Africa’s SMEs contribute to economy, but struggle to survive

Small and medium enterprises (SMEs)’s contribution to employment, income and economic growth cannot be underestimated, according to several studies conducted across various parts of the world.

But some analysts believe the lack of adequate financing of small business has the potential to hurt the SMEs-economic growth casual link, and compromises countries’ policy to fight unemployment.

Contrary to the developed world where SMEs enjoy a great deal of protection and pampering, Africa’s SMEs are said to be living on the edge as borrowing institutions dedicate much of their loan portfolios to big business.

A World Bank report on SMEs financing released in 2011 fittingly documents what it calls the ‘missing middle’ in credit provision for enterprises in Africa.

“When larger firms are served by formal financial institutions and micro-enterprises by micro-finance institutions, SMEs are left in the middle, struggling to find external financing,” the report, published by Africa Finance and Private Sector Development (AFTFP) department, says.

The report deplores the unfair treatment inflicted to African SMEs by banks, whose procedures it says presume a greater degree of formality than those observed in the region.

“Notwithstanding the importance of SMEs and their need of external financing, there are many open questions about the patterns of formal SME financing in Africa,” the report says.

“The low level of disagreement of publicly available credit data in the region generally does not differentiate lending in terms of enterprise size, and thus inhibits calculation of financial institutions’ exposure to SMEs.”

This type of unstable grounds is said to be creating perceptions from many SMEs that financing from the formal financial sector is scarce and expensive, according to the World Bank.

“Moreover, existing financial institutions are perceived to be relatively unininterested in serving SMEs segment, which requires SMEs’ growth prospects, and forces them to rely on alternative financing sources that can be considerably more expensive.”

Martha Khumalo, a Johannesburg small business owner, agrees with the World Bank analysis. “Yes, borrowing money from the formal financial sector is indeed complicated, and I fail to understand why it’s so complicated.”

Khumalo, who has been trying since 2008 to get a 6000 USD loan from a local financial institution, says she has given up and will focus on what she has got at the moment.

“I’ve done well in the past three years. This family business, which I started small with my husband’s savings when he was working in the mines, is now a registered entity. It’s helping us a lot.

“But I desperately need to expand it, and of course without sufficient capital your chances of growth and expansion are almost zero. It’s a nightmare for small entrepreneurs like us to get a loan in South Africa. These people are not interested at all.

“They ask you too many formal things, which most of us don’t even have.”

Despite the South African government’s numerous efforts to give more attention to SMEs, the World Bank regrets that access to finance is still a major constraint for the country’s SMEs.

Some attribute this situation to the Financial Sector Charter’s definition of SMEs, which defines SMEs as firms that have an annual turnover of between 60 000 USD and 2.4-million USD.  This definition does not map easily on to the National Small Business Act definitions, the World Bank notes.

The SME sector in South Africa is constituted of over 1.5 million self-employed, contributing about 40% of the country’s total remuneration, according to official statistics.



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