SMEs consistently rank access to finance as one of the top three constraints to their growth. While there is no statistic documenting the severity of the financing constraint for the entire continent, evidence reported in country or regional surveys suggest that the funding gap is acute. For instance, 45% of all surveyed firms in Sub-Saharan Africa cite access to finance as a major constraint to growth (Demirgüç-Kunt and Klapper, 2012). Surveys conducted in North Africa show a similar pattern. In some countries, access to finance represents the dominant constraint, as in Burkina Faso (for more than 70% of surveyed firms), Benin (for more than 70%), Malawi (for more than 50%) and Algeria (for more than 50%). In most countries, a larger share of small firms report access to finance as a major constraint compared to medium and large firms.
Per interviews of 29 leading banks across six emerging markets around the world, poor business cases were cited as a critical factor for credit declines. Financial institutions perceive poor customer information availability as a critical barrier to lending (McKinsey & Company, 2012). In Africa, addressing both elements is crucial for enabling a more inclusive environment for vibrant and growing SMEs. In particular, improvements in the credit information systems, collateral registries to reduce the information asymmetries, and capacity building and business development services at the firm level need to be addressed in order to accelerate financial inclusion on the continent. In addition, Africa’s financial systems, while they have 69 made great strides over the past two decades, are still undergoing significant improvements that will ultimately help facilitate a more conducive environment for access to finance at the firm level. Financial depth in Africa, as measured by credit to the private sector as a share of GDP, is currently at an average of 26% for African countries, relative to 77% and 172% for all other developing economies, and for high income economies respectively (Demirgüç-Kunt and Klapper, 2012). However, this figure conceals differences between regions. For instance, while private credit to GDP stands at 24% in sub-Saharan Africa, it is equal to 39% in North Africa. The high concentration level and limited competition observed in most African financial systems further constraints SMEs’ access to finance.
Additional key challenges for SMEs finance in Africa include poor customer knowledge which prevents financial intermediaries from formulating an appropriate strategy to target SMEs, lack of financial and management skills and financial literacy across firms, translating into poor financial accounting, record keeping or inappropriate business plans. Lack of collateral is also often cited as a challenge for banks, while poor financial infrastructure in some African countries (e.g., Nonexistent mobile collateral registries or credit bureaus) accentuates the problems of insufficient collateral. Data collected from the WBES in Africa reveal that, on average, 84% of SMEs report having collateral requirements when accessing a loan that amount to an average of 153% of the total loan value. Information asymmetry challenges and other operational constraints lead some financial institutions to decline service to the SME sector as it is perceived to be unprofitable. This contrasts with the findings of a recent study showing that MSME banking revenues are worth USD 150 billion today, and are expected to double over the next 5 years (McKinsey & Company, 2012). For Sub-Saharan Africa alone, revenues are also projected to grow significantly from USD 5 billion to USD 12 billion in 2015, mainly due to recent technological advances according to the banks surveyed in the study. More than 60% of bank respondents cited mobile as a big technological influence, relative to 20% in other regions (McKinsey & Company, 2012). Hence, in Africa, provided that banks understand and cater to SME sector’s needs, there is a tremendous business opportunity. A deeper understanding along with innovative products could reduce risks related to business with SMEs and push the costs downward (McKinsey & Company, 2012). Some banks have already been active in the SME sector, very often thanks to support from development partners (Box III.1). Non-bank financial institutions have also an important role to play to address the SMEs funding gap in Africa. Indeed, greater involvement of non-bank financial institutions will not only expand and diversify product offering to SMEs, but also address some of the barriers preventing them from accessing finance. For instance, private equity funds offers equity which is not available from banks, and helps address the limited capacity of African SMEs thanks to the often used hands-on strategy of private equity players. Similarly, leasing does not require collateral which have been often cited as one of the main impediments for SMEs to access lending from formal financial institutions in Africa.