SMEs' financing gap, reasons and opportunities
More than 50% of SMEs are financially constraint
More than 50% of SMEs in Sub-Saharan Africa are financially constrained
According to the SME Finance Forum, Africa is home to approximately 1.6 million SMEs (companies with 10 to 250 employees) plus more than 40 million micro companies (less than 10 employees).
They provide 60 - 80% of jobs on the African continent, and contribute around 40% of GDP.
Different sources estimate the annual financing gap of SMEs in Sub-Saharan Africa at $140bn to >$300bn.
The missing middle: African businesses employing between 5 and 250 people, with capital needs ranging from $20k to $2mn. SMEs in the missing middle are too big for microfinance organisations, but too small or risky to access sufficient growth capital from conventional debt and equity investors. - London Stock Exchange Africa Advisory Group
3 key reasons that foster the financing gap
Navigating the world of smaller companies can be challenging. Many lack audited accounts, credit history, scores, and collateral, which doesn't align with traditional borrowing norms.
Processing and monitoring smaller loans incur higher transaction costs, making it less feasible. Lenders often opt for larger loans exceeding $1 million for better returns.
Borrowers are discouraged due to bureaucracy, limited awareness, and high expenses. Bank rates of 20-25% p.a., along with even steeper rates from microfinance and digital lenders, compound these challenges.
The opportunity of digitalization and AI
Costs can be more streamlined by minimizing manual steps in loan assessment, processing, and monitoring, e.g., with online customer onboarding and automated checks.
Embracing non-traditional data sources can help to assess risk. For instance, Branch employs mobile data like SMS logs, contact lists, and GPS data to evaluate creditworthiness effectively.
Enhancing the overall customer journey and providing better education are focal points, leading to substantial improvements in the borrower experience.
To learn more, make sure to check out:
LSEG Africa Advisory Group: The Challenges and Opportunities of SME Financing in Africa