Finance and SME Development in Africa

Abstract

This chapter discusses the overview of Small and Medium Enterprises (SME) development, conventional approaches to financing SMEs, challenges of SME financing, and the changing landscape of SME financing in Africa. SMEs generate about 90 per cent of economic activity in Africa, but their structure and informality exclude them from formal value chains, markets, and access to bank credit. They benefit from conventional finance like government credit programmes and factoring that complement formal finance like commercial bank credit, microfinance, venture capital (VC), and specialised stock markets. However, persistent challenges limit funding for small businesses because of structural and institutional barriers, information asymmetry and transparency gaps, low managerial capacity, high transaction and screening costs, and the government crowding-out effect. Innovative models like digital finance, impact investing, fintech, crowdfunding, cryptocurrency, blended finance, supply-chain finance (SCF), and development finance institutions (DFIs) are also helping SMEs bypass credit market shortfalls to access capital. This chapter provides relevant recommendations for governments, policymakers, and key stakeholders.