Small to Medium Enterprises (SMEs) make up 90 percent of all companies in Africa, and they provide 80 percent of its employment too. It has often been said that entrepreneurship is also the future of African economies. SMEs are springing up in numbers from every corner of the continent, as they try to spur Africa’s growth and development.
Unfortunately, the hostile business ecosystems in many African countries don’t support the growth of SMEs, resulting in their rapid death too. Despite the fact that 96 percent of Nigeria’s businesses are SMEs, 80 percent of them fail within the first 5 years. The biggest challenge to small businesses in Africa is funding, and a new report by the London Stock Exchange Group has placed the funding gap for African SMEs at more than $140bn.
The report recognizes four challenges to raising capital for SMEs on the continent for them to be able to survive, and possibly scale up; inefficiency of African capital market in supporting SMEs, low capacity and the need for upskilling and training, minimal visibility to a broad investor base, and an absence of government-led strategies to develop the SMEs ecosystem.
Small businesses on the continent, according to the report, have resorted to funding their enterprises with short-term debts, owing to the fact that it’s the only option available for them. This means they have had to depend on the kind of bank loans, usually from microfinance banks, that were not adequate to fund innovation and long-term expansion projects that create more jobs and reduce youth unemployment.
Another challenge for African SMEs is a lack of trust from stakeholders outside Africa who could provide equity capital for businesses on the continent. Specifically, these stakeholders are usually disillusioned by the lack of transparency, a non-existent vision for growth, the absence of financial records, ignorance about the importance of branding and marketing etc. Corruption, tax policies that are detrimental to small businesses and regulatory laxes around the Ease of Doing Business are some of the factors that highlight how African governments lack specific strategies to develop small businesses.
To solve some of these challenges, support programmes for African SMEs need to create internationally-recognized capacity building programmes and hubs for SMEs. The report found out that “SMEs that take part in sector events or join an incubator or accelerator programme secure 23% more funding, on average, than those that don’t participate in such activities.” They also need to support more small businesses outside of major African cities, encourage a more commercial mindset in entrepreneurs, and devise ways to diversify funding from the IT sector. Governments should raise the visibility and awareness of leading African private businesses, provide a registrar about SMEs where information about their businesses are available to the public, and implement more policies aimed at SMEs development.
The London Stock Exchange Group report on the challenges and opportunities of SME financing in Africa was developed by its London Africa Advisory Group (LAAG), is part of an extensive series of reports on Africa’s capital markets that recommend how to “increase investment flows” into the continent. Other reports include Developing offshore local currency bond markets for Africa, Trends in corporate information dissemination in Africa, Attracting passive investment flows to African markets, developing the green bond market in Africa, and the challenges and opportunities of SME financing in Africa.