Rumble in the jungle

Moses Singo is an African exception. A black farmer with green fingers, he has probably had to overcome more obstacles than faced by most entrepreneurs anywhere else in the world to get his family business off the ground.

A little more than a decade since launching the Singoflora Nursery in Tswane (Pretoria), he now exports some four tonnes of lilies, agapanthus, strelitza, ruscus and snake grass to Europe, the Middle East and Asia every week.

From its origins as a humble plant farm the nursery has since expanded in size and scope, and now has its own export packing division and delivery trucks. It employees more than forty people. Today Mosses Singo is hailed as a pioneering black businessman and is celebrated as one of the most successful exporters of flowers and foliage in South Africa.

Success for this so-called small and medium enterprise (SME) has not come easily. Along with proving to a sceptical white audience that black people can indeed farm, he has had to prize every cent of the funding needed to grow his business from a largely aloof banking system which for decades neglected small black businesses in favour of the more comfortable and lucrative role of servicing governments, wealthy white corporates or high net worth individuals.

But South Africa at least has electricity, a national road network, functioning ports and airports, legally enforceable property rights, and a government bureaucracy which – while cumbersome by the standards of more developed economies – is nonetheless capable of running a reasonably efficient taxation system, an export-import sector and a commercial court dispute procedure on which a vibrant private sector depends. This is not the case in much of the rest of Africa.

Africa is, in this respect, a continent without a middle. SMEs are the backbone of the world economy and the primary engine of its economic growth. In high income countries, SMEs account for almost 50 percent of gross domestic product. In low income countries, the proportion is about 20 percent. But in impoverished Africa, it is less than 10 percent. Africa is host to most of the world’s multinational corporations at one end of the spectrum of economic activity, and a vast profusion of micro-enterprises at the other. Very little exists in between.

Dirk Willem te Velde, Programme Director of the London-based International Economic Development Group, an arm of Britain’s Overseas Development Institute which seeks to promote economic growth in developing countries, told World Finance: “African SMEs have not performed as well as SMEs in other parts of the world for a host of reasons.”

“Chief among these has been the difficulty they face accessing capital. The African financial sector is not developed enough to cater for the SME sector’s needs. Formal links between the banking sector and SMEs are few. The banks have traditionally prefered to lend to bigger firms. It’s more costly and riskier to lend to smaller ones.”

Lack of capital is compounded by other obstacles. “The business legal framework and administrative procedures have also been much weaker in Africa than say in Latin America or Asia,” Mr te Velde said. “It takes longer to start up a business, and longer to export and import in Africa than in other parts of the world. Then there are infrastructure constraints, roads and ports, and of course electricity. In some countries, power provision often covers less than 10 percent of the population. Add to this the widespread skill shortages. All of this has hampered the development of SMEs in the private sector hugely.”

But while the SME sector in sub-Saharan Africa remains small, it still accounts for the majority of private enterprises on the continent. Growing and developing African SMEs, many of which are family-run businesses struggling against seemingly insurmountable odds, is now increasingly being seen by governments, international donor countries, the multilateral development banks, the international commercial banks and other foreign investors as the key to Africa’s future economic development, and the only real chance of lifting the continent out of the poverty in which it has been trapped for decades.

Finally waking up

African governments have in recent years been seeking to alleviate poverty by reforming their legal structures to promote their own private sectors, and directing their financial and technical assistance towards SMEs. Host multinational corporations are under mounting political pressure to make a contribution towards promoting African economic development by including SMEs in their value chains, while African and international financial sectors are beginning to wake up to the huge potential market for credit among Africa’s small and medium enterprises.

According to the World Bank, 24 African countries – half the number on the continent – have embarked on far-reaching macro-economic and administrative reform programmes during the past decade, fostering a more pro-business climate for the private sector, thereby making it easier to start a business, strengthening property rights, improving investor protection, boosting access to credit and reducing the tax burden.

The Africa of today is not the Africa of thirty years ago – even if President Robert Mugabe of Zimbabwe appears to be one of the few people left on the continent not to have understood this. Things have moved on. The love affair with the Soviet-style command economy of the post-colonial era is dead in most African countries, and dying out in most of those that remain. Growing the private sector, especially SMEs, is now at the heart of many African governments economic development programmes.

Along with most other multilateral development banks, the International Finance Corporation, the private sector lending arm of the World Bank, has put nurturing SMEs at the centre of its strategy for promoting growth of the private sector in Africa. “Doing business in Africa was once seen as difficult and complex undertaking,” the Washington-based organisation says. “Red tape, a fragile investment climate, inadequate infrastructure, all contributed to this. But with fewer conflicts, more democratic elections, rising growth rates, that is all changing.”

The IFC has helped scores of family businesses across Africa gain access to the credit needed to make their businesses grow, an area in which an excessively risk-averse African banking sector has been hesitant to tread. Ten years ago the IFC’s Small and Medium Enterprises Solution Centre, through its SME Risk Capital Fund, provided Eddy Kimemia and his wife Diana Ndungu, the owners of a small Kenyan family construction firm, with a $6.6m loan needed to bid for a road construction project, putting the family business on the road to long-term commercial viability.

The IFC has also helped to finance Madagascar’s first commercial laundry company in Nosy Be, the country’s main tourist centre, which caters for the flourishing hotel and restaurant trade. In Uganda, it backed Samuel and Margaret Rugambwa’s soap and cleaning material business, helping it to expand from a $400 initial investment in 1990 to a $250,000 a year business – a one thousand fold increase – today. Success stories like these were few and far between three decades ago. Now they are increasing in frequency.
The reform impulse, fostered by the creation of the New Partnership for Africa’s Development, Africa’s home-grown blueprint for economic revival, has largely come from within. But it is being assisted by the world’s developed economies, partly out of guilt that Africa remains the least developed continent on Earth, but also out of a growing realisation that Africa’s population is fast approaching one billion people – which represents a vast, untapped, market of the future.

The Investment Climate Facility, the public-private sector partnership which came out of former British Prime Minister Tony Blair’s Commission for Africa, has been in the forefront of trying to improve Africa’s business climate to enable African SMEs to prosper and grow. In Rwanda, it has helped to establish a commercial court and an online business registration mechanism, the lack of which proved to be the single biggest obstacle inhibiting banks from lending to SMEs.

In Lesotho, it has helped to streamline and simplify the value added tax regime, which was drowning SMEs in red tape. In Liberia, where a staggering 90 percent of economic activity takes place in the informal sector, it has been helping SMEs to move into the formal economy, thereby providing the state with the beginnings of the tax base needed to fund public services. While in Tanzania, it is helping to computerise the judiciary – and the commercial courts – creating the legal environment within which property rights can be protected.

Some African banks and financial institutions have not been slow to capitalise on these emerging opportunities. Ecobank Transnational, the West African banking group, has long outgrown its modest roots in Togo, and now runs 500 branches in 26 countries, employing 10,000 people, with an asset base at the end of 2007 of more than $7bn. It was among the first to recognise that the sprawling cities scattered along West Africa’s Atlantic coast – one of the most vibrant commercial zones in the continent – offered tremendous potential for banking services.

Most of the trade on West Africa’s Atlantic seaboard is informal. But by servicing SMEs – mostly traders and manufacturers – as well as large corporations and wealthy individuals, Ecobank has been gradually luring the informal economy into its branch network by showing the owners and managers of SMEs that they can make a deposit in Monrovia or Freetown and withdraw it – for a fee – in Lagos or Accra.

Ecobank’s success in drawing SMEs into the formal sector has helped boost the company’s profits year after year, making it one of the most dynamic banking groups on the continent – a record other African and international banking groups are now seeking to emulate – while at the same time helping to fuel growth throughout the west African region and beyond.

But if Ecobank has demonstrated that there are serious profits to be made in providing African SMEs with financial services, the full potential of the sector is still only dimly appreciated. An estimated 600 million of Africa’s 900 million people are engaged in subsistence agriculture – by far the biggest and most neglected sector of the continent’s economy. As images of starving African children constantly remind us, Africa can barely feed itself. Yet it has the potential to triple or quadruple agricultural output, feeding itself, and helping to feed the rest of the world in the process.

Last year’s record rise in global food prices triggered renewed investor interest in African agriculture. The Alliance for a Green Revolution for Africa (AGRA), with start-up funding from the Rockefeller and Gates foundations, and chaired by Kofi Annan, the former UN Secretary-General, is building a continental network of 10,000 agricultural SMEs – small and medium-scale dealers to sell seeds, fertiliser, pesticides and other imputs such as farm machinery and irrigation systems to Africa’s vast army of agricultural workers – in an attempt to breath new life into Africa’s most important economic sector.

Investors across the world, from China to America, the Middle East and India, have taken note of AGRA’s initiative. Serious money is now starting to flow into African land assets, food processing, refining and distribution systems, in the expectation that African food production could finally be on the threshold of a revolution in output.

Africa’s agricultural SMEs, most of them small family interests which have barely kept their heads above water for decades, could now be about to experience an unprecedented expansion. For while global food prices have fallen from earlier peaks, few doubt that as the world’s population races towards seven billion and beyond, high prices will return. African banks were largely unaffected by the subprime contagion, due to tight exchange controls. But African economies are now being hit hard by the freezing of international credit markets and the dramatic fall in commodities. Most analysts expect lending to African SMEs to decline as a result.

But not for long. The sector, starved of cash for decades, is well placed to weather the storm. When the upturn comes, investors are likely to return to a long-neglected prospective growth sector, which had only just begun to tap its potential.