Next Generation Africa: Supporting growth for Africa’s MSMEs
MSMEs form the backbone of Africa’s economies and are the engine of the region’s job creation drive, accounting for 70 percent of employment in the region. With a high proportion of informal enterprises, many of Africa’s MSMEs, which already faced significant challenges, have been hit hard by the pandemic. Addressing the structural barriers to growth that small businesses in Africa face will be essential to both the Continent’s short-term economy recovery and long-term development.
MSMEs in Africa have historically faced numerous barriers to growth. Sitting at the riskier end of the spectrum, access to private financing for early-stage businesses is challenging. Small market sizes and low levels of regional integration preclude many private investment options, accounting for the so-called ‘missing middle’. Meanwhile commercial banks struggle to offer adapted loans where collateral is limited and credit assessments are often unreliable, leaving smaller businesses faced with higher interest rates than their larger peers. In sub-Saharan Africa lending to MSMEs accounts for only between 5 and 20 percent of traditional banks’ portfolios compared to a range of 20 to 60 percent for OECD countries. Even where financing can be secured, to be successful it needs to be accompanied by technical support to combat the skills deficit faced by many MSMEs.
Supporting growth in the MSME segment calls for an ecosystem approach, bringing together targeted small scale financial products and wider business development support. Incubators, VCs and angel investors can play a key role in this respect through mentoring, capacity building and advisory initiatives. For larger investors or commercial banks partnering with these smaller locally embedded actors can help overcome the information gap and allow greater penetration with smaller businesses.
The recent partnership between 4G Capital, a company using tech to drive financial inclusion through micro-loans to small businesses accompanied by training programmes, and Citigroup, the American multinational investment bank is a prime example of the ecosystem approach in action. Innovative financial structures, in particular blended finance, have a transformative role to play in facilitating such partnerships and aligning investments with social and financial inclusion goals. The deal between 4G Capital and Citigroup was underwritten by the American development finance institution, DFC, as part of their Scaling Enterprise guarantee facility. This integrated approach allows the patient capital of DFIs to leverage commercial financing and support in-country programmes providing direct support to small business owners.
Stimulating joined-up thinking is the core aim of Invest Africa’s upcoming Next Generation Africa Forum, taking place during the annual Africa Debate 14-16th September which will bring together entrepreneurs, DFIs and private investors in a series of workshops and discussions aimed at building solutions to the most pressing challenges faced by African MSMEs. Find out more here.
