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The Africa SME Program

24.10.2017

The other week, I was on the phone with a banker in Guinea.  We were talking about funding SMEs and he told me, “If we lent to an SME, we would ask for at least a 70% guarantee.”  Of course the natural thought is, “Well if someone already had over 70% of the value of a loan in assets, why would they need a loan?”  This is a problem that entrepreneurs across Africa face on a daily basis.  On a continent that already has a high level of political risk (witness the recent sudden protests in Togo, the tense political situation in RD Congo that could break out into violence at any moment, attacks in the Sahel – the list goes on), banks are understandably wary of risk.  Adding more by lending to small businesses with no credit history does not seem like a good proposition. 

The problem with this viewpoint is that SMEs, vital to the African economy, are largely overlooked.  A study by the IFC and McKinsey calculated that SMEs account for 58% of employment in Africa and create 33% of the continent’s GDP.  Cutting these entities off from financing is severely detrimental to the prospects for economic growth in Africa, for reducing poverty and creating more inclusive growth opportunities, which is why SMEs have become such an important focal point for development.  The AfDB, in an effort to help address this problem, created the Africa SME Program.  This program created a pool of financing (125M USD to start) that was specifically designated to be lent to small and medium (Tier 2 & 3) financial institutions (FIs) across Africa who then on-lend to SMEs.   Crucially, this funding is also coupled with technical assistance (TA) to help the recipient FIs increase their capacity to lend to SMEs.  In more concrete terms, this often means training banks’ credit officers and risk management team to be able to better evaluate SMEs’ real risk and to debunk the myth that they are always a risky investment that can only be lent to with a large amount of collateral.  FIs may also appreciate offering new better-adapted products with various tenors to their SME clientele.  Furthermore, SME clients can obtain ‘financial literacy’ and ‘business planning’ training if this enhances their loan proposals to FIs.

To date, the Africa SME Program has provided nearly 60M USD in financing to nine FIs across Africa.  The geographic range and the types of institutions have been diverse.  Loans have been made to institutions in Burkina Faso, Mauritania, Mozambique, Nigeria, Rwanda, Sierra Leone, Swaziland, Tunisia, and Zambia.  The FIs have included traditional banks and leasing companies as well as microfinance and development institutions (with SME portfolios).  Likewise, these lines of credit have benefited a wide array of sectors, including ones that are a particular priority for development under the AfDB’s High 5s strategy: agriculture and agro-processing, light industry, transportation, communications, health and education.  These business areas are key to African development and the SME Program proves that access to even limited amounts of financing can go a long way to solving problems for growing businesses. 

Among the recipients of AfDB funds was a meat processing company in Burkina Faso, which was able to expand its business, growing from six to 22 employees.  In a country that relies heavily on agriculture, and is used to exporting livestock, this enterprise added to the value chain by preparing the meat locally and has now set its sights on exporting to the region.  Another borrower was just a small clinic in the Sahel.  After a loan made possible by AfDB financing, they were able to add an operating room to perform surgeries and start a 24-hour emergency service.  The expansion was so successful that the clinic signed a contract with the International Organization for Migration to treat the majority of migrants returning from Libya.  A third business, a bus transport company, used their funding to buy more buses and add new routes to connect Mozambique’s more developed south with the center and north of the country, adding much needed transport services and facilitating stronger economic links between the regions.  These are just a small sample of some of the results to date, and if we multiply these by the thousands of small and medium-sized businesses touched by the Program, it is evident that SME-focused financing can have a very real positive impact.

Finally, the technical assistance component of the Program has also provided lasting impact.  Recipients of training provided through the TA, funded by the Fund for African Private Sector Development (FAPA), have reported a huge boost in confidence and much enhanced ability to analyze SME clients’ applications.  In some cases, they were able to introduce new and better lending products, and thanks to the enhanced credit appraisal methods, could also reduce collateral requirements, attracting more clients.  Through better selection and adapted products, this also has resulted in higher quality loan portfolios, thus boosting the business of the relevant banks even further.  Many institutions have also benefited from assistance in creating environmental and social management frameworks, which are not yet common with smaller African FIs.  This capacity building will have a lasting effect as these institutions grow and reach more and more African entrepreneurs.

For further information about the Africa SME Program, feel free to visit the Program’s dedicated site at http://sme.finance.afdb.org/en or reach out to the Program Coordinator, Jonathan Lange (photo), at j.lange[at]afdb.org

Jonathan Lange is the Coordinator of the Africa SME Program, an initiative of the African Development Bank (AfDB). He is a strong believer in the power of finance and the private sector to fuel economic growth and curb poverty. Prior to joining AfDB, Jonathan worked as the Director of an American Development NGO based in Tunisia where he was also an Accounting and Finance Lecturer. He is passionate about learning languages and experiencing different cultures; he speaks French, Arabic and Portuguese in addition to his native English. Jonathan holds BA and MA degrees from the University of Chicago and an MBA from the University of Texas, Austin, USA. He is a Chartered Financial Analyst (CFA) and a CPA holder.