Supporting small and medium-sized firms is key to every single African market, regardless of how diverse they are political, cultural and economically. In South Africa alone, SMEs represent an estimated 98% of all formal businesses, contributing to more than one third of the country’s GDP. Some 6,400km north in Egypt, there are more than 12 million SMEs - accounting for 98% of all registered businesses and employing more than one third of the entire population.
But there is a massive funding gap for these small and medium-sized firms. Estimates from South Africa put it at around $30bn. A report from Visa earlier this year estimated the SME funding gap in Egypt at $46bn. Gaps of this size are not straightforward to close. “Access to finance, technological adoption, access to markets and business skills are the key challenges that banks have to address to support SMEs,” says Hany El Dieb, head of SME business at Commercial International Bank (CIB) Egypt.
It's not personal
Under the heading of business skills is improved record keeping and standardisation. Segun Adeyemi is CEO and co-founder of Anchor, which provides the digital infrastructure for businesses to build banking and payment products. He points to the informality across the SME space as a key barrier. “They [SMEs] don't have records, they don't have things to ensure that the banks can even meet basic KYC requirements, and as a result they're not able to access credit,” he says.
Adeyemi points to positive developments, including the digital onboarding of SMEs and state-funded programmes to subsidise bank lending to the SME sector. But there needs to be stronger incentives for small and medium firms to engage in the kind of registration and record-keeping that is the foundation of access to finance. Small businesses often use personal emails, bank accounts and addresses - making access to formal financial services an uphill struggle.
Nigeria - where SMEs contribute almost 50% of GDP and employ over 60 million people - is leading the way. Agency banking is booming in Africa’s most populous country. Small armies of individual agents and point-of-sale providers create the infrastructure for millions of SMEs to access financial services. Two of the most successful fintechs - OPay and MoniePoint - have around 900,000 agents between them. OPay has a dedicated business app that offers invoicing and industrial payment solutions. These physical agent networks are driving SME’s adoption of mainstream financial products.
Agents are contributing to the growth of SMEs in another way. Nigeria’s Corporate Affairs Commission (CAC) has formally registered millions of SMEs this year as part of a formalisation push. In May, the CAC instructed individual banking and fintech agents to register by July 7th - although this was extended to September 5th. Under the CAC approach, each agent will become a registered business - an SME.
“We have over 1.5 million agents across the different networks,” says Adeyemi, noting that the government’s goal is to make them part of the formal system where they can start paying taxes. But he points out there are benefits for the agents too. “These people are now thinking as a business, not just as an individual,” he says. Tax registration, utility bills, a business address - these are the building blocks of a viable credit profile, which in turn improves access to credit. The Nigeria Association of Small and Medium Enterprises (NASME) is working to provide additional incentives for SMEs that hit basic metrics, including free business development tools.
Adeyemi points to a correlation between stronger forms of financial identification and inclusion, and the proportion of banked SMEs in a country. Rwanda has made huge efforts to improve financial inclusion, notably through a digital ID initiative rolled out in 2023. “They have about 90% financial inclusion in Rwanda, and as a result, there's also been an equivalent increase in SMEs that are banked in that country,” he says.
This is where regulators are in the best position to help. Individuals might initially resent the headache of registration, but executives working to extend financial services in key African markets say there is only upside. Standardised documentation opens up a world of new services.
Fintechs fuel growth
Another factor improving SME access to finance is the growth of fintechs that - if not able to provide the full suite of traditional banking services - are able to provide cutting-edge solutions to specific challenges. Ola Oyetayo is co-founder and CEO of fintech Verto, which provides businesses of all sizes with access to cross-border payments, FX and banking solutions. Verto is seeing real growth in cross-border SME business - particularly firms importing from abroad and selling locally. “We’re also seeing a lot of what I’d call aggregators,” Oyetayo says. These are wholesale distributors handling imports and then selling them to businesses lower down the chain, who in turn sell them on to end customers. “Trade related [SME] activity has definitely seen significant growth across the continent,” he says.
The fact that SMEs can go to a dedicated fintech like Verto is a feature of the new increasingly digital economy. But Oyetayo says Verto faces the same challenges as other service providers when it comes to less sophisticated SMEs. “We operate as a global fintech company with a mandate to do cross-border [payments] in emerging markets such as Africa, but we also have to operate to global standards,” he says. Verto cannot help SMEs that use a personal email, lack utility bills or a registered address, for example.
“We sometimes find ourselves struggling to cater to the lower end of the SME segment,” says Oyetayo. “But we’ve seen that where we have sophisticated SMEs with the right documentation and requirements, they are often much better behaved than some of our western customers from a fraud and financial crime perspective.”
A dynamic fintech ecosystem is a must-have for any country that wants to bring SMEs into the formal sector. The traditional banking sector has failed to make meaningful progress in serving SMEs. “You can’t do the same thing for years and years and expect different results,” says Seyi Ebenezer, a veteran of the Nigerian banking sector and now CEO and founder of fintech Payaza. His firm provides payments solutions, provides short-term working capital loans and is working on new products tailored to the Nigerian market. Ebenezer wants to build a new online marketplace - “a Shopify for Africa” - that would provide individuals and small businesses with a platform to market and sell products and services.
This landscape where individual start-ups provide specific solutions to specific challenges - be it transfers, cross-border payments, sales and marketing - is what Ebenezer describes as “progress in silos”. The old model of going to a traditional bank for SME business needs simply will not do for the new generation of entrepreneurs.
Risk assessment
The need for change extends to assessing credit quality. “Tailoring alternative ways to assess potential risks other than traditional financial assessment techniques is a must in targeting different SMEs’ businesses,” says El Dieb at CIB. Ebenezer agrees that risk assessment criteria must change to reach African SMEs. There are millions of SMEs making regular repayments on informal facilities, but the informality means they cannot be rewarded for their diligence. “Our biggest barrier is that there's no data,” says Payaza’s Ebenezer.
Faced with an absence of credit data, most traditional lenders fall back on onerous collateral requirements that most SMEs cannot meet. Before the wave of digital innovation, it seemed that the responsibility for solving this challenge may lie with state-backed SME credit bureaus. But digital cash flow lending offers another solution. If a small business uses a payment provider that can record its data, it can demonstrate sustainable cash flow against which banks can lend. This still requires digital infrastructure and identification, but with those two elements in place it is a game changed for SME borrowing.
The World Bank and the Women Entrepreneurs Finance Initiative (We-Fi) launched a digital cash flow lending product in late 2023. In addition to shifting the focus of credit assessment from collateral to cash flow, it also streamlines and simplifies the loan application process. Successful trials with major Nigerian lenders like Access Bank and Sterling Bank suggest this is a digital solution that traditional banks and upstart fintechs can adopt.
Finally, there is growing acceptance that SMEs need not just access to credit, but advice. “Banks should go beyond their offering of financial services but rather offer advisory services to support SMEs and sustain their growth,” says El Dieb. In late 2023, CIB and Visa announced a new co-branded academy that provides SME customers with courses on topics including business management and entrepreneurship.
Oyetayo at Verto says education and training has to go hand-in-hand with innovation and access. “Sometimes people just aren’t aware of the benefits [of different financial products],” he says. “If you have the ability to actually explain these, SMEs should be in a better position to register and scale their businesses.”