Barriers to SME Growth in Africa – African Association of Entrepreneurs

Apart from financial funding, SME growth in Africa is linked to government support and creating an ecosystem that allows small players to learn and grow alongside big players, contributing to the nation’s economy.

Across the world, including Africa, a vast majority of private-sector companies fall under the category of small and medium-sized enterprises – known as SMEs in popular parlance. In fact, the SME sector in Africa provides up to 80 percent of jobs and is a major contributor to GDP and economic stimulus in most African nations.

In this scenario, private-sector SMEs have proven their relevance and criticality towards job creation and economic growth, which are needed for sustainable economic growth. Therefore, private-sector expansion through scaling up SMEs is critical to job creation and economic growth that Africa needs in the future.

The responsibility to increase Africa’s future prosperity and create more job opportunities for the increasing young population falls on local SMEs in most nations. Added to this is the attraction of a market with 1.2 billion people, a profusion of new businesses in emerging sectors, and progress towards achieving a continental FTA (Free Trade Agreement).

However, in reality, a large number of SME enterprises across Africa face a challenging business climate, especially for those seeking to expand further. While easier financing is often thought to be the foundation for accelerating SME growth, a World Economic Forum (WEF) report titled “Why Africa’s SMEs Need More Than Money to Ensure Their Growth” (July 2023) analyses that apart from finance, other factors also contribute to creating a healthy atmosphere to accelerate SME growth in Africa.

The WEF report highlights that although SMEs account for 95% of all registered businesses in sub-Saharan countries and contribute about 50% to the total GDP, first-generation entrepreneurs face significant obstacles to growth and prosperity beyond the traditional barrier of acquiring easy or affordable finance. Addressing their needs and harnessing their potential is essential to create a prosperous Africa.

Another critical factor impacting SMEs is the bureaucratic labyrinth of laws they must navigate before starting any new enterprise. Vetting and financial procedures can also place additional pressure on small businesses, especially when they struggle to fulfil various norms like guarantees and bonds required by some financial institutions.

A lack of enabling infrastructure further isolates SMEs from markets, opportunities, and access to capital. Business owners often handle tasks personally due to unaffordable wage costs, leading to neglect of vital aspects of businesses and a lack of resources and knowledge to manage them fruitfully.

The crucial question becomes: what actions can financial institutions take to reverse these trends? How can African small businesses become the forces of economic change, financial transformation, and innovation that SMEs enjoy in other parts of the globe?

The WEF report summarises that part of the answer is to develop a creative, strategic enterprise development approach leveraging technology, insight, and relationship ecosystems to enable African entrepreneurs to overcome obstacles and gain easy access to skills enhancement, which currently inhibit business formation and growth in Africa.

Moreover, easy access to simplified funding, new markets, expansion of skills and resources are also required if African SMEs are to achieve their desired socio-economic expansion. They must be enabled to handle financial tools and products, enhance their digital skills, understand markets, and have an economic and financial ecosystem that enables them to overcome business barriers.

Additionally, emphasis should be placed on developing the skills and capacity of local construction, infrastructure, and logistics enterprises.

Across Africa, various governments’ SME strategies and initiatives often provide springboards for private sector interventions or public-private partnerships to promote small businesses.

The report also lists finance, regulation, technology and innovation support, market access, and tax incentives and support as major factors that could further boost the productivity of SMEs across Africa if various governments pitch in with significant reforms and options, while ensuring access to easier finance options, promoted through specialised programs and guarantee schemes in conjunction with financial institutions.

Africa, which has the largest youth population in the world, needs entrepreneurs and small businesses to provide future workers with opportunities that also contribute to the economy, besides solving the unemployment issue.

To increase employment, broaden tax bases, and increase national revenues, what is needed is a healthy and expanding African small business sector. This will also allow governments to focus more on other socio-economic issues. Thus, a robust private business formation is key to expanding inclusion and sustaining long-term economic growth in Africa, with SMEs being an important factor in achieving these goals.

To overcome the barriers to SME growth in Africa, various African nations in collaboration with international institutions like UNCTAD, IFC, WEF, and the World Bank should initiate campaigns on how to better equip first-generation entrepreneurs by enhancing their entrepreneurial skills, coupled with additional incentives given by the governments.

New entrepreneurs should be coached in business skills, financial management, negotiation skills, awareness of the latest HR techniques, and focused skills enhancement modules on emerging technology and non-technology sectors, with full analysis of inputs and outputs.

These efforts should come in tandem with favourable policy initiatives by the governments aimed at upscaling and increasing the contribution of SMEs in respective countries.