Africa, financial inclusion and small enterprise: what prospects?
Dr. Olukayode Oyeleye, Business a.m.’s Editorial Advisor, who graduated in veterinary medicine from the University of Ibadan, Nigeria, before establishing himself in science and public policy journalism and communication, also has a postgraduate diploma in public administration, and is a former special adviser to two former Nigerian ministers of agriculture. He specialises in development and policy issues in the areas of food, trade and competition, security, governance, environment and innovation, politics and emerging economies.
The self-reinforcing narrative about Africa’s pervasive poverty seems to have taken root for far too long. While the global economy is on the upswing due to pervasive influence of technological and scientific advancement, with the industrialised nations spawning multi-million dollar industries and vibrant small enterprises, Africa still struggles to
stay afloat across all sectors.
Although it is generally perceived that the industrialised nations have heavy industries, a bulk of their economies revolves around micro, small and medium-sized businesses. A World Bank working paper hinted that the vast majority, over 95 per cent, of firms and enterprises around the world fall into the category of micro, small or medium-sized enterprises (SMEs).
That this category employs 50 percent of the work force in companies with fewer than 100 employees in low and lower-middle income countries underscores their importance as an important component of the private sector in the developing world. Micro and small enterprises in Africa report significantly higher obstacles to their operation and growth than large enterprises. Prominent among these obstacles is the lack of access to appropriate financial services, especially lending services.
According to Making Finance Work for Africa, a think tank, “overall, African micro, small and medium enterprises (SMEs) face a financing shortfall of about $190 billion from the traditional
banking sector. African firms are 19 per cent less likely to have a bank loan, compared to other regions of the world. Within Africa, small enterprises are 30 per cent less likely to obtain bank loans than large ones and medium-sized enterprises are.”
The think tank added that, “among the many constraints faced by formal companies, access to finance consistently ranks as a top issue” as “almost 20 per cent of formal African companies cite access to finance as a constraint to their business.” Financing constraints thus ranks high among the challenges faced by African enterprises.
Because of the centrality of their roles as the biggest job-creators and contributors to nations’ economic growth, micro, small and medium scale enterprises are urgently in need of alternative means of finance for a robust financial inclusion. Surmounting the challenges of devising appropriate development strategies that will capture the financial services requirements of Small and Medium Enterprises (SMEs) which constitute about 70 per cent of the business sector in many developing countries, especially in Africa, requires urgency.
Although Africa has often been described as the last growth market, a large untapped microfinance market exists in Africa today, with growth finally becoming evident. The strong growth in microfinance and SME activities in Africa is a unique opportunity for socially responsible investors. But Africa must overcome the prevailing lack of regulation and supervision and weak governance structure at the level of the microlenders.
Delivery of microcredit to operators of Medium Small and Micro Enterprises (MSMEs) in developing countries is increasingly being viewed as a strategic means of assisting the working poor while
the microfinance industry worldwide has gained recognition as instrumental tool for poverty alleviation and economic growth.
Microfinance institutions target the poor who are considered risky, especially by the commercial banks.
The Bangladesh Grameen model succeeded in Asia and is now gaining currency in Sub-Saharan Africa. However, Africa’s financial systems still remain small, shallow and costly, with limited outreach, although with vast variations across the regions, ranging from well-developed financial systems in middle-income countries, such as Mauritius and South Africa, to shallow banking systems offering only the most rudimentary financial services in impoverished countries like Central African Republic and South Sudan. It is noteworthy that only three per cent of enterprises in Guinea-Bissau have a formal loan, while 53 per cent do so in Mauritius.
Obstacles include those created by commercial or equity banks, institutional imperfections and SMEs themselves. The Sub-Saharan Africa needs to be able to compete effectively in the increasingly globalised environment, with its micro and small enterprises growing and transforming into thresholds where they will be able to adapt efficient production techniques. Indeed,
the SME sector within SSA has been referred to as the ‘Missing Middle’ in the context of financial inclusion or access to financial (including banking) services.
Small and medium-scale enterprises (SMEs) are estimated to account for more than 95 per cent of enterprises across the world and for approximately 60 per cent of private sector employment. A report had it that SMEs account for a greater share of businesses in South Africa, Ghana, and Nigeria and their contribution to GDP, in Ghana for example, stood at about 49 per cent in 2012.
The lack of access to finance by SMEs in Africa has been attributed to two high risk characteristics. First, the provision of finance for Africa is generally rated as riskier than for other regions. Second, the provision of finance for small firms is globally rated as riskier than for large firms. To bridge this gap, therefore, governments and market players need to strengthen existing credit channels as well as expand new financing mechanisms.
According to the International Finance Corporation (IFC), in a publication on Access to Finance, there are about 70 to 90 million formal microenterprises globally, including those in high-income Organisation for Economic Cooperation and Development (OECD) countries. About 78 to 85 per cent of formal microenterprises (60 to 70 million) are in developing economies.
IFC revealed the total gap in access to finance thus: About 52 to 64 per cent of microenterprises (31.2 to 44.8 million) in developing economies are un-served or underserved; about 29 to 35 per cent of formal microenterprises (17.4 to 24.5 million) in developing economies are un-served; about 23 to 29 per cent of formal microenterprises (13.8 to 20.3 million) in developing economies are underserved; about 18 to 22 per cent (11.5 to 14.0 million) of formal microenterprises in developing economies are women-owned firms that are either un-served or underserved.
The report puts in perspective the total credit gap, explaining that the gap in credit financing of formal microenterprises is $0.5 to 0.6 trillion, including high-income OECD countries. The total
credit gap in developing economies was also estimated to be between $0.4 trillion and 0.5 trillion.
More reassuring is the fact that various innovative financing instruments are currently expanding or are presenting strong growth potential across Africa, with private equity funds investing a total of $22.7 billion in Africa across 919 deals between 2011 and 2016. The prospects of new financing mechanisms such as equity, crowdfunding or venture capital within and outside Africa are reconfiguring the financial inclusion landscape.
For Africa’s economy to enjoy the needed quantum jump, all these funding avenues need to be unlocked and beneficiaries supported in their livelihoods and investment drives.
With these, Africa’s small and medium enterprise economy looks set to take off.