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Entrepreneurship in Africa: Supporting Small and Medium Enterprises to Ensure Sustainable Growth

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published
21 October 2015

SMEs in developing countries face significant financing challenges due to the lack of appropriately-sized loans available to them. Needs on either end of the spectrum are – relatively – better addressed; large firms have a variety of mechanisms to choose from and grassroots initiatives fill the gap on the microfinancing end. The funding gap for SMEs, however, is estimated by the International Finance Corporation to be at least $2 trillion, with more than 200 million SMEs in need of a loan or overdraft. 

Small- and medium-sized enterprises (SMEs) will play an important role in growth on the African continent, as localised business models can ensure that growth is sustainable and inclusive. “[Small businesses] have an impact because they are entirely integrated into the local fabric, so they are capable of understanding the needs of the local population, and they are capable of delivering responses that can be adapted to their needs,” said Emilie Debled, Public Relations and Business Development Director at Investisseurs et Partenaires (I&P).

 

 

I&P is a French impact investing group that brings private equity to small businesses – primarily in the francophone regions of Africa – with offices in Senegal, the Ivory Coast, Burkina Faso, Ghana, Cameroon, and Madagascar. Supporting SMEs addresses arguably almost all of the Sustainable Development Goals, from poverty eradication to employment to inclusive economic growth - as businesses grow, they employ more people. “Africa will need to create between 10 and 15 million jobs each year to respond to the demographic needs of the continent,” said Debled. 

I&P also encourages social and environmental responsibility in all of its SMEs, adding another layer of impact to its portfolio. During the European Development Days 2015 (EDD) panel discussion, ‘Small businesses, big impact: African entrepreneurs and climate change’, Debled cited examples such as their role in the transition of one Senegalese SME, from using coal to heat its tile kilns to using readily-available biomass in the form of peanut shells. On the societal value and good governance side of running a business, I&P encourages all companies to provide their employees with health insurance, and they identify tackling corruption as a major priority. 

I&P also invests in the renewable energy industry, delivering a more direct environmental impact. Investing in energy also supports SME growth, as access to a stable electricity supply is the second biggest challenge – after financing – for SMEs. For example, I&P provided 30% of the financing for CDS, a renewables company based in Mauritania with specific expertise in solar. The remainder of CDS’s funding has come from other private sources with no public support. Sidi Khalifou is the entrepreneur behind the company; he participated on the panel with Debled at the EDDs. 

 

 

Speaking to capacity4dev after the event, Khalifou emphasised the ability of solar energy to change lives, especially in isolated areas. “Today with only a solar light introduced into a house […] where there is no energy, it can change lives at the level of childhood education. […] We solve many problems at once: we solve environmental problems, we solve social problems, we solve economic problems, because we are creating activity in rural areas,” he said.

One of the biggest challenges faced by CDS’s business model is the lack of financing available to individuals who want to purchase a renewable energy-based system, but cannot afford to pay the high capital cost up front. To address the payment barrier, Khalifou advocates for increased availability of financing mechanisms, such as lines of credit, specifically for purchasing renewable energy systems. 

“It’s not a question of ‘I don’t want to pay’, I want to pay, but I want to pay relative to my income,” he said, “If tomorrow I have a line of credit […] where you pay in 2 years, in 4-5 payments, or in monthly payments, everyone will have solar energy.” Khalifou explained that the microfinancing that currently exists is geared more towards small businesses rather than individuals.

On a broader scale, high tax rates on renewable energy-based businesses also act as a barrier to industry growth. Khalifou wants an international pledge to reduce taxes on renewable energy, similar to the Information Technology Agreement that, since 1997, has boosted trade of information technology-related products by removing import tariffs on these items in over 50 countries.

CDS also works with local industries to build capacity. For example, the dairy industry in Mauritania is unsustainable – both environmentally and financially – due to the lack of access to energy by farmers. 

Mauritania produces large volumes of milk, but without refrigeration and adequate processing facilities, they dispose of a significant amount of spoiled local milk. The country then imports the majority of its consumption from other countries that have already built commercial capacity. “There are plenty of economic contradictions and after we say that people are poor. [Well that is] because there is no value added – the value is only added in commercial operations,” he said.

Helping to rehabilitate the dairy industry is only one of the many situations that countries face where an SME can deliver profits while alleviating a social or economic burden.

NEST is another African SME partly financed by I&P. It is the brainchild of Khadidiatou Diop Nakoulima, a Senegalese entrepreneur in the healthcare industry. She saw the need for quality healthcare at an affordable price. Many people in Senegal cannot afford the full cost of traditional private healthcare, but they want better quality than that found in the heavily-burdened public system. “The private healthcare sector already exited in Senegal… we want to make it more inclusive,” said Nakoulima. “Our role is not to replace the government or support the whole world, but it is at least a way to be able to contribute.”

 

 

NEST focuses on healthcare for women and children with two facilities in Dakar. Nakoulima shared the story of a woman who had been unable to get pregnant for at least three years and could not afford private treatment. Within months of first receiving support from one of the clinic’s midwives she became pregnant, then delivered her child at their clinic. Nakoulima said that this is a typical story from their patients, and that, “If we had no competent technical facilities on site, we could not have that type of impact.” 

I&P recognises the need for more SMEs in Africa and has a new initiative to establish ten local funds within ten countries in the next ten years. These will be focused on providing the smallest SMEs with financing in a more efficient and direct way. “We think there should be more and more actors in this segment to address the needs,” said Debled. 

Further Reading

On Capacity4dev

External Links

  • For more information on African SMEs, you may want to check out the project Small is Powerful. Joan Bardaletti has put together this fascinating series of multimedia presentations that highlight the presence and power of SMEs across the continent. He also participated on the ‘Small businesses, big impact: African entrepreneurs and climate change’ panel at the EDDs.

  • The Small and Medium Agribusiness Development Fund was established last year by the European Commission and the Government of Uganda. The Fund will provide SMEs with a total of €15 million via equity-based funding tools.

  • Jean-Michel Severino, the current CEO of I&P and former head of Agence Française de Développement, is also the chair of Convergences, a “multidisciplinary platform for thought” that aims to connect actors to reduce poverty through conferences, publications, and an annual World Forum in Paris every September. 

  • The Global Entrepreneurship Summit took place in Nairobi earlier this year. Find out more here.

 

Teaser image copyright of DEVCO.

DISCLAIMER: This information is provided in the interests of knowledge sharing and capacity development and should not be interpreted as the official view of the European Commission, or any other organisation.

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