Consider this. By 2035 the number of Africans joining the working age population will exceed that of the rest of the world combined, according to the International Monetary Fund (IMF).
Micro, small and medium enterprises (MSMEs) are at the heart of Africa’s growth. MSMEs account for around half of Africa’s employment and one third of its GDP – considerably more if the informal sector is included. But the MSMEs are struggling.
Further, MSMEs are the largest job creators on the continent. Still, failure rates for these businesses are extremely high – around 50pc of South African SMEs fail in the first two years, for example – due to factors such as limited access to finance, poor access to markets and low operational capacity. In terms of finance, the World Bank estimates the global funding gap for MSMEs is between $2.1-2.6 trillion dollars in Africa, and this figure is approximately 140 billion dollars.
We need to rethink small business support if we are to awaken Africa’s potential for entrepreneurship. A host of small business support programmes, incubators and accelerators have emerged to help entrepreneurs build skills, obtain finance and access markets – with limited success. There is a need to rethink the way in which businesses are identified and grown on the continent. How?
First, understand the informal sector.
There is very little information on informal MSMEs in Africa, and yet these constitute approximately 90% of the MSMEs on the continent. What little we do know of the informal sector points to a dynamic and varied economy that, if understood, could be harnessed for growth. A recent study in West Africa, for example, found that a third of informal enterprises surveyed had strong growth potential (e.g., business skills, high margins) but were constrained by access to finance and other barriers.
Second, get smarter on business support.
There is a need to move beyond establishing greater numbers of incubators and accelerators to finding ways of surfacing and rewarding successful MSME support models. For example, Catalyst for Growth, a non-profit in South Africa, is currently building an analytics platform to assess the impact of various MSME support programmes, which will help entrepreneurs and investors channel resources to the most effective providers. As part of this effort, it is important to recognise that there is considerable variation within the MSME category itself, and that government has an important role to play in creating enabling environments for business growth through activities such as inclusive city planning.
Third, find new ways of assessing risk.
Many commercial banks across the continent offer SME lending facilities, and yet very few actually lend to SMEs due to the perceived riskiness of these enterprises. One way to counter this challenge is to create mechanisms where donors and/or investors seeking social impact subsidize lending and reduce risk – for example, the African Guarantee Fund, which is backed by the African Development Bank, underwrites commercial bank lending to SMEs. However, there is also a need to move beyond traditional means of assessing risk – like collateral – to more creatively identify the opportunities offered by MSMEs, many of whom lack the means to demonstrate their worth to banks in the way that they are required to.
For example, First Access has created technology that utilizes financial service provider data in innovative ways to provide credit scores to clients in informal markets. Initiatives like this one help mobilise capital for entrepreneurs who otherwise would not have access. We need to think harder about ways to give SME’s access to funding on terms that aren’t restrictive.