SMEs in North Africa: Opportunities and Challenges

The African continent includes several countries stretching across North Africa, West Africa, East Africa, and South Africa. It is a stain on the conscience of the world’s existence with the epicenter of poverty and disease. Also, it is known as a continent desperately in need of foreign aid, and to which the rich and powerful countries must urgently stretch a helping hand of benevolence (Kolade 2022). However, in most developing countries, small and medium enterprises (SMEs) have a significant role in national economies.

This article contributes insights into how North African SMEs sustains the often turbulent institutional environments and volatile markets. With the presence of SMEs over the past decade, revenue growth in the SMEs sector has outperformed other business lines and boosted two to three times as traditional segments. The promotion of entrepreneurship and small business remains a priority of the North African leaders. The commitment is to ensure how SMEs progressively generate national contribution and performance of the regional economy in critical areas such as job creation, equity, and access to markets.  

Small and medium-sized enterprises or small and medium-sized businesses are businesses whose personnel numbers fall below certain limits. World Bank, the EU, the UN, and the World Trade Organization as IOs utilize SMEs abbreviation (Fischer and Reuber 2000). The support of SMEs presence has been many years is to contributing and have a role in the economic growth of the Middle East and North Africa (MENA) region. Regulators, economists, and financial institutions conform to the effectiveness of SMEs in reducing acute poverty and creating jobs. SMEs represent between 80 to 90% of formal sector enterprises in MENA but are often not aware of the economic potential that the public market offers. For the last ten years (2011-2021), most African financial institutions have moved quickly to boosting green lending and digital innovation. African financial institutions have remained relatively resilient during the COVID-19 crisis, and lingering problems could set back financing during the economic recovery (EIB 2021). Almost half of the banks reported that their biggest worry was a deterioration of their loan portfolios. Another 21% were most worried about the increased risk of new lending.

SMEs in Northern Africa Regions

SMEs in North Africa are optimally assisted in capital financing and business sustainability by stakeholders responding to globalization and the world free market. The MENA regional leaders are responsible for jobs and employment for the 20 million young people who will join the workforce by 2025 (Ahamed 2021). The African continent has an area of about 30.37 million km² with a population of around 1.37 billion people (2021) dominated by millennials and generation Z. The UN estimates that North Africa’s current population in 2021 is 254,035,925 (Worldometer 2022). This population is equivalent to 3.16% of the total world population, ranks number 3 in Africa among sub-regions ranked by population. Around 52.4% of the population is urban (129,068,218 people in 2019). Egypt has the largest population, and Western Sahara has the smallest. North African countries have a demographic bonus such as capital, challenge, and opportunity to generate their respective economies through business intensification and opening various SMEs and jobs employment.

However, the lack of access to finance might severely impact SMEs’ growth and employment. All financial institutions must focus on the SMEs segment and expect to encourage the creation of an enabling environment to grow business. The greater competition and reduced profit margins in corporate and retail banking will make banks increasingly seek to diversify into new business lines to maintain and increase profits. Apart from that, banks will differentiate themselves by offering innovative tools and reaching untapped markets, particularly for the management of SMEs in North African countries (Nasr and Pearce 2012).

A sizable population of almost 23 million SMEs in MENA presents a potential business opportunity. It is not only aimed at supporting economic growth and job creation in MENA but also for banks to build a profit from the market. Further, several challenges emerged after the end of the Arab Spring movement in the MENA region, including 1) the need to create job opportunities; 2) equal access; 3) competitive levels of competition; 4) transparency and accountability; 5) the creation of a fair and competitive environment. Crony capitalism, the given-privileged access of certain elites to the favorable legal and regulatory treatment of political patrons, access to markets, and the coincidence of political and economic power were rampant happened, was also a concern contributing to the uprising. Noticeably many saw privilege and corruption as the source of unemployment and inequality, effectively raising barriers to entry and potential growth for entrepreneurs.

Development of SMEs

SMEs represent about 90 percent of businesses with more than 50% of employment worldwide, and formal SMEs contribute up to 40% of national income in emerging economies (World Bank 2022). These numbers are significantly higher when informal SMEs are included. Based on World Bank estimation, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In research from a scholar (Otman 2021), SMEs are now widely recognized in the MENA region as engines of development.

Financial access is a constraint to SME growth as it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries. In the MENA region, it is seen US$57 billion microfinance gap, while the small-medium enterprises’ finance gap is US$138 billion (World Bank 2022). Today SMEs have been at the forefront of industrial growth in many North African countries. It needs market growth in the MENA to help accelerate the regional economy through SME products distributed worldwide. Indeed, without the focus and accuracy of business strategy, business growth will decline and cause a drastic slowdown in the development of domestic and regional industries. North African SMEs should be encouraged to grow and play an active role as strategic bridges for relevant stakeholders who can provide guidance on policy advocacy and create a competitive business environment.

Egypt is a market of more than 100 million people and offers opportunities for trained entrepreneurial skills. Mostafa Amin is an Egyptian entrepreneur stated as follows (Amin 2018).

“One of the best decisions in my life was to reject a job offer from a big corporation and embark on an entrepreneurial start-up journey. Indeed, the journey has been tough and there were, and still are, bumpy roads, but the rising entrepreneurial spirit across the country has been extremely uplifting. I have been in the Egyptian entrepreneurial ecosystem for the past few years and I consider myself well connected and quite informed about everything that has been happening. But I can say with confidence that what the country has been seeing in the past few years is very promising and inspires us to do more.”   

Most of Egypt’s businesses are small-sized, with 97 percent employing fewer than ten workers. Medium-sized enterprises with 10 to 50 employees account for around 2.7% of total businesses, ranging from small stalls to big enterprises. Big businesses with over 50 employees account for 0.4% of all enterprises nationwide. SMEs’ existence can generate business to continue and discover new market trends and advanced technologies in the food industry in Africa. 

Conclusion

SMEs development has a proven track record of driving growth and opening job opportunities. North African countries’ government leaders should be aware and lead all efforts to boost the level of entrepreneurship through supporting SMEs creation and economic improvement. Partnerships between government and various stakeholders and role-players remain a critical success factor. These collaborative institutions have made progressive results in delivering a wide range of support services.

The financing of the SMEs business sector in North Africa needs to be continuously encouraged to develop and grow with the support of bank financing. Therefore, ongoing policy implementation and appropriate strategy challenges require improving the scope and quality of their offerings to SMEs businesses. In addition, SMEs should need to responsively accommodate the integration of the open market provided and supported by the various governmental departments and related institutions.

Bibliography

Articles
Ahamed, Adeeb. “Improving access to finance for businesses in MENA region,” World Economic Forum, 2021.
Amin, Mostafa. “My life as an entrepreneur in Egypt.” World Bank Blogs, 2018.
Fischer, Eileen and Reuber, Rebecca. “Industrial Clusters and SME Promotion in Developing Countries.” Commonwealth Secretariat, 2000.
Kolade, Seun. “How Africa’s entrepreneurs are handling the continent’s challenges: new book.” The Conversation, 2022. 
World Bank. “Small and Medium Enterprises (SMEs) Finance.” 2022.
Worldometer. “Northern Africa Population.” 2022.
Books
European Investment Bank (EIB). “Green, smart and inclusive finance.” EIB Press, 2021.
Nasr, Sahar and Pearce, Douglas. “Middle East and North Africa Region – SMEs for job creation in the Arab World: SME access to financial services (English).” World Bank, 2012.
Research Paper
Otman, Khaled. “Small and Medium Enterprises in the Middle East and North Africa Region.” International Journal of Business and Management, vol. 16, no. 5, 2021, p. 55. Crossref, https://doi.org/10.5539/ijbm.v16n5p55.

hendra_manurung

13 years working experience in teaching, research and community development

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6 thoughts on “SMEs in North Africa: Opportunities and Challenges

  1. Good elaboration to follow. Good luck Dr. Hendra with this project.

  2. Thanks for sharing the project Dr. Hendra. It is benefial to understand the role and contribution of SMEs in North Africa region. Wish you all the best.

  3. The article is clearly related to the fluctuations in the development of SMEs in the North African region by Dr. Hendra Manurung. Indeed, this has certainly boosted insight and meaningful entrepreneurship knowledge to better understand the socio-economic conditions of the community. In the future, it should be also continued with a number of projects related to how other projects organized by AAE relate to the efforts of SMEs in North Africa to advance market competitive products that are able to penetrate international markets and empower the economic life of marginalized people in particular.

  4. Projects related to the development of SMEs in North Africa have provided interesting insights and information for me. Wish you all the best in life and career development Dr. Hendra.

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