By Sendy Thoplan, Head of SME and Business Banking, Bank One
The Global Entrepreneurship Monitor (GEM) 2022-23, released in February 2023, sets a great tone for the World Micro, Small and Medium Enterprises (MSME) Day being celebrated on 27 June 2023. The report insightfully notes that the pandemic catapulted the world towards a so-called “New Normal” that constitutes a world of opportunities for entrepreneurs in turn, as the essence of entrepreneurship is to rise to the occasion to repair damaged economies and societies.
This is a world where opportunities are clearly, and sorely, needed – not just for businesses to be born but employment to be created. Indeed, it is believed that in 2030, 600 million jobs will be needed due to the increase in the workforce. It clearly stands to reason then that MSMEs are now a high priority for governments around the world – more than ever before – as most formal jobs are created by such businesses. While figures from the US show that they create seven out of ten jobs there, closer to home, in Africa, they provide as many as 80% of all jobs across the continent.
The foreword to the GEM report goes on to give immense hope to all aspiring and established entrepreneurs, noting that its results show that policymakers in some countries are striving harder to make it easier for entrepreneurs to put down their commercial “roots” and create successful businesses. Moreover, entrepreneurs themselves are clearly dusting themselves off from the hardship effects of the global pandemic and continuing to do what they do best: grasp opportunities.
The importance of digital transformation for SMEs
Against this optimistic backdrop, an interesting trend that the GEM report reinforces is how the pandemic has created an opportunity to examine digitalisation as a tool for recovery, to gain a competitive advantage and to enhance performance-related outcomes such as the pursuit of new opportunities — in particular, opportunities emerging with the pandemic. At the same time, the report soberingly notes that ‘Digitalisation is global but highly unequal’, with a digital divide evident among societies.
However, the report gives a clear, clarion call to digitalisation, noting that technology is commonly perceived to be a beneficial means for creating competitive advantages. In particular, COVID-19 ensured that the pre-pandemic gentle drift towards online transactions became a torrent for both consumers and producers. Evidencing that this move to digitalisation is not a mere flash in the pan but a wave that shows little sign of abating, the survey conducted under the report found that, in 26 of the 49 economies, over half of those starting or running a new business expected to use more digital technologies to sell their products.
Significantly for Africa, SMEs make up 60% of the employment in the continent and contribute as much as 40% of the continent’s GDP. However, even after COVID, less than half of all African SMEs are using any form of digital banking. This appears counterintuitive, as over 70% of global SMEs use such services. Harnessing digital technology could then be key to unlocking access to finance for such small businesses that are a vital driver of economic and social change in the region.
Access to finance forms essence of SME survival
Indeed, as at May 2022 report by the International Labour Organisation makes only too clear, the unavailability of finance to SMEs in Africa has been identified as the most severe obstacle for SMEs’ business to thrive. Because of the lack of access to financial resources, many SMEs in Africa do not contribute adequately to economic prosperity and job creation to their full potential, the report highlights.
SME surveys have indicated that they are daunted by the high cost of credit, limited supply of credit lines, complicated application procedures, high collateral requirements, and pervasive corruption. This lack of access to finance in turn has a ripple effect hampering the SME’s growth but also constraining its capacity to perform to potential and create jobs in the broader economy.
This is seconded by World Bank statistics which echo that access to finance is the second most cited obstacle facing SMEs striving to grow their businesses in emerging markets and developing countries. The report notes that SMEs find it harder to obtain bank loans than large firms – instead, they are forced to rely on the friends and family network or tap into internal funds to start and run their business in the initial phases.
The World Bank’s International Finance Corporation estimates that 65 million firms, or 40% of formal MSMEs in developing countries, including those in Africa, have an unmet financing need of US$5.2 trillion every year. This figure is shockingly equivalent to 1.4 times the current level of the global MSME lending! This sobering gap varies considerably region to region with Latin America and the Caribbean and the Middle East and North Africa blocs demonstrating the highest proportion of the finance gap compared to potential demand, averaging around 87% and 88% respectively. What is even more worrying is that around 50% of formal SMEs don’t have access to formal credit – with the financing gap widening further when the entire universe of MSMEs, including micro and informal enterprises, is factored into the equation. Within MSMEs, women-owned start-ups face an even bleaker prospect for funding than those run by their male counterparts.
Women entrepreneurship is central to African SMEs
Globally, women own and lead up to a third of all businesses operating formally – meanwhile, millions more run small, informal enterprises in developing economies. In Africa, this is truer than most other regions, with the World Bank noting that 58% of all MSMEs are women-owned.
Indeed, Africa has the highest proportion of women entrepreneurs in the world, with The Organisation for Economic Cooperation and Development (OECD) research revealing that more than a quarter of all businesses were either started, or are run, by women. Contrast this with Europe where the rate of entrepreneurial activity among women is just 5.7%, according to European Investment Bank (EIB) figures. It is worrying then that these high levels of entrepreneurial activity do not translate into funding for women entrepreneurs in Africa.
Indeed, the EIB survey notes that women’s businesses are particularly constrained by the dearth of finance. The same report indicates that this only serves to underscore the importance of establishing a favourable environment to encourage lending institutions to finance businesses owned by women. And, it is a good sign for the future that African banks are increasingly aware of the need to address gender inequality and of the opportunities presented by gender finance, with 60% banks responding to the EIB survey having some form of gender strategy in place. The survey notes that structural barriers must also be addressed and rues that, in some countries, collateral can only be pledged or, de facto, owned by men, which can make it almost impossible for female entrepreneurs to access finance.
Meanwhile, a Reuters report echoes the EIB’s findings by highlighting that women founders receive less than 7% of all such funding on the continent, according to data released by Asoko Insights. And this dismal state of funding persists against a survey by startup-focused publisher Disrupt Africa emphasising that women make up around 20% of founders! The report goes on to note that this clearly constitutes a problem, especially as women entrepreneurs are less likely to give up their businesses than male counterparts, as a University of Liverpool Management School research highlights. This makes for an even more pressing problem in Africa, where investing in entrepreneurs is crucial to fostering growth and development, the report rues.
Green financing with focus on SME sustainability
Significantly, when the pandemic first abated, in 2021, the United Nations hosted three events to celebrate the pivotal role that MSMEs play in strengthening the global economy, with the first held under the theme ‘Empowering the Green Recovery’ to discuss what MSMEs could do to survive crises and challenges.
Against this backdrop, an EIB survey released in November 2021 hearteningly found that close to 70% of banks in Sub-Saharan Africa (SSA) see green finance as an attractive lending opportunity, nearly 55% actively look at climate change when making strategic plans, while more than 40% of African banks employ staff to focus on renewable energy.
However, the same report also cautioned that only around 10% of SSA banks have tailored their products to serve green finance. This not only translates into a lost opportunity for banks but also a big blow to climate change finance overall, as SMEs can serve as huge champions for greening local economies.
Partnerships and collaborations key to green finance, sustainable SMEs
The EIB report also made clear that partnerships and collaborations with local players are crucial for any sustainable investments to be successful. Underscoring the need to work more closely with African financial institutions that are interested in green finance, it harked to initiatives such as a 2021 collaboration with the African Development Bank (AfDB) to expand a shared pipeline of investment projects, including those tackling climate change and supporting environmental sustainability.
Interestingly, the EIB report argues that African banks are well aware that climate change will hurt their lending portfolios – with risks ranging more frequent droughts that can hurt viable agricultural projects, and the loss of land to rising sea levels impacting property projects.
At Bank One, we believe that access to finance for MSMEs is a crucial ingredient for their very survival, while acknowledging that vulnerable livelihoods such as those of women and youth are contingent on such businesses. By the same token, we also believe that it is vital to partner with green initiatives and support climate change causes such as those espoused by the EIB and the AfDB to ensure sustainable businesses, and by extension, sustainable economies.
Shining the light on MSMEs
As the United Nations General Assembly drives the significant cause of MSME Day to raise public awareness of their contribution to sustainable development and the global economy, with the added goal of strengthening such SMEs so that they are viable in times of crisis, we strive to support the UN in this noble endeavour.
At Bank One, we are humbled by the recent approval by the AfDB Group of a US$40 million Trade Finance Package in our favour to help us increase our capacity to support the trade finance needs of key sectors, including MSMEs and local corporates in Mauritius and across the continent.
The AfDB estimates Africa’s annual trade finance gap to be around US$81 billion and also reasons that SMEs and local firms face greater challenges in accessing trade finance compared to multinationals and large local corporates. This transaction guarantee and risk participation agreement approved by the AfDB form an integral part of the strategic tools employed by them to help reduce the continent’s trade finance gap, and we at Bank One are proud to partner with them in this crucial initiative. Following this key milestone, Bank One was pleased to be recognised as the Best SME Bank in Mauritius in May 2023, in an accolade granted for the second year running by Global Finance Magazine.
Going forward, we intend to live up to this honour by reinforcing our strong commitment to digital transformation and customer-centricity for our SME clients. We hope to help our customers reach greater heights of success and sustainability as we laud their efforts on this World MSME Day and beyond.
Sources:
The Global Entrepreneurship Monitor 2022-23
https://www.ilo.org/employment/Whatwedo/Projects/strengthen2/WCMS_844832/lang–en/index.htm
https://www.eib.org/en/essays/africa-green-lending
https://www.worldbank.org/en/topic/smefinance
