PRO-COVID: How to Create Financial Access for Youth Led SMEs in Africa

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By Alkali Amana

With data from the African Development Bank (AfDB) revealing that the estimated number of youths between the age of 15 – 35 on the continent lies at 420 million individuals, it is no doubt that Africa is facing the emergence of a golden generation which will be tasked to lead its affairs for the greater part of coming decades. Part of the structure feeling the impact of this human revolution on the continent is the business sector as industrious and exuberant people from the listed demography make up a large percentage of the small and medium enterprises (SMEs) which drive the growth of the economy and provide for financial stability through little efforts that become significant when considered in their entirety. Statistics from the Economic Commission for Africa point out the fact that 80% of African economies, by countries are SMEs, and 70% of these are in the informal sector. Globally, the World Bank estimates that SMEs represent about 90% of businesses and 50% of employment while contributing up to 40% of national income (GDP) in emerging economies – a number that becomes significantly higher when informal SMEs are included. Given the numbers reeled out and the power of small businesses as considered, it is opposing to see that they are hamstrung in the journey to realizing the full potential they promise by the need for finance to create and provide sustenance for them. Access to finance is a key constraint to SME growth and the World Bank recognizes it as the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries.

The reality behind the existence of most SMEs is that they exist and rely primarily on internal funds or money from friends and family to commence operations and sometimes sustain their business for a while as they are less likely to obtain loans like large firms or businesses offering commensurate collateral for what they wish to receive. According to the International Finance Corporation, about 65 million firms or 40% of formal micro, small and medium enterprises in developing countries have an unmet financing need of $5.2 trillion every year, which when estimated is equivalent to 1.4 times the current level of the global lending for MSMEs. A major part of Africa form part of the emerging markets in the world today and following the growing relevance of its position as the continent with the youngest population in the world, it is time to lead the discussion towards empowering youth enterprises by providing access to finance and credit. The World Bank plays a key role in providing finance for SMEs within Africa, and its approach is a laudable system that other financial institutions or entrepreneurial enablers can use in creating strategies that will find innovative solutions and unlock sources of capital. The World Bank’s line of action is a holistic approach combining advisory and lending services to clients to increase the contribution that SMEs can make to every economy they operate in. the advisory services include support using diagnostics, providing fair assessments, analysis and implementation measures, global advocacy, and knowledge of sharing good practice.

It is the lending operations that break the ground in solving issues linked with closing the gap in finance for most SMEs under their operations and these include:

  • Providing Early Stage Innovation Finance

Using this medium, the Bank provides equity and debt/quasi debt to finance startups or high growth firms which may otherwise no be able to access large bank loans. For implementation, one can draw inspiration from Lebanon where the program is led under the moniker Innovative Small and Medium Enterprises (iSME) project – a $30 million investment lending operation providing equity co-investments in innovative young firms in addition to a grant funding window for seed-stage firms. Empowering startups will provide motivation for more diverse minds to penetrate the SME sector more and create a powered economy to push Africa to the global stage.

  • Providing Lines of Credit

The World Bank’s SME Lines of Credit provide dedicated bank financing which is frequent and usually longer in tenor than what is generally available in the market – to support enterprises for investment, growth, export and diversification. In Nigeria, the Development Finance Bank supports the establishment of the Development Bank of Nigeria (DBN), a wholesale development finance institution that will provide long-term financing and partial credit guarantees to eligible financial intermediaries for on-lending to MSMEs. Part of the project’s activities includes providing technical assistance also to DBN and participating commercial banks in support of downscaling their operations to the underserved MSME segment. Statistics show that in May 2019, the Development Bank of Nigeria credit line to PFIs for on-lending to MSMEs disbursed $243.7 million, reaching nearly 50,000 end borrowers, through 7 banks and 10 micro-finance banks.

  • Providing Partial Credit Guarantees (PCGs)

Featured as a scheme, the design of PCGs is crucial to SMEs’ success, and support can be provided to design and capitalize such facilities. In Morocco, the MSME Development project aimed to improve access to finance for enterprises by supporting the provision of credit guarantees through the enablement of the provider of partial credit guarantees in the Moroccan financial system to scale up its existing MSME guarantee products and introduce a new guarantee product geared towards the very small enterprises. This significantly increased the lending supported by guarantees in the country over time and it facilitated the generation of credit history from many first-time borrowers, which in turn made it easier for them to obtain loans in future.

Notably, it has been visible that since the advent of the Covid19 pandemic most MSMEs globally faced challenges that led to a decline of their revenues and other financial problems such as an inability to pay suppliers, retrenching workers and cutting off supply to stay afloat. The result of this is a general decline in the economy of respective regions including Africa as a continent. It becomes necessary that measures be taken to build back Africa’s economy better and these mediums are ways to ensure that MSMEs are empowered to facilitate the continent’s recovery process. It falls to African governments, regional organizations and financial institutions to borrow a leaf from viable strategies implemented across the globe to boost the continent’s regeneration.

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