On an operational level, PE institutions provide the discipline for SMEs to base their operations on the best environmental, social and governance principles. They also use their networks to help SMEs grow and expand outside of their local environment: via acquisitions or via additional capital for expansion. PE institutions are instrumental in launching SMEs into a higher orbit of operations. PE institutions are normally not involved longer than seven years, and at the end of their involvement will help the SME with its IPO, when it becomes a listed company.

Development finance institutions

DFIs are another category of investor that can help power SMEs. Examples of DFIs include organisations such as the International Finance Corporation, the CDC (the UK’s DFI), and the FMO (the Dutch development bank). Traditionally DFIs will fund SMEs indirectly, by lending to PE institutions, which do the investing. But there is a trend starting whereby DFIs invest directly in SMEs. At present DFIs limit their loans to between three and five years, but African economies will greatly benefit from more long-term arrangements.

Diaspora remittances and unclaimed dividends

It is estimated that expatriate Nigerians remit approximately US$21bn per annum. This is more than three-quarters of the national budget. This inflow can be aggregated to SMEs with the right framework such as through the active promotion of the Nigerian ASeM – the specialised board of the Nigeria Stock Exchange for emerging business with high growth potential. There could be tax breaks on dividend income earned on diaspora remittances that are directly invested in certain SME categories.

Further, there is an estimated NGN. 45bn worth of dividends in unclaimed trust accounts. The government can come up with creative ways of freeing this up to support the growth and development of SMEs.

Breaking barriers to growth

Finally, an African finds it much more challenging to obtain visas and to travel across Africa than an American. Transportation within the continent can be more difficult than trans-Atlantic trips and according to the United Nations, though intra-Africa trade has enormous potential to create employment and catalyse growth, intra-Africa trade is only about 10% of total trade compared to 50% for Asia and 70% for Europe. Government needs to allow the free flow of capital across borders into neighbouring countries and this can be achieved through trade. SMEs need to be incentivised to do business within the larger economic region, for example the Economic Community of West African States common external tariff system that seeks to eliminate duties on trade between West Africa countries. Already the mobile phone revolution is allowing contact beyond national borders. We must go further: the use and development of special banking applications/services to transact across borders must be actively encouraged. Africa has leapfrogged the rest of the world in freeing up its banking platforms and providing financial services to the rural poor.

Moving forward

Compared to large corporates and multinationals, most African SMEs operate, for the most part, at unsophisticated levels. They have a high cost base, limited product range, and do not benefit from economies of scale. This must change. For SMEs to compete and benefit from the economic growth sweeping across Nigeria, and other African countries, they need: better infrastructure, macro-economic stability, operational support, longer term financing at single-digit interest rates and better financial management principles.

SMEs are the spark that will ignite and launch the economic rocket that is Africa. The untapped capital is there. PE institutions and DFIs are eager to provide long-term capital. The government is also making progress in getting its systems in place. Stand by for lift-off.

This article is part of a KPMG report, titled Africa Arisen: The Blue-Sky Continent 2014.

Dapo Okubadejo is a partner and Africa head, Transaction Advisory (corporate finance, transaction services and private equity) at KPMG.