What are the top 5 challenges of SMEs in Africa? Africa is one of the most economically promising regions in the world. It owes this largely to its demographics as well as the continent’s natural riches. A recent World Bank research projects that the continent’s economic growth rate may rise above 5.1 percent in 2022 and 5.4 percent a year later. All of this depends on the speed of COVID-19 vaccinations with a slower inoculation rate reducing growth estimates.
Small and medium-sized businesses (SMEs) account for the majority of the region’s economic activity. As such, strong financial health in Africa goes hand-in-hand with an economic climate that encourages the growth of SMEs.
The COVID-19 pandemic is wreaking havoc on Africa’s small and medium-sized businesses. These enterprises play an important role in economies. They employ an estimated 80% of the continent’s workers in both the formal and informal sectors. However, they are often the least robust during times of crisis. They often have lesser cash reserves, client bases, and commercial pressure management capabilities than larger enterprises.
More shocks from COVID-19 are putting additional strain on African SMEs, who are already dealing with a declining economy. Many SMEs have seen their sales plummet because of the lockdown. Consequently, the majority have had to cut back on business spending to stay afloat. SMEs in Africa face several problems that impede their growth.
Top Challenges of SMEs in Africa
Access to Public Procurements and Corruption
This is one of the top challenges of SMEs in Africa for obvious reasons. As we all know, public procurements are extremely profitable possibilities that can account for a significant portion of an SME’s annual revenue, particularly in the construction and public works industries. These are highly competitive tender calls that attract both huge multinational corporations and small businesses.
Many of these huge companies have the technological know-how and financial resources that SMEs cannot afford. Thus, decreasing their chances of receiving government contracts. Acts of corruption and bribery also distort competition. This further marginalizes SMEs, as many lack the liquid capital required to participate in these practices. Examples abound, as evidenced by the numerous trials.
Access to Financing or Funding Opportunities
Issues relating to funding pose major challenges to SMEs in Africa. Many new and low-maturity SME enterprises lack the financial, operational, and strategic structures of larger corporations. Only between a third and a fifth of SMEs in sub-Saharan Africa have a bank loan or line of credit. An estimated 28.3 percent of firms in the region are fully credit constrained. High-interest rates often deter SMEs from even trying to apply for financing. This lack of affordable financing seriously hinders SMEs in Africa.
This makes it difficult for them to maximize the utilization of available cash to expand their activities. Lack of knowledge and insight into the best ways to set up and run businesses worsen the situation. Some SMEs possess technical talents that are nearly identical to those of major multinational corporations. The financial constraint persists due to SMEs’ difficulty in obtaining financing.
Ineffective Integration
The ineffectiveness of sub-regional integration is another difficulty that SMEs in the region must face (ECOWAS and WAEMU). Even though this integration is theoretically beneficial, it does not guarantee that it will be effective in practice. There are still barriers to the free movement of products, services, and people. Entering a market other than one’s own is a difficult challenge for a small business.
Unsurprisingly, these business disruptions have resulted in a significant drop in SMEs’ income and profitability. Business confidence has dipped as well. Several African owners are understandably gloomy about the economy and economic prospects. Most of them have been experiencing serious reductions in their revenue along with negative earnings.
The problem of slowing demand
Many African SMEs already had to cut back and look for new ways to get their products to market before COVID-19 hit.
The situation today is that COVID-19 has weakened most African currencies. This bad situation is made worse by the ever-increasing prices of goods and services provided by these small businesses. In Nigeria, for one, many people can no longer afford to shop as luxuriously as they used to. As a result of the alarming increase in the price of raw materials like flour and breadmakers, demand for bread has fallen, and entrepreneurs running bakeries have all but folded up.
As a result of the sluggish demand, many African SMEs have had to scale down their expansion plans and look for new ways to sell their products. Most of these businesses have not been successful in this regard.
Political Instability and Access to the right markets
Many African countries’ political instability severely restricts investment in SMEs. Political unrest has been linked to a drop in economic growth. Furthermore, political unrest reduces economic growth by several degrees. The slowing of the local economy is a source of concern for all business sectors. Economic activity is at a standstill during election seasons, making it impossible to make investments and generate accurate estimates.
What’s more? Most global corporations who operate in Africa or aspire to do so would assess the continent’s political and legal systems. Due to the massive differences in political and legal systems created by a new unknown government, some of these enterprises may choose not to operate or cease operations. This further hinders the access of African SMEs to the right markets necessary for their growth and survival.
Conclusion
It is impossible to overlook the importance of the SME sector in Africa. This post has shown you the top five challenges of SMEs in Africa today. Both local governments and SMEs should embrace these challenges to go to the next level. If you have any others, you can share them with us in the comments section. Meanwhile, check out SME360 to read different articles on how to improve your small business.