80% of businesses in Africa fail within five years of establishment – report

Eighty percent of businesses under the Micro, Small and Medium Enterprises (MSME) in Africa fail within the first five years of their existence despite having the highest entrepreneurship rate in the world, a 2022 Nigeria MSME report has shown.

The report titled ‘fuel for Africa’s next billion businesses’ compiled by Kippa, a Fintech startup that helps small businesses manage financial records, also revealed that 22 percent of Africa’s working-age population start businesses due to various reasons but these businesses lack resources or structure to survive.

“Harsh economic environments, lack of access to capital, and poor business practices have stunted the growth and transition of micro-businesses; apart from these, African MSMEs are majorly a one-person show, they often don’t grow to employ more labour, and they don’t scale to out-live their founders or become generational,” the report revealed.

According to the report, the most significant impediment to MSMEs’ growth is not a lack of capital but a lack of the skills necessary to manage a successful firm, as well as a lack of process, corporate structure, and business acumen.

For example, Emmanuel one of the respondents who runs a shoe business in Aba has been operating for 15 years but he only has one employee and two apprentices, hence the possibility of business expansion and sustainability is slim seeing that he lacks the proper documentation and structure businesses require to make meaningful growth.

“Millions of Emmanuel are distributed across Nigeria and Africa, working in various sectors and experiencing the same issues, this is the reality when they argue that African enterprises have potential, but lack the tools and resources to transform those potentials into economic advantage and wealth,” it explained.

The Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) states that out of Nigeria’s 200 million population, there are approximately 39.6 million MSMEs while other countries like the United States have 30 million MSMEs and China has 38 million MSMEs.

When compared to other countries with similar or even bigger populations, Nigeria has more MSMEs, however, businesses in other emerging markets like India, Brazil, Mexico, Peru, and Indonesia outgrow their founders, employ more than one person, grow and record profits over time.

Read also: The African SMEs: African beauty to the world

The short lives of MSMEs raise concerns for Nigeria and the African continent because they are the hope for economic prosperity seeing that they represent around 90 percent of all firms globally, provide roughly 70 percent of all employment, and, by some estimates, contribute up to 70 percent of global GDP.

According to the Business and Sustainable Development Commission, sustainable business models could open economic opportunities worth $12 trillion and create 380 million jobs by 2030, with more than 50 percent being located in developing countries.

Achieving this will require a transformation associated with adapting new business models, bringing in new innovation/technology, and doing business in a more sustainable and ethical manner.

The survey which was carried out with 23,618 MSMEs who use the Kippa App across Nigeria’s six geopolitical zones and thirty-six (36) states showed that 51 percent of businesses are domiciled in the South West while the least number of businesses (5.6 percent) are established in the North East.

“One reason for this may be because the south is more urbanized, has more internet connectivity and smartphone usage than the North as banditry, terrorism, and kidnapping in the region destabilize residents and their businesses,” it stated.

Furthermore, despite the various digital payment options available, the survey also revealed that 73.6 percent of MSMEs in Nigeria receive payments by cash while 23.30 percent receive payments through transfer and 3.04 percent through point of sale (POS) machines. According to MSMEs, cash is mostly preferred for payment because some tools and resources needed in digital payment are still unmet.

“Merchants need a digital payment platform that is stable, secure, and affordable in addition, it must be simple to use with a hassle-free onboarding process, this platform must also have an Instant settlement and seamless dispute resolution process,” the report revealed.