Why SMMEs In Africa Can Lead The Way To Economic Growth

SMMEs in Africa can be a big part of the economic growth needed in both Africa and across the world over the coming decades. It is commonly accepted that the drivers of economic growth and long-term sustainability for emerging markets lie in the potential and effective development of the informal, small, medium and micro and micro enterprise (SMME) sector. Africa will have an estimated population of more than 1.5 billion people by 2025 according to the World Bank. This population has a growing need for the services, business funding, jobs and economic growth provided by local SMMEs, yet these businesses face many challenges above and beyond the challenges experienced by their peers in developed countries.smmes in africa

One key challenge they’re facing small, medium and micro-sized enterprises access to finance and business growth capital. Financial access is the single biggest challenge to both the establishment of new African enterprises and the growth of existing ones. Although we have seen an increase in the availability of Venture Capital across the continent, the volumes of investment required are not close to being met. It is estimated that the continent’s formal SMME sector has an annual financing gap of over US $136 billion, according to Oumar Seydi, International Finance Corporation Regional Director for Sub-Saharan Africa. Of critical importance in his statement is that SMMEs in Africa account for 90 percent of all businesses. These numbers show that the investment potential of the African continent can and will only be unlocked by financing the SMME sector. This reality is underpinned by the fact that Africa’s population is predicted to double in just over 25 years, creating unprecedented market potential.

SMMEs In Africa – Challenges and Opportunities

To better understand the challenges and opportunities in the SMME in Africa, let’s consider the example of South Africa. Building small businesses that contribute to the economy and create jobs is one of South Africa’s biggest development opportunities.

The Unseen Sector is a joint report between the World Bank and International Finance Corporation providing an in-depth assessment of the micro, small, medium and micro enterprise (SMME) landscape in South Africa.

The report measures the SMME sector size and illustrates key barriers SMMEs face in terms of access to finance, access to skills and access to markets in South Africa. The report findings are generated from research and interviews on the business, financial and regulatory environment related to SMMEs in Africa.

While South Africa has one of the highest levels of gross domestic product per capita in Sub-Saharan Africa, it’s the most unequal country in terms of income distribution. The country’s high unemployment rate, which has increased materially in the last ten years and is particularly high among previously disadvantaged communities and youth, contributes to this inequality. SMMEs can make a significant contribution to reducing unemployment.

In South Africa, SMMEs employ between 50-60 percent of South Africa’s work force and contribute around 34 percent of GDP. However, these numbers don’t tell the full picture. There are large differences between the formal and informal sector and across business size. Building a strong SMME sector can bolster South Africa’s economy and reliable and consistent access to data, regulation that improves access to finance and collaboration across the public and private sector will contribute to a better SMME ecosystem.

South Africa’s rate of established entrepreneurship is extremely low compared to other African countries. Given its GDP per capita, South Africa should have a rate of early-stage entrepreneurship three times greater than the current rate. With fewer start-ups and a low rate of survival, there is a thin pipeline of businesses with a high chance of scaling. smmes in africa

A significant portion of informal entrepreneurial activity is driven by necessity, largely unemployed individuals with no alternative source of income. This limits the SMME sector’s potential to contribute to South Africa’s employment needs in a real and sustainable way.

It is estimated that the total size of South Africa’s SMME market, including formal and informal enterprises, is 5.78 million of which only 14 percent is formalized, based on available data sources. Many micro and very small enterprises are creating opportunities for self- employment, while only a few medium- to large-sized enterprises have the capacity to employ more people.

The SMME sector is not contributing significantly to youth employment creation. Youth represent 25 percent of South Africa’s SMME ownership and there’s a high rate of youth unemployment in the country. Youth SMME ownership has stagnated since 2008 in the 25-34 age bracket, and declined in the 18-24 age bracket. Entrepreneurial activity is also less in the 18-24 and 25-34 age groups than in age brackets above 35 years. The data also suggests that the informal sector is not providing the youth with significant employment opportunities compared to the formal sector.

Access to finance is higher for formal SMMEs and those on the upper-end of the firm size spectrum. The IFC estimates the total SMME finance gap between supply and demand to be $30 billion.

Total funding provided to the SMME sector is currently $16 billion (230 billion rand). Commercial banks account for the majority of the financing extended to formal SMMEs, representing 68.9 percent, or $11 billion (160 billion rand), of the current formal SMME funding supply. Bank funding is biased toward longer-term (vehicle or property) financing compared to short-term (working capital) financing. Government and micro-finance institutions account for the bulk of finance extended to the informal sector.

SMMEs In Africa

Why Africa Is the Future – and Why small, medium and micro-sized enterprises (SMMEs) Should Lead the Way

It is widely acknowledged that the potential and effective development of the Small, Medium and Micro Enterprises enterprise (SMME) sector in emerging economies are the primary drivers of economic growth and long-term sustainability in those countries. With a total projected population of more than 1.35 billion people by 2025 according to the World Bank, Africa is increasing at a rate of more than 2 percent per year in the majority of countries, with more than half of the population in several countries being under the age of 25. small, medium and micro and micro-sized firms (SMMEs) in developing nations are increasingly in demand for the services, jobs, and economic growth that they bring. However, these businesses face a variety of problems that far exceed those faced by their counterparts in developed countries.

One of the most biggest difficulties they are experiencing is obtaining financing. Access to finance is the single most significant obstacle to the development of new African businesses as well as the development of businesses which already exist.  According to Oumar Seydi, Regional Director for Sub-Saharan Africa at the International Finance Corporation, the formal  SMME in Africa sector has an estimated annual financing shortage of more than US $136 billion, according to his estimates. His statement emphasises the fact that small, medium and micro-sized enterprises (SMMEs) account for 90 percent of all firms in Africa.

These figures demonstrate that the investment potential of the African continent can and will only be exploited through the funding of the SMME sector, which is currently underfunded. Affirming this truth is the fact that Africa’s population is expected to double in just over 25 years, opening up a previously untapped market opportunity.

What About the Situation in South Africa?

Let us consider the situation in South Africa in order to gain a better understanding of the problems and opportunities in the SMME industry. One of South Africa’s most significant growth potential is the establishment of small enterprises that contribute to the economy and create jobs.

The recent recent search study by the World Bank, indicated that   small, medium and micro-sized enterprises (SMMEs) account for between 50 and 60 percent of South Africa’s labour force and generate approximately 34 percent of the country’s GDP. The Small Enterprise Development Agency (SEDA) in South Africa indicted that the number of SMMEs in South Africa  declined by 11% (or 290 000) year-on-year (y-o-y) from 2.65 million to 2.36 million in 2020. The World Bank indicated that their research suggest that it is possible to strengthen South Africa’s economy by developing a strong SMME sector. There report went further by indicating that reliable and consistent access to data and digital infrastructure, regulatory reform that improved access to finance, and collaboration between the public sector and the private sector all can contribute to the development of a better SMME ecosystem.

If you compare South Africa’s rate of established entrepreneurship to that of other African countries, it is quite low. Based on its GDP per capita, South Africa should have a rate of early-stage entrepreneurship that is three times higher than the existing rate, according to the World Bank. Given the poor survival rate of start-ups and the small number of enterprises that survive, there is a limited pipeline of businesses that have a high possibility of expanding.

A big part of informal entrepreneurial activity is motivated by necessity, with the majority of participants being unemployed or without an alternate source of income. As a result, the SMME sector’s ability to contribute to South Africa’s employment needs in a meaningful and long-term manner is severely limited.

According to available data, the total size of South Africa’s SMME market, which includes both formal and informal enterprises, is estimated to be 5.78 million, with only 14 percent of the total being formalised, according to available data. The creation of self-employment chances is a common occurrence among micro and very tiny businesses, whereas only a few medium- to large-sized businesses have the potential to hire more employees.

The small, medium and micro-sized enterprise (SMME) sector does not make a substantial contribution to the creation of youth employment. Youth hold 25 percent of South Africa’s small, medium and micro-sized enterprises (SMMEs), yet the country has a high percentage of unemployment among young people. Since 2008, youth SMME ownership has been stagnant in the 25-34 age category, while it has dropped in the 18-24 age bracket. Entrepreneurial activity is also less prevalent in the 18-24 and 25-34 age groups than it is in the age ranges over the age of 35. In addition, the data reveals that, when compared to the official sector, the informal sector does not provide considerable employment prospects for young people.

Access to finance is more readily available to formal SMMEs and firms at the larger end of the firm size spectrum. The International Finance Corporation (IFC) estimates that the entire SMME finance gap between supply and demand is $30 billion.

How Can we Grow More Medium Sized Businesses?

As the World Economic Forum‘s Missing Middle Initiative describes it, this challenge has been referred to as the “missing middle” in economics, which refers to “the gap in capital that is larger than micro-finance, yet smaller than traditional institutional financing in emerging and frontier markets.”

What can be done to alter the current situation? Investing in SMMEs requires the development of a country-specific funding approach as well as the establishment of a local knowledge footprint. Unquestionably, the variables that contribute to the failure of small medium and Micro enterprises (SMMEs) extend beyond access to capital, and a thorough understanding of these obstacles is critical to realising the full potential of SMMEs in Africa.

Small, medium and micro and Micro-sized enterprises, or SMMEs in Africa, for example, often have to navigate poor government policies, lengthy and bureaucratic application processes, unfair tender procedures bordering on corruption, delayed payments for goods and services, and a lack of enforcement of the rule of law. Identifying and addressing these issues will be critical to the long-term success of these organisations. SMMEs in Africa are among the world’s most resilient entrepreneurs, possessing a unique ability to thrive in unfavourable business settings, such as those in which they are based. Consider what they could do if they were provided with a more stable and supportive environment in which to grow their businesses.

As a result of its undiscovered mineral richness and natural resources, geo-strategic position, large farming and agriculture based area, and growing population—including a large number of young workers — Africa is expected to become a major factor in the global economy moving forward. SMMEs in Africa could be the driving force behind this shift, which may yet be 10 to 20 years away, but It’s certainly foolish to bet against this future, even if it’s uncertain.

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