Encouraging greater financing for small and medium-sized enterprises (SMEs) in Africa is vital to efforts to build more inclusive, sustainable growth and tackle widespread graduate unemployment, the African Development Bank has warned.
Prioritizing financing for Africa’s millions of enterprises will form a major part of the bank’s revamped private sector strategy which is currently under development and has yet to be unveiled, a senior banking official has revealed.
“There is definitely going to be a big focus on SMEs, who are the missing middle, in the private sector strategy,” Désiré Vencatachellum, the bank’s director of development research, told Emerging Markets.
“There is strong recognition of the barriers that SMEs face in accessing finance and the bank is getting ready to see how it can have a better impact on relaxing those constraints,” he said.
He said the focus on SME finance was part of the “wake-up call that growth is not enough” in the aftermath of the North African revolutions earlier this year.
A lack of financing for small businesses had contributed to the under-developed nature of the private sector and a lack of employment opportunities in many African nations, he said.
While the strategy was still being finalized and it was “too soon” to provide concrete details, he said it would involve partnerships with both banks and governments to reduce regulatory hurdles and associated risk.
A recent joint study by the World Bank’s International Finance Corporation and McKinsey highlighted the lack of credit within the SME sector in Africa, revealing that just 20% of the 36-44 million micro, small and medium-sized enterprises in sub-Saharan Africa had loan facilities.
“In all other regions you can close the credit gap for SMEs with 10% or 20% growth, but the gap for SMEs in Africa is not incremental, it’s transformational, because in order to close the gap you’d have to increase credit by four or five times and that’s a huge undertaking,” Peer Stein, head of financial infrastructure and institution building at the IFC.
Private-sector banking representatives in Lisbon acknowledged that high risks and relatively low returns, coupled with regulatory hurdles such as a requirement for collateral to be held against all corporate bank lending had held back lending to the SME sector.
However, a number of senior bankers said the sector’s growing importance meant that they could not afford to overlook it as a major part of their future growth strategies.
“SME lending is a very key aspect of our strategy,” said Tony Okpanachi, East Africa managing director of Ecobank. “If you fail in that space, essentially you will fail in Africa.”
However, AfDB’s Vencatachellum said that ensuring banks paid more than lip-service to commitments to extending SME financing remained a challenge while many African governments remained overly focused on bond issuance and under-focused on expanding the private financial sector.
“Why would a banker finance a startup if it can get 12% from a government bond at no risk? This is why you need to have players like the AfDB having a dialogue with governments, telling them that such actions are resulting in a crowding out of the private sector,” he said.