Promoting Micro, Small and Medium Enterprises (MSMEs) in Africa: “A Holistic Approach Is a Must!”
Dr Sidi O. Tah, Director General, BADEA
Globally, micro, small and medium enterprises (MSMEs) account for about 90 percent of business enterprises and more than 50 percent of employment. MSMEs are a vital part of the economic fabric of Africa. They account for about 70% of the GDP of some countries, such as Ghana. MSMEs are also recognized as major players in achieving the Sustainable Development Goals (SDGs) due to their ability to create jobs and reduce poverty. Therefore, the attention on them is moving towards the centre of development policies in Africa, because of growing interest of policy/decision makers and development partners in supporting them. Some countries have even created ministries/agencies dedicated to them. International fora, organised by governments, development partners and NGOs, are increasing.
The African Union Development Agency (AUDA-NEPAD) recently launched a campaign called “100,000 SMEs for 1 Million Jobs by 2021” in line with Agenda 2063. This initiative has gained momentum with the support of Ecobank, and the commitment of many stakeholders, including the Arab Bank for the Economic Development of Africa (BADEA).
Despite such a growing momentum and a strong recognition of their roles, a multitude of MSMEs in Africa have failed, while many others are on the verge of collapse. Nevertheless, there are many shining examples too across the continent. Wherever they are found, and in whichever category they belong (struggling or successful), MSMEs continue to face many common problems due to a combination of financial and non-financial factors. These include (as popularly reported) severe financing constraints. According to the International Finance Corporation (IFC), 65 million enterprises, or 40% of official MSMEs in developing countries, record a financing gap of about $5.2 billion each year, which is equivalent to 1.4 times the current level of global lending to MSMEs. Access to market opportunities is often hampered by limited numbers of adequate human resources and insufficient adherence to quality standards. In addition, many MSMEs are lagging behind the rapid advances in ICT in a digitalized global economy. Very often, MSMEs are considered very small to fit in the business models of development finance institutions (DFIs) and too risky for commercial banks and traditional financial institutions. As a result, when they have access to credit, it is at exorbitant interest rates that reduce their competitiveness and growth prospects. The lack of capacity is another non-financial hurdle that prevents MSMEs from taking advantage of even the limited funding opportunities within their reach. These factors have been exacerbated by the global pandemic of COVID-19.
So far there has been a lot of initiatives by the various stakeholders. However, there is a need for coordination among them and a holistic approach to become more effective and more efficient. BADEA recognizes that it is essential to combine both financial and non-financial solutions in order to meet the challenges faced by MSMEs. Financing, advisory and policy support should be combined and include diagnosis, implementation support, global advocacy and knowledge sharing on best practices. Therefore, the bank is now considering a complementary initiative to the efforts of its partners by setting up a global coalition for MSMEs in Africa, a platform that will include key stakeholders to utilize the best of their comparative advantages in support of MSMEs. Synergy from the stakeholders within the coalition can be a game changer in responding more effectively to the challenges of MSMEs and in advancing national, continental and global development agendas across the continent with regard to MSMEs.
As part of this platform, the bank has also set the youth and women entrepreneurship as one of the four pillars of “BADEA 2030”, its strategic framework. Other targeted members of the coalition are clusters of SMEs themselves, specialized agencies of the United Nations, the African Union and the regional economic communities, DFIs, private banks, agencies specialized in guarantees and insurance, academics, think-tanks, foundations, and philanthropists. The coalition will enable the many stakeholders to deeply reflect on how to unleash the full potential of MSMEs so that they can contribute to economic recovery in Africa from the recession induced by the COVID-19 pandemic.
BADEA is cognizant that although limited access to finance is a major challenge, limited management and operational capacity as well as inaccessibility to markets are among the main obstacles to the financing and development of MSMEs. A business-friendly environment for harnessing the full potential of MSMEs is required too. That is why the role of governments as architects in designing and engineering the implementation of an enabling environment for MSMEs is paramount. Therefore, we hope that African governments will be at the forefront of the coalition for MSMEs which BADEA is calling for.
The responses of our development partners so far to BADEA’s initiative has been very positive and we hope to establish it before the end of the year.