Small and medium sized enterprises (SMEs) are vital for job creation, contribution to national GDP, taxes and the overall economic development of a country. The Omidyar Network, a philanthropic investment firm that aims to catalyse economic growth and opportunities in underdeveloped nations, recently commissioned a survey from the Monitor Group to look at the state of entrepreneurship in Africa. One thousand entrepreneurs across six African countries (Ghana, Ethiopia, Kenya, Nigeria, South Africa and Tanzania) were surveyed.
Malik Fal, with 15 years of experience in business strategy, development and entrepreneurship on the continent, was selected earlier this year as the new managing director of Omidyar Network Africa. In an interview in Accra, Fal told How we made it in Africa about some of the limitations that SMEs face in Africa that prevent them from prospering.
The first challenge to SME growth and development is finance. “Eighty-four per cent of respondents said there was a problem with financing of early stage businesses. Nearly 70% say that for growing businesses there is also a huge problem with the finance side. Then 62% are saying that when you do have access to finances, the cost is prohibitive – so what you have to pay in interest if its debt, or how much of the company you need to give away to get equity investment. It’s just way too high,” explained Fal. “They are basically saying that the financers are too greedy.”
Fal also said that the Omidyar Network, which has invested in all stages of the business cycle, considers the problem with financial investment to be structural “in the sense that businesses in different stages of development need different types of financing”.
“There is a particular problem at the early stages which are the most risky,” continued Fal. “They can really battle because the structural gap at that stage is about having angel investors and venture capital funds, which is severely missing on the continent.”
“With regard to skills, there is an issue around our education systems that doesn’t train people who are competent to run entrepreneurial ventures,” said Fal.
Monitor’s report showed that 80% of respondents believe primary and secondary schools do not devote enough time to teaching entrepreneurship, and 59% believe the same of colleges and universities. Fal added that this lack of quality education, compounded by restrictive immigration laws in some African countries, makes it difficult for companies to attract the necessary skills.
“Sometimes countries don’t have an entrepreneurial culture and don’t have competent managers but they are very good at attracting talent to run their businesses. Dubai is a case-in-point. [They] are not particularly entrepreneurial but many of the best entrepreneurs or business leaders are quite happy to move to Dubai,” said Fal. “So in Africa we have a problem on both sides. We are not training good managers, and we are not making it easy for entrepreneurs to import the talent.”
Infrastructure, administration and services
“With regard to infrastructure, it is also a huge disaster,” added Fal. This includes the basics like electricity and internet connectivity, both in terms of reliability and cost. In addition, the study revealed that only 23% of respondents believe they can afford the costs associated with using existing infrastructure.
Corporate laws and the administrative requirements to operate were also assessed. While Fal said the research on the legal side of doing business did not reveal many problems in Africa, the “practice now in terms of administrations is horrendous, and that includes South Africa by the way”.
“People need licences, and also some regulations, to do anything. It increases the cost of operations and it affects the efficiency of entrepreneurs,” said Fal. The research by Monitor Group revealed that 62% say they know of entrepreneurs who have admitted to evading administrative burdens which they say discourages formalising a business. These include paying taxes, obtaining licences and hiring employees informally.
The final issue Fal pointed out that was limiting SME growth was business assistance, with 55% of respondents saying that there aren’t sufficient business support services available for new and growing companies. “Cape Town, Nigeria, and all over the continent people are very creative. But what they lack is the business skills to translate their ideas into a sustainable and functioning business. And that’s why business services are so important. This goes all the way from formal services like accountants, lawyers, HR professionals, that are required to develop up a business, as well as interventional support like incubators… that connect entrepreneurs to experts and so on.”
“All these structures that are supporting our entrepreneurs are really bad. And when they are available the quality is not that good, and they are expensive. So we really need to work with the stakeholders to address those issues.”