Small and medium-sized enterprises (SMEs) are the backbone of the African private sector. They play a critical role in economic growth and development; are vital in creating jobs, spurring innovations and creating new products. African SMEs generate about 58% of total employment and 33% of GDP in the continent. Recent estimates indicate that there are about 5 million formal SMEs based in Africa.
Development of the SME segment is necessary if Africa is to harness its inclusive growth potential. Whereas many African countries have realized impressive economic growth in recent years, the SMEs segment has not experienced a corresponding level of growth. As a result, the Continent's largest employer has been unable to create new jobs and tackle the issue of youth unemployment.
Despite the importance of SMEs, access to finance remains a key challenge to their development. The funding and credit gap has been estimated to be around USD170 billion. Furthermore, only 22% of African SMEs have a loan compared to 43% in other developing regions. SME entrepreneurs repeatedly indicate in surveys that access and affordability of finance is the number one key constraint faced to grow their business.
The absence of finance for SMEs is driven by a supply / demand mismatch between financial institutions and SMEs. Financial institutions lack access to longer term financial resources and often lack the internal capacity to effectively lend to SMEs and to build a good quality loan portfolio. They view SMEs as very risky. They may have an over reliance on collateral to reduce risk. SMEs, on the other hand, may not have the ability to provide registered collateral, or may lack the necessary managerial and financial skills to prepare business plans and bankable proposals. They view banks as cumbersome and expensive.
We believe financing SMEs makes good business sense and offers a win-win proposition. Financial institutions earn on the finance provided, and SMEs accessing finance can fund their business ventures, investments, etc. and grow their business. An increasing number of financial institutions have shown that it is possible to be successful in the SME market. They recognise that it takes dedicated effort to develop specific products, policies and processes to meet the needs of their SME clients.
The Africa SME Programme offers solutions to local Financial Institutions to develop the SME segment. In particular, we focus on local institutions with dedicated SME clientele, to tackle the above mentioned supply/demand gap issue. Institutions already active in the SME market are also assisted to grow their business and achieve better success. Institutions primarily active in other market segments and wanting to upscale or downscale to the SME market may also be considered for support.