The entrepreneurship renaissance sweeping across Africa is both refreshing and unprecedented, and this is a good thing! One would marvel at the sort of “evangelism” that drives this outcome, but this is more of a result of certain enabling factors than anything else. Now that Africans are becoming more ambitious and business-savvy, funding is becoming a hot topic, and the same can be said of the institutions who have become the primary source of financing today – the banks.
Banks are neither NGOs nor charities, they exist and operate in order to make a profit. Banks also exist for the safe-keeping of money, and this means their first duty is to those who have made monetary deposits with them. This introduces a number of imperatives for anyone who would approach a bank for a loan, such people must meet or exceed a certain threshold on the credit-worthiness scale.
Interest rates on the continent are high and returns must be even higher for one to justify these exorbitant rates, but these things are so for certain reasons and due to complex factors. Interest rates are a reflection of current and projected inflation rates as well as the net value of the capital interest payments over the length of the loan. Before a bank grants a loan, it must also do some opportunity-costing and consider the net present value of alternative investments such as government bonds; again, this has to do with credit-worthiness based on track record.
So, this introduces a dilemma of some sort where banks have to choose between the public and private sector. Loaning to the private sector entails dealing with uncertainties and the banks may decide to make up for these by charging high interest rates such that those who eventually payback will provide enough money to offset the non-performing loans (NPLs) from those who do not payback. Unfortunately, these high interest rates also trigger, albeit inadvertently, a vicious cycle where people default because of the high rates and this limits funding available for households, consumption and new innovations.
So, the time has come to establish more Development Finance Institutions (DFIs) and similar structures with a mandate to lend specifically to certain sectors and classes of consumers; these institutions could be provided with tax incentives to ensure that they lend money at affordable rates to even low-income earners. Africa needs more institutions like the African Development Bank (AfDB) and the Nigerian Bank of Industry (BOI) focused on investing in the economic development of the region.
Establishing such SME-friendly institutions should be a component of the overall set of strategies for sustained economic development in the region because of the sure gains that arise from having more SMEs operational in any geography.
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