Finding the Key to Africa’s Macroeconomic Growth

With 2015’s Africa Finance & Investment Forum on the horizon, EMRC’s Ines Bastos addresses one of the key continental trends set to be discussed, with the private sector and SMEs earmarked as potential game-changers

According to OECD/AfDB forecasts, Africa should grow to levels close to the ones reached before the 2008/09 global economic crisis. In fact, considering the current predicaments that have befallen Africa - such as the Ebola epidemic, a drastic drop in oil prices and uncertain global conditions - the continent’s growth levels have not dropped accordingly, but are getting closer to levels witnessed before the financial crisis. 

Africa’s GDP growth is expected to go up to 4.5 percent in 2015 and 5% in 2016 but there is obviously still a high level of uncertainty about the future, especially in African countries that are vastly interconnected to economies that don’t have such promising growth rates.

But nonetheless, we are witnessing some positive trends; the most important one being the international development community’s willingness to finally regard the private sector as a critical and essential player in ensuring the African continent’s sustainable future.

The past couple of years has seen an increase in the number of international financial institutions (IFIs), development financial institutions (DFIs) and foundations that are moving away from simply offering aid and looking to fund business opportunities. This simple change in attitude can bring important and fundamental medium and long-term results to the private sector.

Depth, access, efficiency and stability

At EMRC, we strongly believe in the power of Africa’s private sector, as we see it as an engine of sustainable and inclusive growth. SMEs in particular play an instrumental, but often under-recognised role in private sector growth.

The rise of the SME sector across Africa is essential. When considering the economies of high-income countries, SMEs are responsible for more than 50 percent of GDP and upwards of 60 percent of employment. However, in developing countries, SMEs represent less than half of that; 30 percent of employment and 17 percent of GDP.

Many African economies are built around a large number of microenterprises and large companies with the SMEs sector lagging far behind.

The main reason for this is that SMEs face obstacles in obtaining financial capital for growth and expansion. Local, traditional financial systems do not sufficiently provide the solutions to the needs of small and medium businesses.

As Dirk Harbecke, CEO, ADC (African Development Cooperation) highlighted in 2014: “Efforts to develop the financial sector in Africa should focus on enhancing depth, access, efficiency and stability.

“Few banks engage in long-term lending and bank balance sheets tend to be dominated by short-term deposits, resulting in an unmet demand by small and large corporations alike for credit lines longer than a 12-month term.”

Belief in the African market

Although historically SMEs have lacked access to financial products - particularly longer-term debt instruments and financial services - there is increasing consensus that the SME market can be a profitable segment to banks and others sources of finance. 

By employing a range of measures such as risk adjusted pricing, credit scoring models and SME-tailored non-lending products, banks are slowly but surely developing ways to mitigate risks, lower costs and increase their revenues from SME banking.

Over the past several years EMRC has initiated countless forums and B2B sessions to ensure that sound SMEs hailing from Africa can access investors and financial institutions that are ready to finance a sector which was until recently still considered risky.

By showcasing innovate solutions and alternative sources of finance that allow the mitigation of the Missing Middle gap, a resounding number of international partners, financial institutions and leading experts have partnered with us to highlight the needs to support and develop this part of the private sector.

Every year with our “Africa Finance & Investment Forum” EMRC brings together all ‘those’ that in our opinion can contribute to the development of a “sustainable private sector”. We put together on the one hand the “responsible” investors, the DFIs, the IFIs, the Foundations, and Family Funds that are looking at projects to invest and work through local intermediaries to stimulate capital provision to SMEs.  And on the other hand, African projects are also introduced to for-profit investors from all over the world that have the funds, but are not getting good return on their investment in the “North” and are willing to get introduced to good projects.

Nowhere is this more effectively showcased than during the Entrepreneurship Award, which presents to an international audience a select number of African-based entrepreneurs who have established innovative and successful local or regional enterprises.

Their stories are most often based on their own personal belief in the African market. Over the years, each and every African entrepreneur when addressing the AFIF audience has clearly stated that it is also about time that the rest of the continent and international community believes in the rise and importance of local enterprises. An increase in local and strong enterprises means an increase in jobs and incomes.

The next step forward

Providing pragmatic platforms for discussion and for business-matching is one of the many interventions that can be made to reduce the gap in access to finance. Other more structural changes need to be done and this includes: improving the right business environment and for that, governments and public sector are key to the discussions; and the promotion of regional integration and south-south/north-south relations.

For this interconnected global economy to work, international and regional conventions need to be strengthened, otherwise all the efforts in making African SMEs grow will not work.

Emphasis should also be placed on the qualities of entrepreneurship, which is slowly happening, with the likes of US President Barack Obama giving a keynote speech at the 5th Global Entrepreneurship Summit 2015 held in Nairobi, implying that this is the next step forward for Africa’s economies.

As seasoned African entrepreneur, Allon Raiz, Founder and CEO of Raizcorp- which offers business support services and entrepreneur programmes to South African start-ups - says: “The three fundamentals that I have learnt about entrepreneurship in Africa are; entrepreneurship is on the rise, and it’s become very important – part of the zeitgeist of Africa, infrastructure and skills are the key inhibitors of growth in Africa, and Infrastructure and skills are the greatest opportunities (both sides of the same coin).”