Reflecting on Risk for Early-Stage SMEs in Africa
You can’t talk about business activity in Sub Saharan Africa without referring to SMEs. They are the nerve centre of business activity, accounting for up to 90% of the economic activity on a continent that is expanding by an average of 2.7% year on year[1]. Development finance institutions (DFIs) and other financiers are increasingly turning their attentions towards African SMEs- earlier this year the CDC announced a USD1bn commitment to financing African businesses in 2021 and just last week, the African Development Bank announced that it will be unlocking between USD1.3bn and USD2bn worth of loans to female-led SMEs. Yet this still falls woefully short of the USD330bn in SME financing that’s required for the continent as a whole[2].
Our engagements with entrepreneur support organisations and donors this past week has got us reflecting on risk for entrepreneurs and for governments. Here are four:
For the entrepreneur:
1. Keep Abreast of Regulatory Change: Given just how dominant the informal economy is in Africa- accounting for close to 90% of business activity[3]– there is typically a strong sense of disconnect between the entrepreneur and government and therefore, often a lack of a willingness to engage. However, adopting such an attitude could leave entrepreneurs on the back foot and missing out on opportunities which could favour them. In Senegal for instance, the recently enacted Start Up Act 2020 provides for start-ups to benefit from a tax holiday for three years from commencement and a decrease in registration fees for the setting up of companies from CFA25,000 to CFA10,000[4].
2. Find Mentors and Models of Success
Centuries of disempowerment in Africa have left craters in our institutional memory of indigenous business success stories. But fatalism need not triumph. Entrepreneurs must seek out what success looks like from a local perspective as well as cultivate mentors. Indeed, the estimated USD42bn financing gap for women-led SMEs is intimately tied to issues around mentorship, which the ADB’s Affirmative Finance Action for Women in Africa (AFAWA) program seeks to address[5].
For governments:
3. Ensure Informal Worker Representatives are At the Negotiating Table
Brice Mgameni, editor in chief of Harvard’s Africa Policy Journal put it aptly. “In one of the great ironies of the [Covid-19] crisis, no focused support has been directed towards the shadow economy in the very continent that depends the most on it”. A conversation with a women’s advocacy group in Ghana last week also emphasised that point. While government workers/ legislators turn to the informal roadside sellers of “Kofi Brokeman” for a lunchtime bite or to hawkers for plantain chips when traffic gets too intense, they soon forget the needs of the informal worker when it comes to their protection. This has led to Ghana’s Trades Union Congress (TUC) calling for greater job security and occupational rights for domestic workers recently[6].
4. Make Understanding the Opportunities of the African Continental Free Trade Area (AfCFTA) More Accessible
Trading under AfCFTA began on 1st January 2021 after years in the planning and COVID-related delays. The agreement is designed to reduce tariffs within Africa, such that it becomes cheaper and easier for goods and services to circulate on the continent. However, a survey of 1800 MSMEs in Nigeria last year showed that only 25% of companies surveyed were aware of AfCFTA, particularly those in agriculture and services, pointing to a real need for governments to engage in sensitisation to ensure that the full benefits of AfCFTA are realised[7].
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[1]https://www.economist.com/special-report/2020/03/26/africas-population-will-double-by-2050
[2]https://african.business/2018/10/economy/closing-africas-msme-finance-gap/
[3]https://blogs.worldbank.org/africacan/future-work-africa-making-productive-investments-more-and-better-jobs
[4]https://ventureburn.com/2020/02/senegal-startup-act-built-on-consultation/
[5]https://www.herald.co.zw/afdb-unlocks-us2bn-loans-for-women-smes/
[6]https://newsghana.com.gh/tuc-calls-for-job-security-in-the-informal-sector/
[7]http://naccima.com/media-center/research-reports/307-report-impact-of-the-african-continental-free-trade-area-afcfta-on-nigerian-micro-small-and-medium-enterprises.html