How can financial services best support inclusive growth in Africa? (Part 2)
Inclusive economic growth is growth that leads to job-creation, causing a ripple effect on the purchasing power of the majority of the populace. The private sector, and in particular SMEs, are the drivers of an economy. SMEs are also the largest providers of direct employment and inclusive growth can be achieved through promotion of policies that would drive their development. According to the Central Bank of Nigeria, 96% of Nigerian businesses are SMEs (uS = 53%, Eu = 65%). Inclusive growth can be achieved by positioning these SMEs to take advantage of the opportunities in the economy.
Financial Services is Crucial to SMEs
According to the Small Business Administration of the USA, two of the top 10 reasons why SMEs fail are: lack of capital, and poor credit management. It is no different in Nigeria and the rest of Africa. While there are several aggregators/sources of capital including Private Equity (PE) funds, DFIs and insurance companies in Africa, the key players in the financial services industry that are optimally positioned to serve SMEs and therefore drive inclusive growth are banks and micro-lenders.
Government Macroeconomic policies impact SME Financing
Lenders operate within the wider macro-economic environment, and government policies regarding inflation and infrastructure are crucial to keeping the cost of funding down. When inflation drives up the cost of funding and ultimately lending costs, it in turn drives up the cost of production, making SMEs less competitive.
Standardization of physical address systems is another area where African Governments can make a meaningful contribution to SME growth. Inconsistent address systems make it difficult for SMEs to establish formal relationships and credit histories with suppliers, customers and transient clients.