{"id":320,"date":"2018-09-22T18:30:00","date_gmt":"2018-09-22T18:30:00","guid":{"rendered":"http:\/\/thefreezoneblog.com\/blog\/2018\/09\/22\/a-workforce-boom-makes-smes-more\/"},"modified":"2018-09-22T18:30:00","modified_gmt":"2018-09-22T18:30:00","slug":"a-workforce-boom-makes-smes-more","status":"publish","type":"post","link":"https:\/\/thefreezonechannel.com\/old\/a-workforce-boom-makes-smes-more\/","title":{"rendered":"A workforce boom makes SMEs more important than ever in Africa"},"content":{"rendered":"
\n<\/a><\/div>\n

\nA UN forecast suggests that by 2050, the world will have an extra 2.2 billion people and over half will come from Africa <\/p>\n

Forty-nine
\n countries have signed up so far this year to join the African
\nContinental Free Trade Area, which is the latest contribution to a
\nperennial debate: how to create more jobs on the African continent.<\/p>\n

The
\n need to remove all possible impediments to job creation is a very real
\none. Recent UN forecasts suggest that by 2050, the world will have an
\nextra 2.2 billion people and over half (1.3 billion) will come from
\nAfrica. That\u2019s 1.3 billion more people to be fed, housed, educated and
\ntrained with skills that will lead to jobs in tomorrow\u2019s economy.<\/p>\n

Similarly,
\n the IMF predicts that by 2035 the number of Africans joining the
\nworking age population will exceed that of the rest of the world
\ncombined. This population explosion is either a demographic dividend or
\nmillstone, depending on one\u2019s optimism about Africa\u2019s future economic
\ngrowth.<\/p>\n

The debate about job creation and growth in Africa often
\nfocuses on trade barriers or the huge investments required in
\ninfrastructure and power – typically multi-million dollar projects –
\nthat are correctly seen as pre-requisites for Africa to fulfil its
\npotential. The role of private equity (PE) also garners much attention,
\nand perceptions about foreign direct investment in Africa can often be
\ndominated by what PE is doing and where.<\/p>\n

These factors are all
\nrelevant, but too little analysis is done on investment in
\nsmall-to-medium enterprises – those day-to-day businesses that are the
\nbackbone of any economy.<\/p>\n

A 2017 World Bank Report noted that SMEs
\n total more than 95% of registered firms worldwide. The ratio for Africa
\n is no different. You can have all the free trade areas and
\ninfrastructure you like, but successful economies need successful SMEs.<\/p>\n

Unfortunately,
\n SMEs can be seen as risky propositions by commercial lenders in Africa.
\n Banks compete for mass market savings and have extended mobile banking,
\n but this is not matched by dynamism in lending to SMEs. Where lending
\ndoes occur, it is often at crippling interest rates of up to 20%.<\/p>\n

PE
\n has invested heavily in Africa, but this form of investment tends to
\noverlook SMEs due to stringent qualifying criteria related to enterprise
\n track records and the near-term pressure on PE to profitably exit from
\ninvestments.<\/p>\n

As ubiquitous as SMEs are, and as talented as their
\nmanagement teams can be, they are inevitably more inclined to the
\nnuances of doing business in the local African context, which doesn\u2019t
\nnecessarily gel with the requirements of an overseas PE financier,
\nfocused on a five-year exit plan. There is a natural disconnect.<\/p>\n

It
\n could be argued that a policy of flexible and patient capital is
\nrequired towards African SMEs. This does not mean an interminable delay
\nin a return on investment to investors, rather that foreign investors
\nneed to take a long-term view of the African country and SMEs they
\nselect to invest in, and a long-term view of the people they work with
\nand the issues they face.<\/p>\n

Investors should take into account
\nfactors such as first-mover advantage, existing competition and
\ngovernment incentives. Historical performance in other business areas
\ncan also indicate potential. If an opportunity makes good business sense
\n but company leadership is weak, a financier could decide to strengthen
\nthe management team.<\/p>\n

Patience also means investors take time to
\nunderstand the environment their SME operates in and the challenges
\nfaced, such as infrastructure deficiency and precarious power supply.
\nSME management may be resourceful in handling the challenges of a local
\nenvironment, but they may not necessarily be in the mould of Western
\nEuropean or American MBA management skills.<\/p>\n

Whatever form
\npatience and flexibility takes, it has to happen. Releasing the
\npotential of African SMEs is crucial to creating jobs for those 1.3
\nbillion new entrants to the African economy and for the continent\u2019s
\npopulation rise to be positive, instead of ruinous.<\/p>\n

If local
\nbanks and the international PE model aren\u2019t sufficient, there is a huge
\nopportunity for enlightened Middle Eastern investors to fill the void.
\nThis may require some careful hand-holding for those entering previously
\n uncharted regions or new fund structures that are more SME-focused than
\n the average international PE fund.<\/p>\n

The hand-holding in this
\ncontext will involve building trust which has been cited as an issue
\nholding back Middle Eastern investors from exploring SME opportunities
\nin Sub-Saharan Africa. It will not happen overnight and will require
\npatience, perseverance and goodwill from either side.<\/p>\n

To date,
\ncapital invested by Gulf countries in Africa has been gradually
\nincreasing, mostly driven by the region\u2019s geographical proximity to East
\n Africa. Time will tell how significantly Middle Eastern investors with a
\n flexible and patient view take the plunge, or, whether African domestic
\n lenders will relax their lending practices. But investment in African
\nSMEs must surely happen.<\/p>\n

The opportunity is too exciting, and the alternative too calamitous, for it not to.<\/p>\n

\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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