Financial Inclusion Back

SME Finance


The private sector in Africa is dominated by small- and medium-sized enterprises (SMEs). Estimates suggest that along with micro-enterprises, SMEs contribute more than 30% of GDP and rising to 50% or more in some countries if the informal sector is included.

Yet despite their key socio-economic roles, African SMEs face several challenges and obstacles to their growth and development. These include broad enabling environment issues which span the macro environment including political stability, macroeconomic policies, etc. and the legal and administrative environment such as tax policies, trade rules, red tape and corruption; poor physical infrastructure; and weak governance structures. Inadequate access to financing continues to be of one of the most significant impediments to the creation, growth and survival of SMEs in Africa. According to the World Bank enterprise Surveys more than 25 percent of firms in Africa rate the availability and cost of finance as the most important obstacle, almost twice as many as outside Africa. Finance is also the most cited obstacle. It is estimated that in Sub-Saharan Africa more than 60% of Micro-Small and Medium Enterprises (MSME) need a loan and can’t access one, as opposed to less than 40% in Latin America and 20% in North America and Europe, creating a funding gap exceeding US$ 33 331 billion.

Access to finance is not only a self-reported obstacle, but turns into a growth constraint, especially for smaller firms and in more shallow financial markets (Beck, Demirguc-Kunt and Maksimovic, 2005), and is more binding than other constraints, such as corruption or infrastructure (Ayyagari, Demirguc-Kunt and Maksimovic, 2008).


Access to finance for SMEs in Africa significantly varies between countries. According to the World Bank Enterprise Surveys, while only 3% of enterprises in Guinea-Bissau have a formal loan, 53% do so in Mauritius. Many of the financially more developed economies also have a larger share of enterprises with a loan, although the relationship is not linear and there are many outliers. For example, in South Africa, often seen as the most developed financial systems on the continent, 34% of enterprises have a formal bank loan, while in Burundi, with a rudimentary banking system, 35% have a formal bank loan. It is interesting to note that there is no significant correlation between the large–small enterprise gap and the overall share of enterprises with a formal bank loan across African countries (T. Beck, R. Cull; SME Finance in Africa, 2014).

Efforts to unlock finance for SMEs have traditionally involved lines of credit from development agencies and international finance institutions (DFIs/IFIs) to banks for on lending to the SMEs. Governments have also established special vehicles such as national development banks and guarantee schemes to foster finance for SMEs. The results have generally been disappointing and there is a need for new approaches to financing the African SME sector.  

Some commercial banks have recently deployed innovative techniques such as risk scoring models to increase lending. However, high interest rates and high transaction costs associated with due diligence still render the cost of borrowing expensive for SMEs and prevent the use of bank finance.

We identified the following reasons as the main impediments to the development of an efficient SME finance sector in Africa:

  • Inadequate skills within banks for assessing SME risk, which banks seek to compensate through large collateral demands;
  • Absence of requisite collaterals and adequate collateral registration mechanisms to be able to effectively access available loans at market prices;
  • Deficiencies in the legal and regulatory environment which make it difficult to enforce contracts and foreclose on collaterals;
  • Discrimination against SMEs with certain attributes, i.e. women-owned enterprises (e.g. due to additional collateral problems faced by women), new businesses (SMEs with no track record receive little or no financing), rural enterprises and companies with a lack of political (patronage) links or affiliations.
  • Lack of management and absorptive capacities to profitably utilize available capital; and governance problems. This encompasses issues of weak business skills and human resources as well as weak technology and lack of intelligence of markets and value chains, and issues of access to equity and collateral.


Recent studies indicate that more financially diverse markets are associated with improved access to finance. Policy recommendations to support a more diverse financial landscape and to improve competition within the financial system, thereby allowing for a variety of financial institutions to operate (Love and Martínez Pería, 2015), can have a positive impact on the sector. The broader regulatory environment, and in particular tax administration and governance, may also positively influence access to finance.

Reforming the financial infrastructure in terms of securing transactions and dealing with insolvency and other critical aspects such as credit information systems carries the promise of improving SME lending. The reform of collateral framework with the development of a property law and land registries and the creation of an electronic registry for pledging assets and receivable (collateral registry) have both demonstrated positive results in increasing access to finance for SMEs in Africa.

Beside bank finance, other debt and equity financing options exist, but are often at nascent stage of development in Africa. SME development could benefit from developing leasing and factoring activities, or even venture capital. 

The availability of detailed credit information with broad coverage is crucial for closing the SME finance gap. Firm financial statements and official documentation are essential parts of loan applications for many banks. However, the quality and reliability of these statements varies across countries and firms. MSMEs often lack the necessary technical knowledge for preparing the kind of sound financial statements needed for loan applications. Business development services may help them to build capacity in this area. Regulatory reforms that encourage informal firms to formally register with the authorities may also lead to better information and documentation about businesses (Bruhn 2013; and Campos, Goldstein, and McKenzie, 2015).

Finally we believe that digital technology in Africa can positively disrupt traditional banking industry and create new banking infrastructure to fill the access to financial services gap.

Highlights of our Activities

MFW4A’s supports the design and delivery of the full range of financial and non-financial services for SMEs, with a focus on providing platforms for peer-to-peer exchange to identify and scale up successful innovative products. We also advocate for the expansion of non-banking financial services such as leasing, warehouse receipts and factoring.

Knowledge Management and Research

Webinars, Knowledge Briefs, Case Studies

Networking and Advocacy

High-Level Conferences and Roundtables

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“Overcoming Trade Finance Challenges for SMEs in Africa”, breakout session at the IFC Africa SME Finance Forum, Nairobi, Kenya

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Organisation of a session on the role of non-financial services to help SME access credit margins during 2017 African Microfinance Week

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Participation in the inaugural African Leasing Conference held in Casablanca, Morocco, organized by the Association Professionnelle des Sociétés de Financement (APSF–Morocco) and IFC

Project Support and Capacity Building

Trainings and Marketplaces

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5th Statutory Meeting of the WAEMU Network of SMEs Support Agencies (SA-PME / UEMOA) in Ouagadougou, Burkina Faso

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Creation of the Réseau régional formel des structures d’appui aux PME dans l’espace UEMOA (SA-PME Network)


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Small and medium size enterprises (SMEs) account for over 90 percent of firms worldwide and about 70 percent of Africa’s industrial fibre. SMEs…
Dear Readers, I hope this message finds you well. It is an honour for me to assume the role of the Making Finance Work for Africa (MFW4A)…