Development finance bodies 'key for African SMEs'

Development finance institutions are crucial for small and medium-sized enterprises (SMEs) across Africa who struggle to gain access to finance for building and expanding their operations, according to Meshach Aziakpono, professor of development finance at the University of Stellenbosch Business School and programme head of the MPhil in Development Finance.

Aziakpono said such businesses often suffered as they were not big enough to raise capital on the stock market or liquid enough to be able to issue bonds to obtain financing. The opening up of finance for these businesses would help to unlock the investment potential in Africa.

In terms of training, financial programmes often tended to focus only on traditional financial systems comprising of banks, insurance companies and stock and bond markets, while the majority of the population and businesses in Africa did not have access to these markets.

Key to improving economic efficiencies on the continent was the development of financial structures that stimulated the “middle space” in the economy, said Aziakpono.

He explained that on one side, where traditional financial systems operate, the level of cost recovery was very high, and at the other end, where the cost recovery was very low, one would find “survivalist” enterprises that were not registered businesses with extremely high levels of risk that could hardly be financed by any profit-driven institution.

The middle space
In between these two extremes is what Aziakpono refers to as the development finance niche—the “middle space” in an economy, populated by self-employed, salaried workers, micro enterprises and SMEs.

“There’s a real need to develop financial vehicles that are specifically tailored to the African reality, it’s not practical to have a purely academic solution, we need to engage with industry and learn from them,” he said.

Aziakpono added that a challenge for financial schemes, however, was to overcome underdevelopment in the African environment.

Firstly, there was a lack of collateral due to poorly defined property rights—with most of the property and land in Africa communally owned, a very small percentage of people have the ability to offer their property as collateral for a loan.

Secondly, weak accounting standards throughout the continent posed a significant barrier to assessing the viability of a company as an investment opportunity, while weak legal systems made the enforcement of contracts difficult.

And lastly, Aziakpono said, the significant income inequalities between the poor and wealthy populations in Africa not only limited the pool of savings available in many economies but also the number of individuals who had access to them.

“Dealing with this inequality by improving access to finance for all levels of business is essential to the further development and growth of Africa,” he added.—I-Net Bridge

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