SME financing : between challenges and opportunities

By Dounia Ben Mohamed

Accessing finance is the second most cited obstacle SMEs face in developing their businesses. A study by Investisseurs & Partenaires found that almost 40% of SMEs in Africa identify accessing finance as the « primary factor constraining their growth ».  The International Finance Corporation (IFC) estimates that SMEs in sub-Saharan Africa face an annual financing gap of nearly $330 billion. This compares with a gap of around $1,200 billion in Latin America and $776 billion in Europe.

The gap is even wider for women-owned SMEs in sub-Saharan Africa, estimated at around $42 billion, again according to the International Finance Corporation (IFC).

And if the issue of SME financing has become central, it is because of the weight they represent in African economies and, more broadly, in African societies.

SMEs, critical part of Africa’s economic fabric

On the African continent, SMEs account for around 90% of businesses, create between 60% and 80% of jobs and contribute 40% of GDP. By comparison, in the United States and Europe, SMEs account for 53% and 65% of businesses respectively.

In sub-Saharan Africa alone, there are 44 million micro, small and medium-sized enterprises, almost all of them micro. SMEs therefore play a crucial role in job creation and economic growth.                                

For these businesses to grow, create more jobs and generate economic growth, they need access to capital.

But many SMEs struggle to access the finance they need to grow, even though governments and international development organizations recognize their key economic role. 

One of the main difficulties is access to appropriate sources of finance: only 20% of very small and medium-sized enterprises (VSEs) have access to bank finance, and only a very small proportion of SMEs have access to investors. In sub-Saharan Africa, the current financing gap is estimated at $330 billion. African SMEs also face obstacles directly related to their nature, economic environment or activities: they are perceived as riskier, their governance is sometimes weak, or they lack the equity or guarantees needed to attract investors.

As a result, 51% of these vital businesses need more finance than is currently available to them.

Another obstacle to financing SMEs is the perception of the risk they represent.  The situation was exacerbated by the COVID-19 pandemic, which caused immense economic suffering in sub-Saharan Africa, with $115 billion in lost output and an expected 3.3% contraction in GDP. SMEs were particularly hard hit by simultaneous shocks to supply and demand. The ensuing crises – the war in Ukraine, the rise in fuel prices, the disruption of value chains, etc. – have particularly affected SMEs, which deserve special attention as they are rightly seen as the driving force behind economic recovery.

A growing awareness

African governments are increasingly aware of the strategic importance of supporting SMEs and have set up specific programs for them. Côte d’Ivoire, for example, has set up a ministry and a fund to support SMEs; Rwanda has made SMEs part of its strategy (Rwanda SME Development Policy); Nigeria has created a new development bank entirely dedicated to financing SMEs…

Development partners are also targeting SMEs. At the G7 Summit, the G7 development finance institutions, the IFC, the private-sector arm of the World Bank, the EBRD and the European Investment Bank announced their commitment to invest $80 billion in Africa’s private sector. This investment, spread over five years, is intended to support the economic recovery of the continent, which will suffer a historic recession in 2020 as a result of the COVID-19 pandemic.  France has also launched the Choose Africa program, adapted to post-COVID needs: the package has been increased to €3.5 billion instead of the €2.5 billion initially planned for the period 2018-2022.

Pan-African institutions are also trying to respond to the problem. At the initiative of the Central Bank of West African States (BCEAO), the West African Economic and Monetary Union (WAEMU) has set up a system to support the financing of small and medium-sized enterprises (SMEs) and small and medium-sized industries (SMIs).

These mechanisms are often considered « complex », « inadequate » or inappropriate by the main stakeholders, i.e. business leaders.

Partnership and innovation                       

« Less than a quarter of VSEs and SMEs actually have access to a bank loan, » Léonce Yacé, Managing Director of NSIA Banque Côte d’Ivoire, told the French magazine Entreprendre.fr.

This is due to the particular configuration of both SMEs and African economies. Against this background, banks, public bodies and financial institutions are stepping up initiatives and partnerships to develop innovative financing models at a time when liquidity has become scarcer since the health crisis.

One such initiative was launched last spring by the Bank of Africa Group (BOA) and the IFC to support economic activity and job creation in 10 sub-Saharan African countries. IFC will invest $77 million in the risk-sharing facility to increase BOA’s lending to small and medium-sized enterprises (SMEs), including women-owned businesses, in Benin, Burkina Faso, Côte d’Ivoire, Ghana, Madagascar, Mali, Niger, Senegal, Tanzania and Togo. IFC’s investment will guarantee 50% of a total portfolio of up to US$154 million equivalent in loans to businesses in agriculture, trade, energy, construction and other sectors. Through this facility, BOA is expected to provide 12,000 new loans, including at least 2,000 to women-owned businesses, which often face greater barriers to accessing finance. IFC will also provide advisory services to help BOA strengthen its portfolio of women-owned SMEs in its affiliates in the ten countries.

The initiative builds on a multi-country risk-sharing facility that IFC established with BOA in 2018, with support from the GSMEF, to support small business growth in eight African countries.

Last August, Afreximbank and the China Development Bank also signed a $400 million loan to support African SMEs. Under the agreement, the seven-year facility will be extended either directly to eligible African SMEs that meet Afreximbank’s eligibility criteria, or indirectly through local financial intermediaries.

Digital innovations also offer disruptive solutions to the problems faced by African SMEs through the innovative business models they enable. 

Tackling climate change in Africa: an opportunity for SMEs

Meanwhile, another opportunity for African SMEs is emerging: climate change. Tackling climate change in Africa represents an economic investment opportunity of $3,000 billion on the continent by 2030. The private sector in Africa is essential for adapting to and mitigating climate change. This is particularly true for SMEs, which make up a large part of the continent’s private sector. SMEs that move towards green growth would have access to new sources of finance and new markets.

These are initiatives that should be encouraged and multiplied in order to promote new financing mechanisms for SMEs, take advantage of digital technology, e-commerce and blockchain, and ultimately promote job creation and entrepreneurship among young people. That’s what it’s all about. The World Bank estimates that nearly 450 million young Africans will enter the labor market between 2035 and 2050.        

SMEs are essential to meeting the needs of Africa’s rapidly growing population. Not only because they will create these new jobs, but also because they create economic opportunities, develop skills, promote inclusive economic development and thus contribute to social cohesion.