In a sign of the times, small businesses will drive the continent’s growth over the next decade. As the world’s second largest economy, Africa accounts for 23% of global GDP. It also has a lot of untapped potential. The world’s fastest growing region, Africa is home to a growing middle class that is demanding higher standards of living. Manufactured goods are in high demand and the majority of factories are small businesses. The continent has a combined capital base of $2.2 trillion.
In small towns and rural areas, businesses are often family-owned. They are the backbone of the economy. But these businesses have not been given the opportunity to grow. They are just not big enough or have access to capital. According to the World Bank, there are more than 20 million small businesses in Africa. These businesses have the potential to contribute $3.5 trillion to the continent’s economy by 2025.
What are the barriers to small business growth in Africa?
There are many barriers to small business growth in Africa. Some of these are poor infrastructure and unreliable power supply, inefficient supply chains, a shortage of skilled workers, and barriers to scaling up for small businesses. Let’s examine these one by one.
Lack of access to capital
Credit remains a major barrier to entry in Africa. But the most significant impediment to small business growth in the continent is found in the lack of access to capital. In many African countries, banks are reluctant to provide loans to small businesses. This is due to a combination of poor business understandings and lack of collateralization. Loans are expensive and the interest rates charged by most banks are higher than those charged by commercial banks in developed countries. As a result, a large number of small businesses in Africa go out of business. Lack of access to capital is a pervasive problem. According to a survey, only one in three small business owners in Africa had received a loan from a financial institution in the last 12 months.
Poor infrastructure and unreliable power supply
In many African countries, poor infrastructure and unreliable power supply continue to be significant barriers to small business growth. These are both critical to the growth of small businesses. They prevent small businesses from operating effectively and efficiently. Power cuts and blackouts are common in many African countries. These are often due to inadequate maintenance and a shortage of power generating capacity. In some areas, power cuts are a daily occurrence. This affects small businesses particularly when they are operating from home. It also affects those businesses that have invested in the installation of reliable power sources.
Inefficient supply chains
Many African small businesses operate as independent operators in rural areas. They are often part of a local supply chain. But many of these operators suffer from inefficiencies in the supply chain. This may be a result of a lack of scale in manufacturing in Africa. Or it may be due to a lack of technology that would enable efficient tracking of delivery. Whatever the reason, it has a significant impact on business growth in the continent.
Lack of skilled workers
The world’s largest youth employment crisis has been acknowledged by the international community. It is also the biggest challenge facing African small businesses. Over the next decade, the continent’s population is projected to grow by 50 million people. This is expected to create a shortage of skilled workers in a range of professions. Africa has a combined capital base of $2.2 trillion. But it does not have the skills to leverage this capital. As a result, small businesses will drive the continent’s growth over the next decade.
Barriers to scaling up for small businesses
The biggest barrier to growth for small businesses in Africa is found in the fact that few of these businesses are able to scale up. This is due to a lack of access to manufacturing and distribution partners that would enable these businesses to reach a broader customer base. Manufactured goods are in high demand in Africa and the majority of factories are small businesses. The continent has a combined capital base of $2.2 trillion. But it has just one manufacturing plant that could be used to produce goods for export. This is found in South Africa. It has the capacity to produce only a small range of products.
Where is Africa going wrong?
Barriers to growth for small businesses in Africa are generally found in the regulatory environment and a lack of infrastructure. These are coupled with a shortage of skilled workers and a dearth of technology. Thankfully, these challenges are addressed by improving the regulatory environment and enhancing infrastructure. They are also mitigated by increasing access to capital and skilled workers. But the biggest elephant in the room is a lack of political will. This is the main challenge facing the African small business sector over the next decade.
Africa has a huge potential as the second-largest economy in the world. It is also home to more than 20 million small businesses that could drive growth and create more jobs. But these businesses will only realize their full potential if the continent is able to overcome the barriers to growth.