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Africa needs to keep cutting business capital requirements says World Bank

By David Whitehouse
Posted on Wednesday, 20 November 2019 13:41

A street trader outside the Africa Investment Forum in Johannesburg, November 14, 2019. Africa needs to bring more of its informal traders into the formal economy. David Whitehouse/The Africa Report.

Sub-Saharan Africa has made progress in making it easier to start a small business by reducing minimum capital requirements – but other countries are moving even faster.

That’s a key finding of Doing Business 2020, published by the World Bank at the end of October.

The report assesses businesses regulations across 190 economies worldwide. Overall, Sub-Saharan African economies raised their average ease of doing business score by 1 percentage point from last year, while economies in the Middle East and North Africa raised their average score by 1.9 points.

Only two African economies rank in the World Bank’s top 50 for ease of doing business. Of the bottom 20 countries, 12 are in sub-Saharan Africa. The report found that sub-Saharan Africa was the region implementing the greatest number of reductions in minimum capital requirements, with many of the cuts being made by the 17 members of the Organization for the Harmonization of Business Law in Africa.

The problem is that while incremental improvements are slowly being made, the rest of the world is not standing still and waiting.

  • The Central African Republic cut its paid-in minimum capital requirement from 527% of per head income in 2004 to 35%, the report finds.
  • But Jordan and Saudi Arabia have even bigger reductions, from over 1,000% of per head income in 2004 to zero now.
  • Minimum capital means that entrepreneurs need to find more cash, and this may negatively affect an entrepreneur’s decision to start a business, the World Bank report says.
  • Higher requirements for paid-in minimum capital are associated with lower rates of new business creation, it finds.

Outdated tool

Minimum capital was originally designed to provide protection for investors in European businesses, the concept first being developed in the UK House of Lords in 1855 to protect investors in British railways.

  • These days, countries with lower paid-in minimum capital requirements tend to have stronger minority investor protection, the World Bank says.

In the context of sub-Saharan Africa, where an estimated 16 m new jobs must be created each year to absorb new entrants into the labour market, the tool looks out of date. For young African jobseekers to have a chance of finding employment, many of the jobs will have to be created by small and medium-sized companies (SMEs).

But small businesses are not getting a hearing in line with their importance.

  • The Africa Investment Forum held this month in Johannesburg was dominated by large businesses and organisations talking about the importance of small business, and about the challenge of bringing more of Africa’s informal economy into the formal sector.
  • Small business – let alone informal traders – were conspicuous by their absence.

It’s “absolutely” necessary to give small business more of a voice at such events, Amadou Wadda, vice president at the Africa Finance Corporation, said in an interview in Johannesburg. Small businesses “can address youth unemployment,” he said. “We need to encourage SMEs.”

Bottom Line: Minimum capital requirements for businesses continue to hinder job creation and the extension of formal economic activity in sub-Saharan Africa.

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