Africa (Commonwealth) _ Africa’s economies are driven by small and medium-sized businesses (SMEs). According to the World Economic Forum, SMEs serve as growth engines by creating around 80% of the jobs on the continent, reducing poverty and income inequality, supporting the emergence of a new middle class, and generating demand for new products and services.
Because of this, fostering an environment that makes it easier for small businesses to access financing will increase their capacity to not only contribute to Africa’s labor force but also to promote the continent’s development and economic growth while fostering the innovation required to address the socio-economic problems it still faces.
The continent’s SMEs still struggle to obtain equity capital despite the continent’s thriving startup environment, which (according to key results from Startup Genome’s 2021 Global Startup environment Report for Africa) boasts a value of $6.6 billion.
A more competitive fundraising environment has also been brought about by the rise in geopolitical tensions, the instability of the global economy, and record high inflation rates. Given that investors have traditionally considered Africa to be a high-risk region, this could cause even more problems with access to credit. It is evident that SMEs are essential to enabling Africa to reach its full economic potential. However, there must be a change away from conventional equity finance in order to realize this potential.
Debt possesses a lot of power. Debt is the means through which the world produces wealth, and at reasonable levels, it can increase growth and wellbeing. As a result, debt financing enables SMEs to get investment without dilution of stock.
Contrary to typical equity funding, where the business sells a portion of its equity in exchange for capital, the lender essentially has no control over the business and the connection with the lender terminates once the debt is repaid.
Additionally, because loan payments are predictable and the interest on such debt financing is sometimes tax deductible, it is much simpler for SMEs to plan their expenses. Venture debt, a sort of loan targeted at early-stage, high-growth businesses with venture capital backing, could prove to be particularly significant for Africa’s SME ecosystem and the continent’s overall growth in this difficult funding environment.
Unlike other forms of lending, venture debt investment is available to SMEs without them having to demonstrate any positive earnings or cash flow. As a result, access to capital is significantly increased when compared to traditional equity.
Venture debt is very alluring for SMEs, fund investors, and development finance institutions alike because it may be used as performance insurance, funding for acquisitions or capital expenses, or to bridge the gap between venture capital rounds. It also has strong and consistent interest rates.
The ability of SMEs to innovate, create, and discover in ways that benefit entire communities will increase with improved access to capital.
According to the most recent data from the Africa Long-term Finance Initiative (LTF), the financial sector assets in Africa are largely concentrated in banks. In 2019, the combined assets of insurance companies and pension funds on the continent totaled less than 40% of GDP, compared to commercial banks, whose assets averaged approximately 100% of GDP. Therefore, it should come as no surprise that banks are the main sources of long-term debt in Africa.
Because it enables investments to be financed over the course of their active lives and thereby matches the liquidity demands of the investment project, long-term debt is crucial to sustainable development. In general, debt is less expensive than other forms of financing like equity, dueniority, regular installment payments, and flexibility in (re)financing.
Commercial bank assets, the market capitalization of government and corporate bonds, and stock market capitalization are used to assess the strength of the financial systems for a selection of African nations.
