Job creation is undoubtedly one of the most pressing priorities for African countries. It is no longer feasible to rely on the public sector as the driver of employment - increasing attention is now being placed on the role of the private sector in the economic development of the continent.
The African Development Bank and the Norwegian Agency for Development Cooperation recently hosted an event in South Africa to share lessons on what has and has not worked in promoting private sector development, specifically through financing. One of the topics discussed was ways to stimulate small and medium sized enterprises (SMEs) as a node of growth in Africa.
Globally, SMEs empower citizens and can cascade economic growth. In Asia, North America and Europe, SMEs are associated with the impressive economic growth in their countries and they still hold an influential place in the economy in all countries.
In Africa, SMEs dominate business, making up 90 percent of firms in rural and urban areas and providing a major employment avenue. SMEs promote entrepreneurial and business skills among communities and are important drivers for achieving key national goals such as poverty alleviation and economic growth.
In South Africa, SMEs are active in both the formal and informal parts of the economy. About 80 percent of the formal business sector are SMEs, collectively contributing between 50 and 60 percent to GDP.
The developmental impact of SMEs can be enhanced by increasing access to finance and their capacity to manage their strategies and their finances throughout the life cycle - inception, survival, growth, expansion, and maturity. Access to finance for SMEs can add a massive contribution to economic growth in developing countries. Without access to financial services, they lack the means to create goods and innovations that are crucial for achieving this growth.
Most SMEs cite the lack of access to funding as the single biggest challenge, yet often this situation is compounded by information asymmetry or a lack of clear marketing by service providers to SMEs.
Different institutions provide funding to microenterprises through to medium-sized enterprises. Different financiers target specific industries, business types or locations. Finding the appropriate financier is important but remains a struggle for entrepreneurs on the continent.
Other barriers to SME development include rigid regulatory environments and red tape; policy uncertainty and a lack of transparency; long waiting periods for changes to be effected; and barriers to trade.
Within the Southern African Development Community, the business community has made a number of concrete suggestions on ways to improve the environment for SMEs under the umbrella of the Southern African Business Forum.
This includes addressing both hard (physical) and soft (regulatory) infrastructure shortcomings, such as the transport systems to access markets. Firms from all sectors asked for policy certainty on the use of tariffs, fees and levies at borders; mining houses and agro-processors called for stable and predictable export regimes; and infrastructure developers and agro-enterprises raised the need for consistent and transparent land use rights. Financing options to support SMEs in the uptake of standards will improve their potential to participate in global supply chains.
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There is no shortage of ideas. The key, however, is action and implementation. This requires ongoing efforts to engage at the grassroots level with SMEs and the facilitation of active exchanges of information between governments and their intermediaries, such as chambers of commerce and business associations.
Institutions such as the African Development Bank and Norad might not be best suited to get down to the firm level in their activities but they have a clear role to play in supporting programmes in this crucial area for development.
Lesley Wentworth and Catherine Grant Makokera work for Tutwa Consulting Group in South Africa.
