Africa is the world’s second fastest growing region after Asia, and has seen increasing interest from foreign and African investors. However, access to finance is – in general – still a major limitation for many African small and medium enterprises (SMEs).
A recent report by the African Development Bank (AfDB) titled Financial Inclusion in Africa highlights some statistics surrounding SME access to finance across the continent. One of the points raised is that African SMEs are generally more dependent on internal funds for financing than in other developing regions.
Using data from organisations such as the World Bank Enterprise Surveys, the report showed that the average percentage of enterprises (of all firm sizes) in sub-Saharan Africa with a bank account is on par with the average of the rest of the developing world.
“For instance, 83% of small-sized enterprises and 94% of medium-sized enterprises in Africa report having a bank account as compared to 87% of small-sized and 93% of medium-sized enterprises in other developing economies,” stated the AfDB’s research.
However, firms in sub-Saharan Africa have more limited access to external funding with only around 22% of enterprises having a loan or a line of credit compared to a 43% average in other developing economies outside the continent.
Limited access to financing
“Like elsewhere, small firms in sub-Saharan Africa are at a relative disadvantage in accessing external credit,” continued the report. “In sub-Saharan Africa, 45% of firms cite access to finance as a major constraint to growth. However, a higher percentage of small firms identify access to finance as a major constraint relative to medium and large enterprises.”
The AfDB research indicates a similar disadvantage for small enterprises in North Africa with only 16% of small and 44% of medium-sized businesses having a loan or line of credit.
According to Aline Benihirwe, operations and compliance manager of business financing and private equity firm Fusion Capital in Rwanda, one of the main reasons for the firm denying funding for many SMEs is that those businesses do not have adequate financial records.
Randall Kempner, executive director of the Aspen Network of Development Entrepreneurs, a global network of organisations that propel small business entrepreneurship in emerging markets, shared his thoughts on the matter at the Growing SMEs conference in Kigali last month. He explained that while many entrepreneurs view access to finance as their biggest limitation in business, finding investors willing to fund their business is even more difficult if they have a poor team, do not understand their consumers, and do not know how to get their products to market.
However, Kempner acknowledged that Africa presents its own specific set of challenges with SME access to talent and markets.
African SMEs rely on internal funding
The AfDB report estimates that “using one-year growth rates in employment as a measure of firm growth shows that about 15% of SMEs in both Africa and other developing countries are high-growth firms”. However, it highlights that there is a difference between the sources of financing used to finance this growth in African and other developing economies.
For example, 84% of investments in SMEs in Africa are financed through internal funds – where company profits are used as a source of investment – in comparison to an average of 70% in other developing countries. The research also indicates that the share of bank financing in Africa is 8% and the share of equity financing is less than two 2%, compared to an average of 11% and 8% respectively in other developing countries.
“This data suggest that firms in Africa, with similar growth opportunities as firms in other developing countries, are more dependent on internal funds and are more credit constrained in terms of accessing external formal financing,” summed up the research.