Making the African Continental Free Trade Area a global powerhouse starts with backing the continent’s small and medium-sized enterprises, writes Ade Ayeyemi, group CEO of Ecobank.

Ade Ayeyemi

The power of every nation is its sovereignty and independence. Most economic communities created across multiple countries are today trading sovereignty for better economic outcomes. With sovereignty being the right of every population, it is imperative that initiatives that trade away this vital asset demonstrate better economic outcomes for most of the people. While the outcome of stronger intra-African trade is more apparent for large countries and for large companies, it’s less so for smaller countries and much less for their small and medium-sized enterprises (SMEs).

SMEs are the vehicle for wealth creation and distribution among the majority of the people; they are truly the last mile and must be nurtured to realise growth and development on the continent. Accordingly, for a sustainable economic union such as the African Continental Free Trade Area (AfCFTA), we must ensure that the benefits accrue to SMEs as a means of getting the support of the population and ensuring its sustainability. The benefit of intra-African trade must be truly distributed to avoid disgruntled losers; if the losers are also voters, the consent to trade off economic sovereignty could be withheld.

Therefore, one of the big conundrums of the AfCFTA — which became operational in 2021 and is the world’s biggest such zone by the sheer number of participants — is how to integrate a continent of small businesses into a successful large and diverse market. Of its 55 countries and 1.3 billion people, the continent’s trade is driven by millions of SMEs. The existence of the AfCFTA presents previously unimaginable opportunities. The question for the continent is: how will African traders take advantage of intraregional free trade?

SMEs create hundreds of millions of jobs across Africa and are vehicles for innovators and entrepreneurs

SMEs create hundreds of millions of jobs across Africa and are vehicles for innovators and entrepreneurs. Potentially the big businesses of tomorrow, they have long existed on the margins of policy and finance. They face major financing gaps of more than $50bn annually. Based on their mostly informal nature and formation, their ability to easily tap into funding sources from financial markets is impeded by their lack of structure, making them a risky sector for banks to fund. This limits their prospects in the continental marketplace.

Despite this, I remain convinced that SMEs must be part of the conversation, to ensure the continent’s desired economic transformation. Their resilience attests to the continent’s spirit of ingenuity. It was the farmers in Ghana, Nigeria and French West Africa that increased cocoa export production by 800–1000% over four decades, despite the best efforts of colonial officials to frustrate them. In Kenya, small-holder tea production overtook plantation farming within five years of independence in 1963, after decades of tea exports being the exclusive domain of white settler farmers.

How do we prepare our SMEs for the market? Organisation, access, viability and certainty.

Organisation

Those not viable at home can’t really trade abroad. For many SMEs, notably in agribusiness, a co-operative model allows them to operate as a large-scale enterprise. The success of Kenya’s tea export sector readily comes to mind: the 600,000-member Kenya Tea Development Agency — which acts as advisory agency, export marketing agent, absorber of currency fluctuations and distributor of payments — is organised into co-operatives, through which farmers purchase machinery and access loans in between the two annual payments they receive for the sale of their leaf. Exports are done through an auction in Mombasa.

To be organised, SMEs need input, incentives and training. Their goods and services must meet international quality standards and certifications to enable value chain participation, raising of their revenue streams and increasing buyers’ confidence in their output. Technical training and financial literacy training are also key.

Today, we see banks raising awareness and educating SMEs about financing opportunities. The African Union Development Agency-New Economic Plan for Africa’s Development’s (Auda-Nepad’s) ‘100,000 MSME’ initiative, for example, focuses on strengthening the response and recovery of micro-, small and medium-sized enterprises (MSMEs) from the impact of the Covid-19 pandemic. Ecobank is currently working with Auda-Nepad to enable MSMEs to access capabilities, markets, finance, technical knowledge, mentoring and knowledge sharing. Finance-focused training has been provided to MSMEs in eight countries, with more to follow.

Access

Access to markets is a natural corollary to organisation. For too long there’s been a lack of information about what’s available in the various African countries, and this has led to avoidable and often more expensive imports of goods and services from other continents, and to the unacceptably low level of intra-African trade. The growth of e-commerce and digital marketplaces are strong facilitators of trade growth. Banks can create e-commerce solutions by partnering with fintechs to provide online stores and payment platforms to increase marketing reach and sales of SMEs’ goods and services across numerous markets.

Viability

There’s no reason why Africa can’t produce chocolate to the standard and quality of those in Belgium and Switzerland. Belgium imports 55% of its cocoa beans from Côte d’Ivoire, 10% from Nigeria and 10% from Ghana, whereas 57% of Switzerland’s cocoa imports come from Ghana and 7% from Côte d’Ivoire.

In the eurozone and the US, subsidies to farmers are a vital source of support for agribusiness. African governments allocate an average of 3% of their annual budgets to agriculture. In sub-Saharan Africa, 60% of its population are farmers and 60% of their resources are allocated to food, creating a classic poverty cycle. European governments have resisted demands to end subsidies for purely political reasons: agriculture still employs a significant segment of the population and often constitutes a vocal voting bloc. Increasing agricultural scale, productivity and value, while also reducing the proportion of the population engaged in farming will require structural policy and economic reforms. The rewards, however, of creating high-value primary export processing industries on the continent speak for themselves, as Europe attests.

Certainty

For any business to thrive, it must get paid in a timely manner for its goods and services, within a reasonable delivery period. There are instances when governments don’t pay on time, and this affects the viability of SMEs’ working capital balances and funding/loan requirements. This is a drag on commerce and should be addressed so that banks can more easily advance financing with SMEs, utilising purchase orders as firm repayment sources.

Lending to SMEs

Many African banks have funds available for SMEs, but often lack an informed knowledge of the segment that would lead to effective and sustained lending strategies. Some banks regard SMEs as high-risk, resulting in them being turning away and having to seek alternative — often informal and riskier — sources of finance.

A language of mutual interests must be cultivated. Until the fintech revolution, vast swathes of SMEs in the informal economy remain unbanked.

Ecobank launched its Ellevate programme to support women’s businesses with financial and value-added non-financial support. Also needed are education, training and mentorship, challenging and overcoming the societal norms around gender discrimination, finding solutions to financial exclusion, informal employment, subsistence living and lack of collateral. McKinsey reported that if Africa makes progress towards gender parity, the continent could add $316bn, or 10%, to gross domestic product by 2025.

There’s no reason why Africa can’t produce chocolate to the standard and quality of those in Belgium and Switzerland

Banks have the local presence and relationships to understand local conditions, requirements and risks. They can partner with development finance institutions sharing their goals and willingness to take some of the risk associated with lending to SMEs. This enables banks to expand lending capacity, reduce collateral requirements and introduce new credit facilities to SMEs.

Growth of SMEs will positively impact economic development and some governments have put in place intervention funds for MSMEs to provide subsidised loans at attractive interest rates, using banks for disbursements.

Innovative finance solutions and digitisation are critical for the AfCFTA. For example, working capital finance can be extended by tying it in with the increased utilisation of digital platforms for collections. The turnover of digital collections received into the linked collection account is used to obtain a credit facility for the SME.

Factoring, supply chain financing and receivable financing will continue to grow in popularity. Where the buyer and seller are in different countries, as will be the case under AfCFTA, factors in both countries will typically be involved to provide the safeguards under the Factors Chain International’s two-factor system.

Grasp the prize

Continent-wide collaboration and determination across all stakeholders can help to ensure that the AfCFTA reaches its potential, and sets Africa on its path to becoming a global economic powerhouse. SMEs need to become local innovation hubs, connected to communities and creators of wealth. With good access to markets through the value chain, they may be acquired by bigger companies that are able to scale their know-how. SMEs want to be small for the occasion and when the time is right, achieve scale; but even without scale, our responsibility as society is to ensure SMEs thrive.

Ade Ayeyemi is the group chief executive officer of Ecobank.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter