Why African SMEs need tailored funding to drive growth

Institutions and innovators offering financial solutions for African small and medium enterprises (SMEs) have been urged to design funding approaches tailored to local cultural nuances, enabling business growth and improving access to capital.

Ebiekure Eradiri, president of the All-Africa Association for Small and Medium Enterprises (AAASME) made this call during a briefing in Lagos, saying an Afrocentric model of financing should be developed to recognise the diverse savings and investment culture of Africans, without ignoring scalability.

Eradiri said the Western financial model currently practised features impediments that make it difficult to empower over 100 million African SMEs that are largely informal.

While this remains, he said Africans have trust-based models of financing that can serve as alternatives if developed and scaled to ease the difficulties small businesses face in accessing capital.

“We need to redesign an African Approach. The best way is to have a hybrid solution to ease access to finance, create wealth, and achieve prosperity in Africa,” Eradiri said.

“The Afrocentric model of finance, an alternative recipe, should be introduced by multilateral financial institutions, creating African solutions for African problems. We operate a colonial template which remains adopted by banks, making it difficult for SMEs to draw down finance.”

According to a World Economic Forum analysis of the African approach to financial models, Egypt has a fintech company that leverages local knowledge of financial culture to gain the acceptance of locals.

Money Fellows raised $31 million in funding in 2022, riding on Egypt’s “cash-is-king” behaviour and the widespread lack of bank accounts among Egyptians.

The analysis pointed out that copying and pasting Western business models into the African context isn’t the answer. It’s essential to approach African markets with a nuanced understanding of these cultural differences.

The president said the association has engaged the African Union, Afreximbank, Bank of Industry, Nexim Bank and other development finance institutions on providing pathways for financial access and special economic zones.

In addition, AAASME is pushing for interoperability and advancing conversation over border challenges across 55 African nations.

“We are happy that Lelook, a bag manufacturing factory in Nigeria is able to export its products to Kenya and Ghana under the Africa Free Continental Trade Area (AFCTA),” Eradire said.

He added that the association has activated an SME caravan on the AFCTA to encourage seamless and borderless trade across Africa.

The pan-African SME advocacy group is also aiding the implementation of the African Union SMEs strategy given their importance in economic growth.

In Nigeria, there are about 40 million, and over 100 million in Africa, according to AAASME.

SMEs in Nigeria face inadequate working capital, difficulty accessing credit and high operating costs. They also face inconsistent fiscal policies and tough regulatory conditions, according to the European Center for Sustainable Development.