Micro, small, medium enterprises (MSMEs) play a crucial role in the private sector in developing countries. Localised businesses are vehicles for inclusive and sustainable growth in Africa. They are the economic backbone of African communities.
By 2035 the number of Africans joining the working age population will exceed that of the rest of the world combined, according to the International Monetary Fund (IMF). It is imperative to invest and support budding MSMEs because they are key actors in supporting the massive number of new labour entrants. Helping African MSMEs flourish is crucial not only for Africa but for the global economy, because it creates a growing middle class with disposable income, in tandem with market opportunities for new investors.
Challenges to MSMEs in Africa
The mortality rate of SMEs among African countries remains very high with five out of seven new businesses failing in their first year. Identifying and tackling these challenges are essential to increases MSME operation and fostering development on the continent.
Unfavourable business climate: hostile legal requirements, high taxes, inflation, fluctuating and unreliable exchange rates drastically restrict the growth and prosperity of African MSMEs.
Electricity supply: A study by World Bank Enterprise Survey (2010) ranked electricity problems as the most important (25%) challenge facing African SMEs. Africa is the only continent where electricity shortage is a major challenge to business growth. Lack or limited electricity means it is expensive to run a business and the business cannot operate in full capacity.
Lack of skills and adequate training: Formal education is a key factor in MSME’s performance. Higher levels of education are associated with higher returns to self-employment, with returns being greatest for matric, post-matric and apprenticeship qualifications. Previous experience, and marketing, accounting and IT skills positively affect firm performance.
Limited access to finance: MSME finance is an important component to economic growth and poverty alleviation. The survival and growth of MSMEs hinge on the supply of financial capital. A survey by The Enterprise Surveys of the World Bank in a period of ten years and covering over 100 countries found that access to finance as the most important constraint hindering operations and growth of MSMEs compared to other parts of the world where the problem was moderate. Less than a quarter of adults in Sub-Saharan Africa have access to formal financial services. This is the main challenge to MSMEs.
Microcredit: Linked to access to finance is microcredit. It was viewed as a Hail Mary for the ills associated with poverty in Africa. However it was not the panacea as expected. It turned out to be the opposite. Microcredit turned out to be a main cause of poverty in most African countries. Borrowers don’t generate any new income that they can use to repay their loans so they end up taking out new loans to repay the old ones. Further new businesses face lack of consumer demand and struggle to yield net increase in employment and incomes. The microcredit movement plunged large numbers of African’s into deeper over-indebtedness, poverty and insecurity.
Corruption: Corrupt practices are the norm in the business landscape in Africa. Often business owners must reduce their budget or find additional capital to finance this unwarranted activity.
Negative perception: potential customers have a negative perception towards goods and services offered by MSMEs. They prefer to engage large businesses, as they believe they will receive better services.
Political instability and inadequate legal framework create an instable environment that chokes the growth MSMEs. These factors increase the risk of failure of enterprises operating on the continent.
MSMEs play a vital role in harnessing Africa’s demographic dividend. They are in the unique position to provide jobs to labour entrants particularly the youth and women. African Governments must commit to deliberate action and implement policies to support women owned MSMEs due to the gender gaps characterising the SME sector and the constraints women face in starting, operating, and scaling enterprises. Governments and regional actors must heavily empower and support MSMEs to unlock new growth and prosperity in Africa.