What are the projections for the SME sector
in Africa for the coming few years?
A vibrant private sector, especially SME sector is
critical for sustained economic growth and poverty alleviation. SMEs form the
backbone of the private sector and their number represents 97-99 % of all
enterprises generating over 90% of employment in the enterprise sector.
Research also reveals that in most cases the SME sector outperforms public
enterprises in overall turnover, value added and exports. Therefore, investment
in the growth and development of SME offer, in most instances, the only
realistic prospects of a meaningful and rapid increase of employment and
economic growth. Access to affordable finance and business support services is
With (1) improving business enabling environments in
Africa, (2) increasing participation of Africa in the global economy, (3)
awakening of the SME sectors as entrepreneurial drivers within the local
economies, supported by (4) remittances flows and (5) increased banking focus
on the SME sectors, the expectation is that many informal SMEs will
progressively participate in the formal economy, and that the formal SME
sector, with increased vigour and entrepreneurial drive, will grow and will create
a level of competitive mid-sized enterprises that is currently largely absent,
hence the ‘missing middle’ syndrome. As the SME sector grows, it will
increasingly also integrate into the economy and become part of forward and
backward linkages systems within the value chain of the larger African
enterprises. In this process, the African SME sectors will follow the trends of
other continents where SME will gradually form the mainstay of the economies in
terms of jobs and contribution to GDP.
What are and how can the hurdles facing the
SME sector be confronted?
The hurdles in the SME sector are multiple, and include
for example registration and business licensing constraints, taxation issues,
infrastructural constraints, contract enforcement issues, lack of access to
finance, absence of good collateral registries and credit bureaus. These and
other hurdles can be addressed through concerted and joint efforts by
governments and private sector (SME) representative organizations to identify
and action the specific national constraints. Specific SME policies, better
taxation approaches, one-stop-shops for SME licenses, private sector credit
bureaus capturing SME related information supported by adequate laws that
require banks to share credit information, increasing competition between banks
and initiatives by financial institutions to service the SME sector are all
needed to overcome the current hurdles faced by SMEs. The various parties will
need to work together and all take responsibility. International agencies can
assist through finance and technical assistance in the process. Exchange of
information on ‘best practice approaches’ will also assist in cross-fertilisation.
is your vision of AfDB’s role in the development of Africa’s SME sector?
Whilst DFIs including AfDB have extended
helpful resources, such as LoCs for local FIs and BDS support services
development, much more needs to be done. The sustainable solution lies in the
development of the local financial sectors and the capacity of banks to service
the SME sectors. Activities such as factoring, leasing and franchising needs
expansion and the SME market needs mezzanine financing and equity capital.
Africa also needs to plant an entrepreneurial ‘seed’ in young people, for
example by introducing entrepreneurship training in the school curricula at
secondary level. After all, SMEs are created and operated by entrepreneurs.
The AfDB’s vision with regards the SME sector is to increase our support
in effective and efficient manners, to be able to reach out to a much larger
number of small enterprises. We believe we can add more value to the local
markets by creating partnerships with other financiers, governments, financial
institutions and local business representative organizations. The financial sector needs more factoring,
leasing and mezzanine finance solutions and the AfDB can play a catalytic role
and assist in creating a demonstration effect in supporting a number of ‘proven’
models in Africa. Finance and technical
assistance, together with the right partnerships will assist in introducing
more of these financial instruments. As for banking finance, AfDB can provide a
larger number of LoCs to local banks and at the same time assist by building
capacity of banks to successfully lend to the SME sector. Credit scoring, SME
desks, relationship management, and portfolio management systems form some of
the TA that needed by banks. Supporting the delivery of adequate business
development services is also key in the SME sector and the AfDB will continue
to integrate this into its SME projects. The Bank will work with its partners
to address local constraints, and improve the enabling environment for
(AGF) in collaboration with Denmark and Spain has recently been
established. What is the goal of this particular fund and what results are
expected from this new project?
The AGF is an innovative African initiative that will
allow local banks and other FIs to obtain portfolio and portable guarantees.
The portfolio guarantees will allow shared risk that local FIs take on the SME
target group thus making it easier to engage in this segment. This will be
coupled with TA to assist banks to set up the right structures, mechanisms and
products for the SME market. Portable guarantees will enable FIs to seek local
affordable and longer term liquidity which can subsequently be used to provide
loans to the SME sector. In essence, this fund will be important to assist
financial institutions to address real and perceived risk perceptions in the
SME sector and increase local SME lending, with better tenors.