This is the 18th post in a blog series to be published in 2022 by the Secretariat on behalf of the AU High-Level Panel on Emerging Technologies (APET) and the Calestous Juma Executive Dialogues (CJED)

Small-and-medium size enterprises (SMEs) are crucial towards contributing to Africa's inclusive socio-economic development and growth. This is because SMEs are generating work opportunities, income, and wealth creation, and thereby, enhancing poverty reduction. Notably, there is no standard international definition of small and medium-sized enterprise (SME) that exists. SMEs are variably defined in the legislation across countries. This is because the dimension “small” and “medium” of a firm is dependent to the size of the domestic economy.[1]

The Organisation for Economic Co-operation and Development (OECD) refers to SMEs as companies that are employing up to 249 people. Micro employs between 1 to 9 people, small refers to hiring 10 to 49 people, and medium ranges between 50 and 249 people.[2] This consideration and definition can enable the best comparability given the varying data collection practices across countries, as various countries are using different conventions.

SMEs account for approximately 80% of jobs in Africa and this makes SMEs a significant mechanism for socio-economic growth.[3] For example, within Sub-Saharan Africa, there are approximately 44 million SMEs.[4] In addition, the African Continental Free Trade Area (AfCFTA) is promising to expand access to regional and continental-wide export markets for SMEs.[5] Further to this, the Sustainable Development Goals and the African Union acknowledges that Africa’s drivers of economic growth and long-term sustainability for emerging markets are dependent on the potential of the effective development of the SME business model.[6]

The presence of SMEs in all sectors of the African economy are signifying their vital role in steering the socio-economic development and growth of the African continent. In the context of Africa, SMEs are essentially contributing towards job creation and employment for a large populace. For example, up to 90% of the population in African countries such as Uganda, Ethiopia, and Kenya are employed within SMEs.[7] This is because SMEs are essentially enabling invention, innovation, and the creation of new ideas and technologies. Fundamentally, SMEs are providing for pre-incubation, incubation, introduction, and commercialisation of innovation and technology into the market. This provides a platform for creating and testing new products before they can be upscaled and disseminated into larger industry through the macroeconomic systems.

In addition, SMEs are attributed and accredited for identifying and creating new markets and serving as the foundation for new companies. This is consequently providing a source of income for millions of Africans. Thus, SMEs are enabling wealth creation by driving the demand for goods, services, investments, innovation, technology, and trade.

However, despite their positive influence towards the development of the Africa continent, SMEs are still facing tremendous and restrictive obstacles that are impeding their long-term survival and contribution to the development of Africa. As a result, the mortality rate of SMEs among African countries stands at an astonishing rate of 5 out of 7 businesses failing in their first year.[8] For example, in Uganda, one-third of new company start-ups fail within the first year of their operation.[9] On the other hand, South Africa has a failure rate of start-up companies that ranges between 50% and 95%, depending on the industry.[10]

African SMEs are bearing the disproportionate share of the burden of institutional and market failures. This is most noticed as observed from the limited access to finance and credit. Additionally, impediments to the growth of SMEs across the African continent include inadequate institutional and physical infrastructure, political instability, exploitation, and burdensome regulatory environment. The Enterprise Surveys of the World Bank observed that limited access and affordability to finance are the predominant constraints against the growth of the SME sector in Africa.[11]

In Africa, SMEs are usually informal because they are not properly established as firms. Consequently, this makes access to finance and funding challenging and difficult for SMEs. Notably, only one-third to one-fifth of SMEs in Sub-Saharan Africa (SSA) have access to financial instruments such as bank loans and lines of credit.[12] Further to this, an estimated 28.3% of SMEs in SSA are entirely credit limited.[13] This is particularly a significant concern for African SMEs because this impedes their capacity and ability to develop and grow without sufficient operating capital.

Furthermore, SMEs are also challenged by their capacity to afford loan instruments because of the high bank interest rates varying between 20% and 25%.[14] Alternatively, financial providers and supporters such as microfinance organisations and internet lenders, would normally charge even higher interest rates, ranging between 40% to 50%.[15] Fundamentally, the high interest rates can sometimes thwart the SMEs from even attempting to obtain credit. Thus, the absence of accessible funding can severely impede the expansion of Africa’s SMEs.

Several financial and banking institutions acting as lending institutions in Africa find it hard to lend capital finance to SMEs. This is because most of Africa’s SMEs can barely have the prerequisite information such as credit history that is necessary and essential for lending, limited financial statements and reports, and inadequate land and building ownership for collateral purposes. Thus, there is a need to enable tools that can be utilised to collect and manage transactional data that can be used to easily create financial reports and statements.

Therefore, the African Union High Level Panel on Emerging Technologies (APET) is accentuating the digitalising of financial data and transactional history through innovation and emerging technologies. This provision can substantially enable appropriate reporting of financial statements and history. Such information and well-organised data can enable access and diversification of financing for SMEs in Africa.

APET notes that the utilisation of online applications and the automation of underwriting, due diligence, loan servicing, and regulatory compliance duties may enhance the conventional lending processes. This can increase productivity while lessening the operational expenses for the banking institutions to make loan processing affordable. SMEs, when seeking loan instruments from financial institutions, can easily provide the necessary data about their business operations and transactions from well-organised data capturing mechanisms and management systems. Such digitalised data can streamline business activities and subsequently make the SMEs easily become eligible for credit.

APET further observes that these digital technologies that can be employed include cloud-based accounting, digital payments, and the automation of invoicing and settlement procedures. This kind of information can substitute the need for bank statements and costs associated with compiling financial statements and reports. Furthermore, the enhanced availability of financial data, along with alternative smartphone data, can also enhance loan eligibility screening and credit evaluation. APET recognises that can subsequently decrease the risk and default for financial service providers. In this way, digital loan applications can offer simplicity and convenience, and this is suitable for SMEs that have limited administrative and managerial capacities.

For example, the African banking sector presents abundant terrain for digitalisation to expand Africa’s financial markets. Statista has reported that Africa's e-commerce industry is envisaged to expand at a compound annual growth rate of 24.7% between 2017 and 2024. [16] In 2017, the industry’s annual revenue was approximately US$7.7 billion and envisaged to increase up to US$42.3 billion in 2024. Fundamentally, the yearly income stands will expand by nearly 500% in seven (7) years.[17] The consumer preferences are favourable for emerging technology breakthroughs in Africa as demonstrated by the world's largest mobile money deployment.

APET observes that these breakthroughs are substantially improving the business mechanisms and management systems for Africa’s SMEs. For example, digital technology has enabled access to finance for SMEs in Kenya by using the mobile money applications. This has substantially bolstered the quantity of digital loan applications and approvals. Consequently, these digital loans have surpassed the approval rate of traditional loan instruments.[18] The Reserve Bank of Kenya has acknowledged that the adoption of the Loans Information Sharing System (CIS) is broadening financial inclusion in Kenya.[19] Furthermore, this system is making it simpler for SME borrowers to acquire extra growth credit.[20] Notably, this has since expanded over the last several years because of the improved credit ratings as supported by the CIS system. This has enabled the digital lenders such as M-Shwari, Tala, and Zenka to offer essential finance to Kenya’s SMEs that were seeking swift short-term loans.[21]

Finally, APET advises African governments to invest towards their citizens' capacities. This can be accomplished by investments towards digital physical infrastructure and digitalising financial systems across the African continent. Digitalisation can significantly enhance financial inclusion, most particularly for unserved and underserved enterprises, such as SMEs. In addition, APET notes that to reap these digital benefits, capacity strengthening of human capital development towards fundamental financial and digital literacy skills, should be bolstered in Africa. Most importantly, African countries should strengthen their infrastructural capacity of mobile networks so to participate fully in the world’s technological boom and address Africa's socio-economic challenges.

Featured Bloggers – APET Secretariat

Justina Dugbazah

Barbara Glover

Bhekani Mbuli

Chifundo Kungade

 

 

[1] https://www.oecd.org/cfe/smes/31919278.pdf.

[2] https://data.oecd.org/entrepreneur/enterprises-by-business-size.htm.

[3] https://au.int/en/pressreleases/20220205/african-smart-finance-and-digital-banking-initiative-game-changer-msmes.

[4] CSIS Briefs, July 7, 2021, Supporting Small and Medium Enterprises in Sub-Saharan Africa through Blended Finance. https://www.csis.org/analysis/supporting-small-and-medium-enterprises-sub-saharan-africa-through-blended-finance.

[5] https://au.int/en/videos/20200201/positioning-smes-africa-tap-and-benefit-afcfta.

[6] https://au.int/en/newsevents/20220627/african-union-annual-small-and-medium-enterprises-forum.

[7] Small and Medium Enterprises (SMEs) Finance, Improving SMEs’ access to finance and finding innovative solutions to unlock sources of capital. https://www.worldbank.org/en/topic/smefinance.

[8] Bushe, Bernard. (2019). The causes and impact of business failure among small to micro and medium enterprises in South Africa. Africa’s Public Service Delivery and Performance Review. 7. 10.4102/apsdpr.v7i1.210..

[9] https://www.theguardian.com/global-development-professionals-network/2016/feb/16/uganda-is-a-land-of-entrepreneurs-but-how-many-startups-survive

[10] https://www.news24.com/fin24/entrepreneurs/the-number-1-reason-most-start-ups-fail-and-how-to-avoid-it-20220304.

[11] https://www.idos-research.de/uploads/media/DP_4.2020.pdf.

[12] https://www.brookings.edu/wp-content/uploads/2016/06/SME-Finance-in-Africa-Designed_FINAL.pdf.

[13] https://www.csis.org/analysis/supporting-small-and-medium-enterprises-sub-saharan-africa-through-blended-finance.

[14] https://ec.europa.eu/growth/system/files/2021-11/SME%20Envoys%20Finance%20-%20Final%20conclusions%20on%20national%20solvency%20measures%20for%20SMEs%20October%202021.pdf.

[15] Afsheen Abrar | David McMillan (Reviewing editor) (2019) The impact of financial and social performance of microfinance institutions on lending interest rate: A cross-country evidence, Cogent Business & Management, 6:1, DOI: 10.1080/23311975.2018.1540072.

[16] https://ventureburn.com/2022/06/e-commerce-in-africa-to-bring-in-46bn-by-2025/.

[17] https://www.statista.com/statistics/1190541/e-commerce-revenue-in-africa/.

[18] https://www.idos-research.de/uploads/media/DP_4.2020.pdf.

[19] https://www.bis.org/ifc/publ/ifcb38.pdf.

[20] https://www.standardmedia.co.ke/article/2001384916/study-mobile-loans-grow-as-source-of-funding-for-kenyas-smes.

[21] https://www.oecd.org/cfe/smes/New-Approaches-SME-full-report.pdf.