As an intern this summer with the African Entrepreneur Collective (AEC) in Kigali, Rwanda, I’ve had the opportunity to see firsthand the challenges faced by businesses in the so-called ‘missing middle’. After exploring this concept in an academic setting, it was refreshing and eye-opening to explore the ‘missing middle’ in greater depth in a practical setting.
The African Entrepreneur Collective (AEC) provides a holistic set of services to small and growing businesses (SGBs) in Rwanda with the potential to transform their communities through job creation and other positive ripple effects. By focusing on entrepreneurs who are already in business, AEC aims to meet the needs of those businesses that often fall into what is called the ‘missing middle’.
The ‘missing middle’ is a phenomenon at the forefront of conversations amongst development professionals and financiers working in emerging markets. Definitions vary, but generally the ‘missing middle’ is discussed in terms of number of employees and is used to categorize those small and medium enterprises (SME) that employ 5-250 people and whose financing needs are largely underserved or completely unmet in developing country contexts. These SMEs usually require larger amounts of funding than microfinance institutions (MFIs) typically provide, but at the same time they rarely qualify for funding from traditional banking or capital sources as they are seen to be too risky or to have low growth potential. Thus, the ‘missing middle’ is comprised of these SMEs whose financing needs are unmet.
It is imperative to resolve this financing gap for SMEs in developing nations as these enterprises have huge potential to fuel economic growth and poverty reduction. SMEs can serve as “the engine of pro-poor job creation,” as is argued by authors Joe Dougherty and Radoslava Dogandjieva. In their discussion of some of the traditional limitations of financial inclusion, Dougherty and Dogandjieva note that research suggests that it is employment and job creation that are more powerful (“reliable”) ways to effectively boost incomes and reduce poverty, instead of microfinance initiatives. More specifically, it is employment in the formal sector that is a more compelling antidote to poverty, since the formal sector tends to be characterized by higher wages, more stability, and fewer subsistence-oriented activities than the informal sector. The vast majority of these jobs are in or will be created by SMEs. SMEs are estimated to provide approximately “80 percent of formal employment in low-income countries and about two-thirds of employment in lower-middle-income countries.”
Furthermore, investment in SMEs in emerging markets produces returns that have ripple effects across entire communities. According to a World Economic Forum report, the multiplier effect for funds invested in such SMEs is 13. Additionally, as is discussed in another report by SEAF, those SMEs that serve as ‘aggregators’ provide additional benefits to their communities by supporting smaller (often agricultural or ‘micro’) businesses and allowing them to access markets and participate in value chains that would otherwise be out of reach.
AEC provides a compelling model for how the needs of these SMEs in the ‘missing middle’ can be met. By working closely with entrepreneurs through hands-on advisory services and tailored trainings, as well as providing them the option of applying for low-cost financing, AEC provides SMEs in the ‘missing middle’ with services that are typically unavailable or difficult for them to access. This comprehensive array of support services constitutes a strong foundation upon which growth, job creation, and additional positive impacts with the potential to transform communities can be built.
This summer, I am working with the division of AEC called Inkomoko, which leads the consulting component of these services. As a mentor, I’ve been paired with two of Inkomoko’s client businesses, one milk collection center and one pepper producer and exporter. Working closely with these entrepreneurs to diagnose the root causes of the challenges they’re confronting, my colleagues at Inkomoko and I are contributing to the formulation of effective, realistic solutions that these entrepreneurs can implement to overcome obstacles to growth and unlock entrepreneurial solutions to economic development and poverty alleviation.
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