legal frameworks.

Financial institutions and inclusive business financing

The report focuses on how to finance inclusive businesses through banks and other financial institutions. Drawing on case studies, it highlights ways in which financial institutions can structure inclusive business products and services, leverage technology, and align incentives with clients. The report also notes the importance of measuring social and environmental impact and applying environmental, social, and governance (ESG) standards to investment selection.

Private equity funds and inclusive business financing

The report explores how private equity funds can support the financing of inclusive businesses, which require long-term equity capital to scale. The report considers key considerations for fund managers, including the stages of business development, deal sourcing, due diligence, impact measurement, and exit strategies. Private equity funds face challenges in sourcing suitable deals, building strong local networks, and measuring social and environmental impact. The report suggests ways to overcome these challenges, such as developing fund mandates that explicitly integrate impact and ESG, partnering with local intermediaries and NGOs, and actively seeking co-investors.

Recommendations

The report makes several recommendations to different stakeholders for advancing the financing of inclusive businesses. For financial institutions, the report recommends developing standardised products and services that meet the needs of inclusive businesses, offering technical assistance to enhance the capacity of inclusive businesses to access finance, and setting criteria for measuring social and environmental impact. For private equity funds, the report recommends focusing on growth-stage deals, partnering with local intermediaries and NGOs to source deals, developing mandates that explicitly integrate impact and ESG, and seeking co-investors to reduce risk. Finally, the report recommends that policymakers and development finance institutions take a proactive role in creating an enabling environment for inclusive business financing, such as improving legal frameworks and reducing regulatory burdens.