Investment in SMEs holds the key to Africa’s growth

I am often asked this question, ‘what will it take for Africa to develop?’ My answer is simple: invest in micro, small and medium enterprises (MSMEs), whether formal or informal.

Unknown to many, they account for an increasing share of growth in gross domestic product (GDP) and jobs. Yet the typical response is “They are so high risk, we can’t possibly invest in that segment”.

This line of thinking is the issue. The MSMEs are the most marginalised business segment in terms of access to funds and technical support, across the continent. Then everyone sits around wondering why headline economic growth in Africa does not translate to equitable development.

In the past year or so in Kenya, we have seen private sector being squeezed out of credit by government.

The interest rate cap created impossible risk margins and actually inverted monetary policy.

Normally, a reduction in interest rates should expand credit provision, yet in the context of an interest rate cap, this logic fails. Lower interest rates will lower the risk ceiling of credit provision and actually contracts liquidity. And reverse is true too.

So where are we? We are in a situation where monetary policy does not follow traditional logic streams, and as a result, has led to the Kenyan government to squeezing private sector out of credit streams due to the interest rate cap and their own aggressive and substitutive appetite for credit.

The question becomes what can be done to revive credit to the private sector given these extenuating circumstances.

There are two answers to that question. The first is incentives. The government has to create an incentives structure that extends credit to MSMEs despite the interest rate cap.

The cap has led to a notable decline in credit provision to private sector. To stem this trend government has to create unique packages that allow private sector to access credit in the context of personalised assessment. The biggest problem with risk assessment at the moment is that it is often done by junior officers with limited experience and who face hard and unforgiving targets. This has to change.

Credit assessment should be done by the more experienced individuals who can understand the nuances of running an MSME. We need a holistic upgrade in assessing risk that leads to intelligent incentives provision.

If MSMEs are not financed, the economy is not financed. The government and financiers must create an incentives structures that direct funds to the small businesses that create jobs and drive the economy.

The second answer is development expenditure by government.

First, government must prioritise development over recurrent expenditure. And that is not enough, government should create structures that enable indigenous and domicile private sector to absorb the bulk of development spending.

A failure to do so will translate to Kenyan taxpayers paying for services and goods that benefit outsiders.

Let the government ensure that the bulk of development spending goes to indigenous companies, particularly MSMEs. Only then will Kenyans feel the power of government spending. In doing so, the government will force MSMEs to improve their performance and develop the capacity to meet high-level targets.

In short without MSMEs accessing credit and being the target of government development spending, not much will change. There must be a fortitude of spirit and determination of mind that builds the domestic private sector.

Ms Were is a development economist. Email: [email protected]