Impact investing: An approach must for sustainable socioeconomic growth

Impact investing: An approach must for sustainable socioeconomic growth

Impact investing: An approach must for sustainable socioeconomic growth
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Although traditional microfinancing initiatives play an important role in economic development, there is an even greater need to support businesses that have a multiplier effect on economic activity and create wealth that lifts people out of poverty and which meets ethical and religious obligations. 

This can be achieved by assisting deserving small and medium-sized enterprises. This is not the same as giving charity or donations and zakat. It is a form of partnership that aims to build up such deserving institutions' capacities to prosper for the common good. 

There has recently been a focus on social enterprises, which is another important segment overlapping with SMEs. They often originate from charitable or donor-driven organizations, evolving to provide market-based solutions that drive social change including improving healthcare. 

They also address gaps in gender and youth issues. Virtually all countries in the Gulf Cooperation Council have initiated plans where such social and gender issues are at the heart of societal transformations. 

The aim is to provide sustainable economic opportunities to farmers, artisans, and micro-entrepreneurs, or affordable basic services to people at the base of the social and economic pyramid. However, there are significant constraints that limit social enterprises' access to medium and long-term financing and targeted capacity-building in areas such as financial management, governance, human resources, supply chain management, and sales and marketing. 

These obstacles are frequently a result of their size, stage, geographic location, or lack of collateral. As a result, many are often considered by traditional venture funds to be too risky for commercial investment. The limited financing of social enterprises is thus a major hindrance to the productive capacity of an economy.

This is where “impact investing,” can help fill in the financing gap that exists, drawing on lessons learned from microfinance. However, platforms must be built to scale up and replicate what has worked, to develop a stronger ecosystem of supporting structures while assessing social returns in the broadest sense.

If a strong ecosystem for impact investing can be developed, the potential impact could be significant. For philanthropic foundations and investors, impact investing is a way to promote global economic growth and worthwhile social objectives on a scale that is unattainable with microfinance. Globally, there have been some commendable initiatives that aim to make a significant social impact, particularly in the agribusiness and small scale SME sectors, where the development of a fair and efficient supply chain is critical to tying micro-producers at the base of the pyramid to large, value-adding processing and marketing organizations.

Many of us have seen branded commodity adverts whether coffee, sugar, or cocoa that extols the products sourced at fair market prices in support of fairer societal impact. 

Such investments often require a combination of blended capital and coordinated partnerships whereby socially aware investment institutions work with socially responsible agricultural companies in developing countries to build inclusive supply chains, linking smallholder farmers with national and international markets. 

In the Gulf, where agriculture is becoming more important due to food security concerns, this model of social investing can fulfill many ethical and religious obligations to both corporate investors and their stakeholders who can insist that their boards follow such principles even at the cost of lower dividend pay-outs in the short term.

The social impact model is not only confined to the agricultural sector but can be extended to small-scale manufacturing and supply chain companies, something that the Kingdom is vigorously pursuing in various mega industries, whether these are in defense procurement or the energy sector and mining. The overall aim is simple — spread societal economic stake amongst many and not a few, to ensure a more socially content and fairer society. 

• Dr. Mohamed Ramady is a former senior banker and Professor of Finance and Economics, at King Fahd University of Petroleum and Minerals, Dhahran.

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view