Kick-starting Africa’s SME sector
Small and medium sized enterprises (SMEs) are essential to growing African employment and GDP.
In high-income countries, SMEs represent a high share of economic activity, a large share of employment, and bring informal business activity into the formal economy. Yet, a severe lack of financing is limiting the ability of African SMEs to grow and achieve scale.
Current estimates put the SME funding gap at $80bn across Africa. A big problem to be sure, but it is difficult to imagine another economic development ‘problem’ that offers such an attractive commercial reward to those who can deliver a solution. With that goal in mind, The Tony Elumelu Foundation and Lion’s Head Global Partners commissioned a research initiative into this funding gap, including in-depth surveys of Nigerian banks and SMEs.
First, we found SME lending has indeed stagnated in Nigeria over the past decade: while private sector credit ballooned ten-fold in a decade (from $5.3bn in 2002, to $55.3bn in 2011), the percent of credit allocated to SMEs fell to less than 1 percent in 2011, from its former high of about 9 percent in 2002. Second, we found that Nigerian SMEs rate access to finance as their number one barrier to growth—a higher priority than poor infrastructure. Once SMEs have sufficient resources, they may be able to work around operational challenges like transport, power, and water. But without financing they are hamstrung and unable to move forward.
While this may seem like a daunting challenge, the scope of the problem may be more manageable than it first appears: there are currently around 23,000 SMEs in Nigeria with annual turnover of between $32,000 and $3.2m . The key to solving the funding gap is to understand its key drivers and then implement targeted solutions for this discrete, but attractive market.
Banks say that SMEs need to be much more rigorous in their management and financial functions, and they need to be more knowledgeable about the loan application process. And SMEs in many areas do not seem to fully grasp the scope of the challenge—e.g., 75 percent of SMEs interviewed believe they meet banks’ insurance requirements, but at the same time, in 10 out of 11 key industry sectors less than 50 percent of Nigerian businesses actually carry insurance.
According to SMEs, bank lending practices need improvement too, in areas like lower interest rates and longer loan terms. They believe that many bank credit staff are not well-versed in how business cycles impact cash flow, that collateral requirements can be daunting, and that banks do not take time to understand the unique challenges of individual businesses.
Once we identify key causes of the funding gap, solutions appear within reach as long as both sides come together in a deliberate effort to fix the problem. A critical first step is to unlock commercial debt from Africa’s own banks, by prioritizing SME finance and launching targeted initiatives “down market” that engage this sector. Though we may also need new models of financial institutions specifically focused on this segment—e.g., more resources for underfunded microfinance banks so they can go “up-market” to close the funding gap. Insurers also need to get involved: educating business owners, providing assistance in obtaining insurance, and designing policies for this market that shore up coverage gaps and help businesses qualify for credit. Accounting and auditing firms should also be launching tailored and affordable service offerings to this segment, to help SMEs meet banks’ requirements for formalized financial functions.
All across Africa, growing SMEs deliver more jobs, potentially millions of jobs. SMEs create wealth, and they create enormous opportunity for those in the private sector who can help them achieve success. And strong SME offerings from Africa’s financial services sector can make it easier for growing microenterprises to join the ranks of SMEs. Improving SME finance is a win-win for all concerned, and Africa cannot succeed without them. We are getting a firmer grip in what is causing the funding gap—now let us implement solutions.
Wiebe Boer is the Chief Executive Officer of the Tony Elumelu Foundation
Article published on http://www.thisisafricaonline.com/News/Kick-starting-Africa-s-SME-sector?ct=true