Small and medium-sized enterprises (SMEs) are critical to Africa’s inclusive socioeconomic growth. These businesses help to anchor countries’ economies and contribute to inclusive socioeconomic growth. SMEs account for 40% of GDP in emerging economies and create at least 90% of new jobs.
This is especially true in Africa, where more than 60% of the population is under the age of 25. SMEs account for approximately 80% of jobs in Africa, with the African Union Development Agency noting that SMEs employ up to 90% of the population in African countries such as Uganda, Ethiopia, and Kenya. According to the Central Bank of Kenya’s (CBK) recent National Economic Survey report, SMEs account for 98 percent of all businesses in Kenya, create 30 percent of jobs annually, and contribute 3 percent of GDP.
Aside from employing people, SMEs provide goods and services and serve as an important link in the manufacturing value chain, generating economic activity along the way. Many manufactured products reach consumers via SMEs, typically through a network of small independent retail stores such as dukas and kiosks in Kenya, ojas in Nigeria, hanouts in Morocco, or spaza shops in South Africa. As a result, SMEs are the backbone of most economies. Countries’ economies can be strengthened by enabling SMEs to grow and compete in the value chain.
Despite the important role that SMEs play in African economies, there are several obstacles to their survival and success. In fact, despite having the highest entrepreneurship rate in the world, research shows that up to 80% of African SMEs fail within the first five years. Access to infrastructure and connectivity, business enablement tools, finance, and digital skills are all potential roadblocks for SMEs.
The most significant barrier that most SMEs face is obtaining financing and affordable lending. These businesses frequently lack appropriate information such as a credit history, financial statements, and other required data points, while traditional credit-scoring models used by many financial institutions discriminate against SMEs. Without access to working capital, SMEs are unable to invest in and grow their businesses. There is a need to enable tools that SMEs can use to collect and manage transactional data that can be used to provide valuable business insights to guide SME decision-making and that can be leveraged to create financial reports.
Digitization can assist businesses in developing a financial and transactional history that will allow them to obtain loans. This information and well-organized data can help African SMEs gain access to and diversify their financing options. This financing allows them to expand their businesses, hire more people, and contribute to the economy of their country.
Microsoft collaborates with international organisations such as the IFC and local financial services institutions to develop innovative financing mechanisms for African SMEs that allow them to establish a credit record and differentiated data sets that tell the story of the business rather than a simple money-in-money-out overview. This opens up more borrowing options for SMEs, allowing them to join the integrated value chain and participate in the formal economy.
These small and medium-sized businesses will also require connectivity and business-development devices to successfully complete their digitisation journey. Connectivity and device affordability issues are certainly not new to Africa. Though internet access varies greatly depending on the country, the high cost of data remains a major barrier for many nations across the continent. According to the Alliance for Affordable Internet, only 14 of Africa’s 48 countries have access to affordable internet, with affordability defined as 1GB of mobile prepaid broadband costing 2% or less of the average monthly income.
Microsoft is addressing Africa’s connectivity issues through the Airband Initiative, which invests in infrastructure that drives connectivity. The initiative collaborates with African startups that are overcoming barriers to affordable internet access in underserved communities by utilizing TV white space (TVWS) and other innovative last-mile access technologies. Accelerated internet adoption is the first step toward digital enablement. Microsoft recently announced that it is expanding the Airband Initiative through new partnerships with local and global providers to bring internet access to 100 million Africans by the end of 2025, and that it is working with partner Viasat to extend satellite connectivity to 5 million Africans.
Another stumbling block is gaining access to business hardware. The vast majority of SME owners and entrepreneurs in Africa rely on smartphones to run their businesses. However, having access to devices such as laptops with preloaded software may help business owners manage their business processes and reap the benefits of having easier access to best-in-class Software as a Service (SaaS) products.
Microsoft has recognized that different SMEs have very different solution requirements. Microsoft distinguishes itself by collaborating with Independent Software Vendors (ISVs) and startups that create software solutions that can be used with Microsoft technologies. This enables businesses of all sizes to access these solutions from the marketplace, with the added benefit that when curating a business bundle, a SME can look at their specific needs and match them to the software available in the Microsoft Marketplace.
SME owners frequently lack access to business skill development opportunities. SME owners can increase their business understanding to help their day-to-day business operations, build their business literacy, and develop the technical understanding necessary to support their digitisation journey by using platforms such as the Africa Transformation Office’s SME Skilling package, Microsoft Learn, the Cloud Academy, and LinkedIn Learning.
Digitization has the potential to significantly improve financial inclusion, particularly for unserved and underserved enterprises such as SMEs. Creating an enabling environment for these important economically active businesses that allows them to thrive and participate actively in the continent’s economies is critical for sustainable and inclusive economic growth.
By Gerald Maithya, Startups Lead, Microsoft Africa Transformation Office