by Introduction
Africa is one of the fastest growing continents. Statistics suggest that by 2050, the population will be an estimated 2.5 billion and will constitute 25% of the world population. Yet, the lack of access to finance has been an issue within Africa, with evidence showing how much it contributes to the slow development of the continent. For example, about 25% SMEs indicated that lack of access to finance hinders their growth. Studies suggest that there is a strong positive correlation between SME growth and access to finance.
Small and Medium Enterprise (SME) Financing
The importance of Small and Medium Enterprises (SMEs) in developing countries cannot be overlooked. In developing countries, SMEs make up to 90% of the private sector and create more than 50% of employment in the economies. Sub-Saharan Africa has an estimated 44 million SMEs. On the other hand, SME financing in Africa shows trends that 50% of SMEs need more capital than they are currently accessing. Some of the factors that exclude SMEs from accessing finance is that SME financing is still considered risky by financial institutions due to a number of reasons. These include the high failure rate of SMEs, lack of business continuity, poor regulatory environment for SME operations, etc.
Available finance options in the African financial ecosystem include:
- Private finance;
- Microfinance and angel investing to venture capital;
- Private equity and potentially listing on growth segments of local exchanges;
- Financing based on concessions;
- Blended finance;
- Informal finance such as microfinance with wide products such as mobile banking, savings and credit cooperatives.
Trends in the African financial system reflect challenges and solutions for the development of financial products for SMEs to access finance. For example, in East Africa, Kenya is considered to be one of the most innovative financial systems in Africa, being perceived as the hub for fintech innovation in the continent. These innovations include the use of mobile phones to access finance, which have revolutionized how SMEs access finance (using products such as M-PESA) and making significant contributions to GDP. On the other hand, South Africa is considered to have the highest developed financial system and capital markets development in the continent. There are, however, challenges in terms of allowing access to SMEs, for example, the South African Reserve Bank noted that at the end of 2020, total SME credit exposure amounted to 25% of business loans disbursed. At a continental level, efforts to increase access to finance for Small and Medium Enterprises (SMEs) through financial institutions were made by the African Development Bank where they support financial institutions with long term liquidity and technical assistance to readily finance SMEs.
Food production and technology is a sector to develop for SMEs for structural transformation to happen and development to take place. As population pressures mount, the demand for food will increase proportionately, therefore innovative and technologically empowered food production systems will be on the rise, including agritech innovations. There are however challenges in ensuring investments in the agri-tech sector are aggressive enough. For example, in 2023 venture capital activity totaled $1.4 billion for agritech firms, down 35% from the third quarter. Deal counts reached 181, down 17% from the same period. This might have been due to a number of reasons including the rising inflation rates globally which prompt investors to pull back from investing. Moreover, the footprint of investment in African capital markets is the smallest in the global finance system. This is attributed to their dependence on volatile commodities, such as oil, copper and cotton. According to the UNCTAD (2023), between 2019 and 2021, 74% of LDCs relied on these raw materials for at least 60% of their merchandise export earnings. When prices drop, their fiscal space shrinks drastically. A slow development of industry and productive manufacturing firms that increase the value for export also contribute to a slow development in the financial system. Tertiary services in African economies are mostly provided by the government and, due to low innovations, financial system performance is slow. For example, Africa, although the second largest continent, contributes 4% of capital in the global capital markets while the EU, UK and America combined contribute to 71%, while Asia contributes 12%.
Neoclassical economics argue that capital accumulation is a function of the total factor productivity and the total population as a ratio of its labor force. On the other hand, studies show that businesses that have access to external finance grow faster in developing economies. In a 2019 interview with Ali Dankote, one of Africa’s renowned entrepreneurs, he highlights access to finance as the largest obstacle for small and medium-sized enterprises in sub-Saharan Africa.
Before SMEs can even imagine access to finance, they need to thrive. In other words, the business environment should be convenient. Various authors categorize the business environment as a combination of factors that enable people to conduct businesses in their specific area. For example, the World Bank Enterprise Surveys categorize the business environment using the following indicators: measures of the impact of regulation, crime, access to infrastructure, and the level of corruption. Acemoglu and Robinson (2012) categorize the business environment as “Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills that are more conducive to economic growth.” Others cite economic, political, institutional, legal, technological and cultural conditions. From all sides, we can observe that there are a lot of factors that contribute to business success in a country. For economic conditions to thrive, their main focus area should be capital generation through development of the business environment.
An overview of the current state of agritech in Africa
The continental overview of the agri-tech sector is still developing. Documentation of agri-tech companies on a single database could not be ascertained, which indicates a major gap in data availability, to analyze or regulate the sector. The well documented agri-tech companies are composed of mainly franchised international private sector companies dominating the space. Given the statistics that 70-80% of African start-ups fail in the first five years, the question then becomes: will agri-tech startup companies be resilient enough to compete for the market share in the sector?
The African Development Bank (AfDB) makes efforts to develop the sector through The Technologies for African Agricultural Transformation (TAAT), which is a flagship program of the Feed Africa Strategy (2016-2025). TAAT is a major continent-wide initiative designed to boost agricultural productivity across the continent by rapidly delivering proven technologies to millions of farmers.
The most recent initiatives to encourage agritech innovation in Africa include the 2023 edition of the Pitch AgriHack launched by Africa’s Food Systems Forum (AGRF). The competition aimed to promote agri-tech innovation and sustainable agricultural development in Africa.
Conclusion
SMEs are the main drivers for development in Africa. An emphasis on developing the sector through enabling legislature and conjunctive environment for business continuity and sustainability is imperative. Agriculture, being a major contributor of developing economies, should be diversified into utilization of digital technology by initiating agri-tech technologies in the continent. Moreover, to maximize profitability of SMEs and investment in technology, the expansion of knowledge on capital markets/investment is crucial for both SMEs and governments.
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