The Middle East and North Africa (MENA) has made recent gains in supporting entrepreneurship at a strategic level, but a considerable opportunity for impact remains largely untapped.

Earlier this year, JP Morgan and the Global Impact Investment Network released the “Perspectives on Progress” report, a survey of ninety-nine impact investment groups headquartered around the world. Some of the most recognizable names in the impact investment sphere contributed to the survey, including the Omidyar Network, the Bill and Melinda Gates Foundation, and large investment groups such as the Overseas Private Investment Corporation and Credit Suisse.

The outlook was optimistic. Since their inception, these groups had collectively designated $36 billion for impact investment. In 2012, they committed an estimated $8 billion and, on the whole, plan to increase this sum by $1 billion in 2013. Nearly all—96 percent—of the institutions surveyed were engaged in measuring their social and/or environmental impact. The findings suggest a growing adherence to strategic and savvy impact investment practices globally. However, the MENA region was nearly absent from the report, and the few mentions it received were negative.

According to the report, the region attracted the smallest share of investment representation and general investor interest (aside from Oceania). Judging from the study, MENA’s impact investment space was virtually non-existent. Two main issues can justify this gap: a lack of awareness for such a hybrid concept of the private sector and potential for social impact, from both the entrepreneur and the investor side, and a lack of an enabling legal and regulatory environment.

Minimal impact investment opportunities and presence of impact funds into MENA is discouraging. “People in the Arab world haven’t realized that financial returns are correlated to social returns/impact,” says Emile Cubeisy, managing director of the Badia Impact Fund at Accelerator Technology Holdings.

However, the situation is improving. Local investors, incubators, mentors, and entrepreneurs are becoming better versed at converting ideas to businesses and fortifying them with resources and networks. This is due to several factors:

  • A tighter entrepreneurial community: Support mechanisms are developing in complexity and are in increasingly steady contact with one another. Platforms such as Wamda have opened a series of new programs and services for entrepreneurs, and business incubators are playing the role of capacity builder, investor, and angel network all in one. This same dynamic/chemistry can evolve to support social enterprises as well.
  • A more extensive investment pipeline: Entrepreneurs are becoming more socially minded. “Nowadays, if you took any business plan competition in Egypt, Lebanon, or Morocco, you would be pleasantly surprised that 20-30 percent are social enterprises,” points out Ehaab Abdou, Ashoka Fellow and team leader for the Egypt/MENA Development Marketplace at the World Bank Institute. One could also see this prevalence at the recent MIT Enterprise Forum Arab Startup Competition, where 20-25 percent of the 50 semi-finalists were working on businesses with potential for social and/or environmental impact.
  • A larger number of impact investors: Organizations that employ a venture capital approach to social enterprises, such as Village Capital, the Acumen Fund, Grey Ghost Ventures, Root Capital, and the Grassroots Business Fund, are all exploring potential entry into the region. In addition, funds like Willow Impact Investors, an impact investment company, have established a full-time presence in MENA.

So what needs to happen next?

The recipe for boosting impact investment regionally hinges on investors buying into the value of social businesses and getting governments on board to help create an enabling ecosystem for social enterprises.

First, legal integration of social enterprises and investment funds must become a top priority. The region has some of the most restrictive laws in the world for nonprofits. Because governments do not have specific clauses for “hybrid” models, most social enterprises and social funds are registered as nonprofit organizations, which are the only exceptions allowing tax-exempt donations. Naturally, registering under such a legal title places restrictions on profit generation, investment, and, consequently, growth and impact.

Second, success stories need greater promotion, and the success factors, potential value, and challenges facing MENA’s social enterprises need more research. In other words, there must be a more concerted effort to position impact investment as a field with attractive returns for both investors and society in general.

Achieving this transition toward more social-minded investment practices must involve stronger dialogue between the social sector, investment circles, and government stakeholders. “Private sector financing should meet with public sector support. We need a policy framework that encourages impact investment,” says Cubeisy. The issue needs intense lobbying to press governments to create special exceptions for social enterprises and impact investment funds in the region.

The growing social consciousness associated with recent political shifts and a deepening regional expertise for strategically supporting entrepreneurship will inevitably intersect. Smart capital is on the rise across the region, and there is no shortage of young leaders eager to solve pressing socio-economic challenges. If the necessary legal environment comes about, it will only be a matter of time before more impact investment opportunities arise as well.