Least Developed Countries (LDCs) typically face significant financing gaps in their efforts to achieve the Sustainable Development Goals (SDGs). According to UNCDF’s publication Blended Finance in the Least Developed Countries, between 2012 and 2018, only 6 percent of private finance mobilized by official development finance went to the LDCs, and even that 6 percent was highly concentrated in a small number of sectors, countries, and transactions.

Financing shortfalls are especially large for small and medium enterprises (SMEs) seeking relatively small amounts of growth capital. On 9 February 2022, UNCDF convened a virtual high-level panel discussion to launch a conversation to identify financing gaps, better known as the missing middle, and what could be done to mitigate these.

The panel included the following speakers:

• UNCDF, Preeti Sinha, Executive Secretary;
• Sierra Leone, H.E. Dr. Francis Mustapha Kai-kai, Minister of Planning and Economic Development;
• The World Bank, Mr. Jingdong Hua, Former Vice President and Treasurer;
• UNCDF, Anders Berlin, Director LDC Investment Platform;
• U.S. International Development Finance Corporation (DFC), Andrew M. Herscowitz, Chief Development Officer;
• Nordic Development Fund, Isabel Leroux, Program Manager;
• FinDev Canada, Stéphanie Emond, Vice-President and Chief Impact Officer;
• European Development Finance Institutions (EDFI), Laure Blanchard-Brunac, Director- Policy & Partnerships;
• Investment Fund for Developing Countries (IFU), Morten Elkjaer, VP for Finance Sector;
• Finnfund, Valtter Louhivuori, Business Development Manager;
• Norad, Nikolai Østråt Owe, Senior Advisor;
• Permanent Mission of Luxembourg to the UN, Thomas Lammar, Counsellor;
• Permanent Mission of Luxembourg to the UN, Olivier Maes, Permanent Representative;
• and was moderated by OECD, Paul Horrocks, Head of Unit for Private Finance for Sustainable Development.

Small and Medium Enterprises (SMEs) contribute to building a more diversified, agile, and resilient economy; however, these enterprises face significant constraints such as access to finance in the mid-late growth stage of innovation, which frequently is the single most important constraint. This is due to SMEs generally being perceived as high risk by most commercial banks, and too large for microfinance institutions, with investment needs that are too small for commercial financiers. Studies reveal that 131 million or 41 percent of formal MSMEs in developing countries have unmet financing needs. In fact, research done by The World Bank exposes that the credit gap that formal SMEs face is about $1 trillion. In addition to the difficulty of accessing finance another constraint arises: informality, with the credit gap for informal SMEs at roughly $2.6 trillion. The SME Finance Forum, established by the G20 Global Partnership for Financial Inclusion (GPFI) and managed by the International Finance Corporation (IFC), estimates that the MSME finance gap is approximately $5 trillion, equivalent to 1.3 times the current level of MSME lending--a financing gap that directly undercuts the pursuit of inclusive economic growth and the promotion of resilient economies at the local level.

The panel addressed essential questions: how does the current mandate of development finance institutions (DFIs) allow for undertaking very small transactions or highly risky transactions in the least developed markets, and how do credit rating needs of multi-lateral development banks, regional development banks, and DFIs constrain financing the missing middle.

This convening confirmed that SMEs in LDCs require the support from the international community as well as IFIs and DFIs, since they represent the backbone of the developing countries. Looking from a profit for purpose perspective, LDC markets offer tremendous opportunities that should not be overlooked. Equally, it is important that we consider how to bridge these market imperfections and create long-term sustainability. The panel reached several conclusions including the need for a middleman between the IFI’s, DFI’s and international community, and the hundreds of companies who are looking for support to organize a dialogue with the SME’s.

UNCDF has tried to complement other finances with its offering by building an investment continuum for companies being financially underserved. To better serve this financial landscape "we need to work together at scale and with diversity actors, to orient investments to where they are most needed," concluded H.E. Mr. Olivier Maes, Permanent Mission of Luxembourg.