All sorts of meetings on the topic of Africa’s economic takeoff are constantly being organized. Local transformation, inclusive growth, industrialization, youth unemployment, competitiveness, etc. are discussed at them. Strangely, they often address the role of African SMEs between the lines. Yet they are the real drivers of Africa’s economic transformation.
Do we believe in the power of SMEs?
SMEs ensure that there is a broader and more equitable redistribution of the benefits of growth because they account for 90% of private companies in Africa and create 45% of employment. They serve as both laboratories and incubators by paving the way for innovation and entrepreneurship. Their remarkable distribution across all territories allows them to provide employment and purchasing power in areas that are the most remote from economic centers. They are also a remarkable melting pot for training and human resources. Finally, they constitute the first stage for Africa’s economic rationalization process. Despite this preponderance, why do SMEs only account for 33% of Africa’s GDP, against 60% in developed economies? It is because they do not benefit from the necessary economic and institutional attention that could promote their development. On the contrary, they are bombarded with taxes, which hampers their growth. Furthermore, the recent study by the PWC consulting firm has shown that African SMEs were the most subject to tax in the world. What benefit can SMEs hope to gain from the taxes that they will be made to pay? What public services will be rendered to them? Too few unfortunately. Consequently, they very often prefer to remain below the radar and stay in the informal sector. Another major factor which severely hampers the development of SMEs in Africa is their difficulty to access financing. The loans offered by banks reach prohibitive rates, while financial markets are still too weak. To find money, the only solution for business leaders is often to use traditional methods, which are practically as costly and certainly less reliable (tontines, loan sharks, etc.). The ratio of private sector credit to GDP only averages 18% in Africa, against 30% in South Asia and 107% in high-income countries. Fortunately, the assessment of the needs of SMEs has given rise to innovative initiatives. They include mesofinance, a mechanism that offers alternative, flexible and rapid financial tools to companies that are already too developed for microfinance institutions. The African Development Bank has also taken the subject on board by creating the USD 125m Fund for African Private Sector Assistance (FAPA) and, more recently, the African Guarantee Fund (AGF), based in Nairobi. This fund is designed to allocate credit lines and provide technical assistance to targeted financial institutions.
How to make them the Champions of tomorrow?
In this context of an active revival and transformation of African economies, more than ever before, leaders need concrete solutions to the many challenges they are facing. Part of the solution lies in scaling up interactions between the various actors in this ecosystem, from business leaders to bankers, and including ministries and financial institutions. In terms of banks, the management of “SME” risks must be tackled differently. The proximity to the field that banks need to develop with SMEs will allow them to get a better understanding of the structure of their activities and of their leaders, and give them real advice on the choice of financial instruments (income from cash, investment, debt, etc.). It is also vital to facilitate their access to financial and stock markets, like the successful experience of the Mauritius Stock Exchange, and to scale up access to growth incubators, with the advice and coaching required for their development. Employers’ associations must also give more operational responses to SMEs by providing them with technical assistance and promoting greater interactions between big companies and SMEs, in the form of subcontracts, training, by making expertise available and via knowledge transfers. For governments, the assistance format of public funds for guarantees and to support and accompany SMEs must be more “intelligent” and managed better. As with the Phoenix Plan, which was recently launched in Côte d’Ivoire, governments must also facilitate access for SMEs to public procurement during bid invitations, in the spirit of the USA’s Small Business Act. It is essential to offer a whole range of tools, networks and services to African SMEs. They will consequently come out of their safe haven and give themselves the means to achieve their vocation: sustainably transform Africa and finally become the Champions of tomorrow.