The African Development Bank (AfDB) has called on financial markets to increase affordable loans and provide more diverse and innovative financing instruments to Africa’s micro, small and medium sized enterprises. Industrialization is one of the High 5s priority areas of the African Development Bank.
Credit providers need to increase their lending by at least US $135 billion in order to meet demand by African Micro, Small and Medium-sized Enterprises ( MSMEs).
In a statement to mark the United Nations’ Micro, Small and Medium-sized Enterprises Day, June 27, AfDB noted that firms with fewer than 20 employees and less than 5 years’ experience provide the most jobs in Africa’s formal sector.
“The entrepreneurial culture is vibrant with about 80% of Africans viewing entrepreneurship as a good career opportunity. The continent has the highest share in the world of adults starting or running new businesses, but often in sectors where productivity remains low. New industrialization strategies should focus on leveraging this dynamism and targeting the continent’s fast-growing private enterprises which have potential to create quality jobs,” said Akinwumi Adesina, President of the African Development Bank Group.
According to the UN, micro, small and medium-sized enterprises represent around 90 per cent of global economic activity and are on the front lines of embracing transformative technologies and new business models.
In 2016, the AfDB provided financial services to 156,000 individual owner-operators and micro, small and medium enterprises through financial intermediaries, addressing a key constraint to starting up and growing businesses.
The AfDB also worked with USAID, the Fund for Africa Private Sector Assistance and the International Labour Organisation to build the capacity of small and medium enterprises (SMEs) in Zambia and enable national financial institutions to become efficient at lending to smaller business. The Bank is also launching a number of new programmes that are designed to help move Africa toward its industrialization goals.
In 2016 the Bank launched Fashionomics (the economics of fashion) initiative to increase Africa’s participation in the global textile industry supply chain. Fashionomics is an AfDB initiative to support the development of micro, small and medium-sized businesses (MSMEs) operating in the textile, apparel and accessories (TA&A) industry in Africa, with a focus on women and youth empowerment.
Given Africa’s potential for increased involvement in this sector, AfDB is also increasing its efforts to promote access to finance for entrepreneurs to create start-ups and expand existing businesses. But a holistic policy approach is needed to strengthen entrepreneurship for Africa’s industrialization and tackle the multitude of constraints.
The first is improving skills of entrepreneurs and of workers in general and aligning them with labour market needs. While governments can promote learning, engaging the private sector is necessary. The second policy area relates to grouping firms in business clusters, such as industrial parks and special economic zones. Clustering can support start-ups and increase existing firms’ productivity and growth, assuming adequate infrastructure is available.
Many African countries need to improve women’s rights to make decisions about their own lives and enterprises with adequate, flexible and affordable financial services and business education. According to the 2017 African Economic Outlook, many women entrepreneurs find financial services inaccessible due to high interest-rates and inflexible repayment schemes.
Women entrepreneurs face additional constraints which affect their firms more than those of men. Often women endure harassment and discrimination in the market place and from government and financial institutions. In Uganda, 28% of women own land compared to 53% of men; but only 10% of female landowners can use land as collateral compared to 95% of male.
African governments in July 2016 endorsed the African Development Bank’s (AfDB) Industrialization Strategy for Africa 2016-2025. It identifies “competitive talents, capabilities and entrepreneurship” as a key driver of the strategy. The AfDB’s fourth flagship programme aims to realise the strategy’s objectives by focusing on “Promoting and Driving Enterprise Development”, particularly small and medium-sized enterprises (SMEs).
The African Guarantee Fund for Small and Medium-sized Enterprises (AGF) provides a successful example of the financial viability of a credit guarantee scheme. AGF was set up in 2011 by the AfDB, the Danish international development agency (Danida) and the Spanish Agency for International Development Cooperation; the Agence Française de Développement (AFD) joined more recently.
By the end of 2015, USD 230 million worth of guarantees had been signed. Commercial banks increased this amount, by leveraging the USD 230 million in guarantees to lend out USD 460 million to SMEs. The credit guarantee scheme has benefited more than 1,300 SMEs, generating over 11,000 jobs. The fund operates in 35 African countries, with 54% of the credit guarantee capacity spent in West Africa and 22% in East Africa. After only three years of activity, the fund became profitable and reached break-even point. Revenues quadrupled between 2013 and 2015, from USD 2 billion to USD 9.1 billion.
The Boost Africa Initiative – a joint collaboration between the AfDB, the European Investment Bank and the European Commission- is expected to help create and grow 1,500 innovative businesses, create 25 000 direct jobs and 100,000 indirect jobs, and improve environmental, social and management practices in African youth-owned SMEs.
The Boost has an initial budget of EUR 150 million to deliver innovative, additional and long-term financial capacities in Africa; provide business advisory services and skills transfer for youth entrepreneurs to help them grow in an efficient and sustainable way; and improve knowledge, information, and networks regarding the development of entrepreneurship and of small and medium-sized enterprises (SMEs) in Africa.
Youth entrepreneurs are prioritised for support in sectors with development impact, including healthcare, education, agriculture/agribusiness, manufacturing and climate mitigation.
Indeed, micro, small and medium sized enterprises are vital in achieving the Sustainable Development Goals, in particular in promoting innovation, creativity and decent work for all.
But better policies are required to help micro, small and medium-sized enterprises to help increase productivity and income via microfinance programmes and education in Africa.
The continent also needs to validate skills acquired in the informal sector through certification.