A wave of entrepreneurial vitality is sweeping the African continent, with more people daring to establish and nurture enterprises within and across the continent. The African Development Bank has previously indicated that 22 percent of working-age people in Africa start a new business, more than anywhere else—the highest rate of entrepreneurship in the world.
These businesses are also innovative, with 20 percent of new African entrepreneurs introducing a new product or service. At the same time, funding for startups and African businesses has witnessed unprecedented growth in the last decade, albeit more muted following the aftershocks of COVID-19.
As a collective, Africa could emerge as one of the world’s largest economies by 2050.
Still, this intra-African entrepreneurship is playing a pivotal role in creating jobs and spurring growth. As a collective, Africa could emerge as one of the world’s largest economies by 2050. Fostering its entrepreneurial spirit could be catalytic in propelling us towards this milestone.
Three key challenges
Recurring challenges hamper the scale of this potential. Entrepreneurs face one of the main hurdles: lack of access to reliable funding, owing to the ebbs and flows of international financial markets.
January 2024 was the second slowest month for fundraising announcements in the past six years, only behind March 2023. This drop-off threatens the strong momentum created by the recent rise in entrepreneurial activity.
Additionally, there is a lack of coordinated effort among African nations, which prioritises intra-African trade but instead places less emphasis on intra-African entrepreneurship. In the absence of a unified strategy, entrepreneurs face inconsistent regulatory frameworks, varying taxation structures, and disparate policies across Africa’s borders. This creates a labyrinth of complexity, discouraging the very essence of entrepreneurship—the freedom to innovate and scale without unnecessary barriers.
Third, cross-border financial infrastructure remains an issue. African businesses face challenges in accessing banking services and conducting cross-border transactions efficiently, limiting their ability or inclination to grow across the continent, even if successful in their subregion. This impact isn’t confined to the vibrant small businesses driving the continent’s economic pulse; even institutional operators are affected. These hiccups underscore the urgency for the continent to prioritise investment in and promotion of efficient payment mechanisms that enable seamless and cost-effective fund transfers between African countries.
All of these hurdles raise crucial questions about the strategies African sovereigns, corporations, and entrepreneurs can adopt to finance long-term growth projects, develop local businesses, and expand seamlessly across African markets.
Evolving dynamics in international financial markets
The Eurobond issuances by African entities over the past five years show a significant decline, indicating a shift in Africa’s access to international capital markets. This necessitates a deeper examination of how Africa can adapt to the changing face of international financial markets. Factors contributing to this situation include the surge in interest rates in Western economies, which affect African issuers, making borrowing more expensive for African businesses, deterring international financing opportunities, and exacerbating financial exclusion.
Second, risk profiles are not necessarily aligned with risk appetites. Despite efforts by African issuers to improve their risk worthiness, persistent misconceptions continue to dampen investor confidence. The reluctance of investors seeking stability amidst uncertain economic climates results in a diminished appetite for risk associated with frontier markets, muting capital flows into the region.
Local financing solutions
Strengthening local capital markets is pivotal for powering intra-African entrepreneurship. Robust financial markets are the backbone for efficient capital allocation, enabling businesses to thrive. This necessitates a commitment to supporting and fortifying critical financial infrastructures for stocks, bonds, and an array of financial instruments that collectively breathe life into the entrepreneurial spirit of a region. It goes beyond creating a space for financial transactions; it’s about creating an ecosystem where ideas can transform into tangible businesses and where innovation is rewarded.
To improve local financing solutions, it’s crucial to prioritise homegrown private credit funds and financial institutions that deploy private equity funds in local currency. This is especially important in countries like Nigeria where transactions are predominantly in the local currency, the naira. Incentivizing local ventures and private equity funds to raise local currencies from the start can help entrepreneurs access funding that aligns with their operational currency, reducing exposure to currency risks.
A coordinated approach
Imagine if Africa functioned as one country. It could streamline and harmonise regulatory frameworks, creating standardised processes for business registration, taxation, and compliance, reducing the bureaucratic hurdles faced when operating across borders, and creating an environment of nimbleness essential for Africa’s entrepreneurs. It could establish pan-African institutions dedicated to supporting entrepreneurship, providing mentorship, funding, and resources tailored to the unique challenges and opportunities faced by entrepreneurs operating across regions.
For this ideal to be effective, creating safeguards for raising funds across African borders, especially for business expansion, will be instrumental. Mainstreaming risk mitigation instruments like credit risk, cross-border risk, political risk, and other transaction-related guarantees and insurance products can attract ambitious investors by alleviating their concerns about political and market risks.
As the continent leans into its entrepreneurial spirit, let us be certain that we are fostering an ecosystem where financial empowerment becomes a shared reality. Let us also make a real commitment to creating avenues for African businesses to flourish, for investors to find opportunities aligned with their aspirations, and for the collective vision of a continent to materialise in the form of sustainable economic growth.
