Small and Medium Sized Enterprises (SMEs) have often been referred to as the engine of growth for Africa. Given their small size, SMEs tend to be more agile and innovative in creating wealth, driving inclusivity, and creating employment. SMEs also engage most of the people in formal employment across the continent, providing approximately 80 percent of all formal jobs in Africa.
The African Union estimates Sub-Saharan Africa to be home to 44 million SMEs currently. It is therefore undeniable that accelerating the growth of existing SMEs as well as establishing new ones will continue to create a significant economic impact in Africa.
A perennial challenge for SMEs in most countries has been access to finance. This often starves SMEs of working capital, slowing down their ability to invest and grow, and increasing their vulnerability when times are tough.
Various studies suggest that most SMEs do not have access to loans and/or lines of credit. The cost of financing is another key constraint, with many African countries offering SME loans at double-digit interest rates, not factoring in other transaction costs such as legal fees.
According to a report by the International Finance Corporation (IFC), the funding gap is Sub-Saharan Africa is estimated to be $ 300 billion. However, the report also highlights the significant role that digital finance has already played in addressing this gap.
As climate change increasingly emerges as a threat to African prosperity, it is essential that new SME financing strategies from banks and other providers of capital should be deliberate in introducing a sustainability component and help SME clients manage the complexity and cost of ESG reporting and green taxonomies where these exist.
In addressing the triple challenge of access, cost, and sustainability, it is critical for all actors - state, private and non-state actors- to collaborate as no one actor has all the finances and solutions required.
Policymakers, for instance, should set the tone and encourage financial regulators to develop clear, enabling regulations to help transition SMEs to the green economy. The development sector - donor governments and development institutions - should increase both funding and technical support, creating more incentives for local financial institutions to innovate and implement financial instruments that are better suited for an SME sector that looks to the future.
The novel gender bond issued by Tanzania’s NMB Bank is a good example of the kind of financial innovation we need to see more of – one that was able to connect the power of capital markets with the advantages that the retail banking sector has in distribution.
By working together with the Government of Tanzania through the Capital Markets and Securities Authority and Financial Sector Development Africa (FSD Africa), which provided technical support, the gender bond was successful in raising substantial funds that have supported women owned/led SMEs with affordable credit, a big boost for Tanzania’s female entrepreneurs.
Greater collaboration between actors will enable the development of even more innovative financial instruments and thus increased supply of funding for SMEs in Africa. The African Guarantee Fund (AGF), a leader in promoting the financing of SMEs in Africa, and FSD Africa recently entered a strategic partnership to help financial institutions develop innovative financial products such as thematic bonds (such as gender, green or sustainability bonds).
Through the partnership, investors in the bonds will benefit from a partial guarantee from AGF. This will make it easier for financial institutions to raise capital using these kinds of bonds and to on-lend the proceeds at more affordable lending rates.
Given their numbers and impact, green SMEs are expected to play a significant role in reducing CO2 emissions and bolstering climate resilience across the African continent. Innovative SMEs that are successful in combining commercial sustainability whilst also delivering environmental benefits could be seen as having attractive business models that bigger, more established companies might want to adopt, or even improve on, thereby accelerating the green transformation of the continent. This would be a great demonstration of how it is possible to protect our environment and make a profit at the same time, and contribute to national economic objectives such as job creation, especially for youth and women.
Napier is the CEOÂ of Financial Sector Deepening Africa and Ngakam is the Group CEOÂ of Africa Guarantee Fund.
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