A total of $9.3 billion in ‘impact-investment’ funds have flowed into East Africa over the past five years, with almost half of that amount being disbursed in Kenya, according to a new report.07 Aug 2015.
The ‘Landscape for impact investing in East Africa’ report, based on research funded by the UK Department for International Development’s impact programme, said the investments in Kenya exceeded $650 million in that period.
Direct investments by development finance institutions (DFIs) “favoured financial services”, which represented nearly 40% of all direct deals, the report said. “The energy sector has received 25% of capital deployed to date (driven by large energy projects such as dams and wind farms), while infrastructure and mining have also been prominent.”
‘Impact investors’ are defined in the report as “those who invest with the intention to generate a beneficial social or environmental impact alongside a financial return and who seek to measure the social or environmental returns generated by their investments”.
Kenyan investments were “more than triple the amount” deployed in neighbouring Uganda and Tanzania, the countries with the next highest amounts at around 13% and 12% respectively, the report said.
According to the report, Kenya’s capital city of Nairobi “is the physical hub for impact investing in the region, where 48 impact investors have local offices, and is often the first port of call for impact investors operating in the region, even if they look for opportunities beyond Kenya”.
Of other East African nations, Ethiopia has received only about 7% of disbursements to date, the report said. However Rwanda, “with an economy just one-eighth the size of Ethiopia’s, has received half as much impact capital, or 4% of all disbursements in the region”.
Common investment challenges in the region include “insufficient investment-ready opportunities, insufficient human capital and difficulty accessing bank financing”, the report said. “Though investors acknowledge that there are many businesses with exciting potential, investors encounter few companies that they believe are truly investment ready.”
Challenges are also posed by international decision makers who can “frustrate entrepreneurs”, the report said. “Many non-DFI impact investors have investment committees based abroad and whose members may not have on-the-ground experience with investments in East Africa. These remote investment committees often interpret risk differently than their investment teams operating on the ground.” The report said this can cause due diligence and deal closing procedures for both debt and equity investments to take up to 18 months before completion.
However, the report said there is still a “substantial gap in the market” that impacting investing seeks to fill.
The African Development Bank said last year that recent discoveries of oil, gas and coal could help propel Kenya to “middle-income country status in the medium term”. The bank said in its Country Strategy Paper for Kenya for 2014-18 (53-page / 1.14 MB PDF) that it wants to work with development partners and the private sector to “leverage funding” for infrastructure development in Kenya, rather than act as a sole financier.