Unlocking Africa’s Potential: SMEs and Economic Growth
Introduction:
The Organisation for Economic Co-operation and Development (OECD) refers to Small and Medium Enterprises (SMEs) as companies that employ up to 249 people. Within the SME classification, we have micro-enterprises, which employ between 1 to 9 people, small enterprises hiring 10 to 49 people, and medium-sized enterprises ranging between 50 and 249 employees. (Source: OECD)
SMEs: Engines of Job Creation and Innovation:
SMEs are the backbone of Africa’s economy, accounting for approximately 80% of jobs on the continent. Their significant role in job creation makes them a powerful mechanism for driving socio-economic growth. For instance, Sub-Saharan Africa alone houses approximately 44 million SMEs. Moreover, the African Continental Free Trade Area (AfCFTA) is poised to expand access to regional and continental-wide export markets for SMEs. Recognizing this potential, the Sustainable Development Goals and the African Union emphasize the importance of effective SME development for driving Africa’s economic growth and long-term sustainability.
Catalysts for Socio-Economic Development:
The presence of SMEs spans across all sectors of the African economy, underscoring their vital role in steering the continent’s socio-economic development and growth. SMEs serve as critical drivers of job creation and employment for a large portion of the African population. Notably, up to 90% of people in countries like Uganda, Ethiopia, and Kenya find employment within SMEs. These enterprises foster a culture of invention, innovation, and the creation of new ideas and technologies. By providing platforms for pre-incubation, incubation, introduction, and commercialization of innovations and technologies, SMEs support the testing and scaling of new products in larger industries through macroeconomic systems.
Enablers of Wealth Creation:
SMEs in Africa are not just job creators; they are also credited with identifying and creating new markets, laying the foundation for new companies and ventures. The economic opportunities they create act as a catalyst for income generation for millions of Africans. By driving demand for goods, services, investments, innovation, technology, and trade, SMEs actively contribute to wealth creation across the continent.
SME Contribution to the African Economy:
SMEs play a pivotal role in Africa’s economic landscape, contributing to approximately 40% of the continent’s Gross Domestic Product (GDP). On a global scale, SMEs are key players in driving job creation and economic development. They represent approximately 90% of businesses worldwide and contribute to more than 50% of total employment. The World Bank estimates that by 2030, around 600 million jobs will be needed globally to accommodate the expanding workforce, making SME development a high priority for governments worldwide. In emerging markets, SMEs create 7 out of 10 formal jobs, illustrating their significance as engines of employment.
Challenges and Opportunities:
Despite their immense contributions, SMEs in Africa face challenges, particularly regarding access to finance. This obstacle hampers their growth potential and, consequently, results in a high mortality rate, with an astonishing 5 out of 7 businesses failing within their first year. Moreover, Africa’s share of direct Foreign Direct Investment (FDI) remains disproportionately low at around 3-5%, despite being home to approximately 25% of the world’s population.
Overcoming Finance Barriers:
SMEs face greater difficulty obtaining bank loans compared to large firms, often relying on internal funds or contributions from friends and family to launch and sustain their ventures. The International Finance Corporation (IFC) highlights that approximately 40% of formal micro, small, and medium enterprises (MSMEs) in developing countries, totaling 65 million firms, face an unmet financing need of $5.2 trillion annually. This substantial funding gap is equivalent to 1.4 times the current level of global MSME lending.
The situation is particularly challenging for small businesses in Nigeria, where a report titled ‘Market Bite Nigeria’ by the ICP indicates a substantial finance gap of $32.2 billion. Similarly, in Egypt, though nearly 99% of all enterprises are classified as MSMEs, they only account for a mere 5% of bank loans in the country, compared to 18% for large firms. This is in stark contrast to the global average of 26% of bank loans going to SMEs. Estimates put the financing gap for MSMEs at almost EUR 14 billion.
Rapid Urbanization and Growing Markets:
Africa’s population, currently around 1.2 billion, is projected to reach 1.7 billion by 2030, with over 80 percent of the population growth expected to occur in cities. This makes Africa the fastest-urbanizing region globally, generating numerous business opportunities in the consumer market. By 2030, annual spending by African consumers and businesses is projected to reach an impressive $6.66 trillion, up from $4 trillion in 2015. This burgeoning market offers significant potential for various sectors like food, beverages, pharmaceuticals, financial services, healthcare, and education.
Conclusion:
Africa’s entrepreneurial spirit is unparalleled, as companies on the continent have exhibited exceptional ingenuity to overcome serious challenges and drive innovation. The key to successful investments in Africa lies in identifying and addressing the continent’s major problems in collaboration with like-minded Africans. By providing support and fostering the growth of SMEs, we can unlock Africa’s vast potential and drive sustainable economic growth and prosperity for the continent. With opportunities abundant and challenges surmountable, investing in Africa’s SMEs is an investment in a brighter future for Africa and the world.
Sources:
https://www.nepad.org/blog/unlocking-potential-of-africas-smes-using-emerging-technologies-africa
