Why Africa’s SMEs need development finance institutions

Development finance institutions are crucial for the development of small- and medium-scale businesses across Africa, which otherwise struggle to gain proper access to finance to help build and expand their operations. It is the opening up of finance available to these businesses that will help to unlock the investment potential in Africa.

Prof Meshach Aziakpono

Prof Meshach Aziakpono

According to Meshach Aziakpono, programme head of the University of Stellenbosch Business School’s (USB) MPhil in Development Finance, such businesses often suffer as they are not big enough to raise capital on the stock market or liquid enough to be able to issue bonds to obtain financing.

Aziakpono, who is an expert in economic and financial sector development in Africa, says that, in terms of training, financial programmes often tend to focus only on traditional financial systems comprising banks, insurance companies, and stock and bond markets. “The majority of the population and businesses in African countries do not have access to these markets, hence they are often excluded.”

“There is an urgent need for training in this area – it is critical to develop programmes and schemes that will assist in financing these supposedly risky, but extremely important, businesses in the economy.”

Aziakpono believes that key to improving economic efficiencies on the continent is the development of financial structures that stimulate the ‘middle-space’ in the economy. “On the one side, where traditional financial systems operate, the level of cost recovery is very high. At the other end, where the cost recovery is very low, one finds ‘survivalist’ enterprises that are not registered businesses. These survivalist enterprises come with extremely high levels of risk and they can hardly be financed by any profit-driven institution.”

In between these two extremes is what Aziakpono refers to as the development finance niche – the ‘middle-space’ in an economy. “This space is populated by self-employed, salaried workers, micro-enterprises and small- and medium-scale businesses (typically called SMEs).”

Aziakpono says that by working with industry bodies, academic institutions can design courses that provide the skills people need to develop schemes that can assist in providing finance to the poor and the SMEs. “There is a real need to develop financial vehicles that are specifically tailored to the African reality. However, it is not practical to have a purely academic solution. We need to engage with industry and learn from them.”

According to Aziakpono, one challenge for these financial schemes is to overcome the challenges of underdevelopment in the African environment. “Firstly, there is a lack of collateral due to poorly defined property rights. Most of the property and land in Africa is communally owned. Therefore a very small percentage of people have the ability to offer their property as collateral for a loan. Furthermore, weak accounting standards throughout the continent pose a significant barrier to assessing the viability of a company as an investment opportunity. There is also the weak legal system which makes the enforcement of contracts difficult.”

He says the significant income inequalities between the poor and wealthy populations in Africa not only limit the pool of savings available in many economies but also the number of individuals who have access to them. “Dealing with this inequality by improving access to finance for all levels of business is essential to the further development and growth of Africa.”