Robert Zegers, AfDB’s Private Sector Coordinator for SME Finance, answers some questions concerning AfDB’s vision for Africa’s SMEs.
1. What are the projections for the SME sector in Africa for the coming few years?
A vibrant private sector, especially SME sector is critical for sustained economic growth and poverty alleviation. SMEs form the backbone of the private sector and their number represents 97-99 % of all enterprises generating over 90% of employment in the enterprise sector.
Research also reveals that in most cases the SME sector outperforms public enterprises in overall turnover, value added and exports. Therefore, investment in the growth and development of SME offer, in most instances, the only realistic prospects of a meaningful and rapid increase of employment and economic growth. Access to affordable finance and business support services is therefore imperative.
With (1) improving business enabling environments in Africa, (2) increasing participation of Africa in the global economy, (3) awakening of the SME sectors as entrepreneurial drivers within the local economies, supported by (4) remittances flows and (5) increased banking focus on the SME sectors, the expectation is that many informal SMEs will progressively participate in the formal economy, and that the formal SME sector, with increased vigour and entrepreneurial drive, will grow and will create a level of competitive mid-sized enterprises that is currently largely absent, hence the ‘missing middle’ syndrome.
As the SME sector grows, it will increasingly also integrate into the economy and become part of forward and backward linkages systems within the value chain of the larger African enterprises. In this process, the African SME sectors will follow the trends of other continents where SME will gradually form the mainstay of the economies in terms of jobs and contribution to GDP.
2. What are and how can the hurdles facing the SME sector be confronted?
The hurdles in the SME sector are multiple, and include for example registration and business licensing constraints, taxation issues, infrastructural constraints, contract enforcement issues, lack of access to finance, absence of good collateral registries and credit bureaus.
These and other hurdles can be addressed through concerted and joint efforts by governments and private sector (SME) representative organizations to identify and action the specific national constraints. Specific SME policies, better taxation approaches, one-stop-shops for SME licenses, private sector credit bureaus capturing SME related information supported by adequate laws that require banks to share credit information, increasing competition between banks and initiatives by financial institutions to service the SME sector are all needed to overcome the current hurdles faced by SMEs.
The various parties will need to work together and all take responsibility.
International agencies can assist through finance and technical assistance in the process. Exchange of information on ‘best practice approaches’ will also assist in cross-fertilisation.
3. What is your vision for the AfDB’s role in the development of Africa’s SME sector?
Whilst DFIs including AfDB have extended helpful resources, such as LoCs for local FIs and BDS support services development, much more needs to be done.
The sustainable solution lies in the development of the local financial sectors and the capacity of banks to service the SME sectors. Activities such as factoring, leasing and franchising needs expansion and the SME market needs mezzanine financing and equity capital.
Africa also needs to plant an entrepreneurial ‘seed’ in young people, for example by introducing entrepreneurship training in the school curricula at secondary level. After all, SMEs are created and operated by entrepreneurs.
The AfDB’s vision with regards the SME sector is to increase our support in effective and efficient manners, to be able to reach out to a much larger number of small enterprises. We believe we can add more value to the local markets by creating partnerships with other financiers, governments, financial institutions and local business representative organizations.
The financial sector needs more factoring, leasing and mezzanine finance solutions and the AfDB can play a catalytic role and assist in creating a demonstration effect in supporting a number of ‘proven’ models in Africa.
Finance and technical assistance, together with the right partnerships will assist in introducing more of these financial instruments. As for banking finance, AfDB can provide a larger number of LoCs to local banks and at the same time assist by building capacity of banks to successfully lend to the SME sector. Credit scoring, SME desks, relationship management, and portfolio management systems form some of the TA that needed by banks.
Supporting the delivery of adequate business development services is also key in the SME sector and the AfDB will continue to integrate this into its SME projects. The Bank will work with its partners to address local constraints, and improve the enabling environment for SMEs
4. The Africa Guarantee Fund in collaboration with Denmark and Spain has recently been established. What is the goal of this particular fund and what results are expected from this new project?
The AGF is an innovative African initiative that will allow local banks and other FIs to obtain portfolio and portable guarantees. The portfolio guarantees will allow shared risk that local FIs take on the SME target group thus making it easier to engage in this segment.
This will be coupled with TA to assist banks to set up the right structures, mechanisms and products for the SME market. Portable guarantees will enable FIs to seek local affordable and longer term liquidity which can subsequently be used to provide loans to the SME sector. In essence, this fund will be important to assist financial institutions to address real and perceived risk perceptions in the SME sector and increase local SME lending, with better tenors.
Source: Afdb Emrc SME forum media pack
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