Entrepreneurship is thriving in Africa. Throughout the continent poor people start up and run tiny businesses – micro-enterprises - in the unregulated informal sector. Why are aid agencies, governments and financial institutions not improving their access to credit? Why isn’t more being done to give small and medium enterprises (SMEs) increased access to credit facilities?

A report from the University of Stellenbosch Graduate School of Business argues that sustainable long-term development in Africa is dependent on better-funded and better-managed mechanisms to provide microfinance and venture capital to the poor. Small each one may be, but the cumulative impact of Africa’s millions of micro-enterprises is enormous. They employ an estimated 80 percent of the working population of Africa.

The report describes the many kinds of successful indigenous credit lending mechanisms in developing countries and urges modern microfinance institutions to learn from them. Most are small: of the estimated 7,000 microcredit organisations operating world-wide, only about a thousand have reached a thousand or more clients.

It is far from easy to establish a successful micro-lending scheme. Microcredit programmes depend on getting right three consistently problematic aspects of development: group organisation and motivation, money collection, and identifying viable income-generation activities.

A further challenge is that those in positions of influence attach little significance to micro-credit schemes because they involve such small sums of money and target women and the poor. They lack the glamour of large development banking and investment schemes, which attract resources and political support. Supervision of micro-credit programmes (usually given seed money by foreign donors) is invariably located in already under-resourced and under-staffed departments such as rural or women’s affairs.

What are the pitfalls, which befall microfinance schemes? The report finds that:

• Many become moribund due to competition from adjacent aid projects, which provide grants.
• Powerful men often sabotage schemes targeting women and the poor.
• The ‘copy cat’ syndrome rules. Borrowers frequently invest in well-trodden niches.
• Governments often introduce accounting and disbursement procedures, which are overly bureaucratic and impose unreasonable demands on illiterate or semi-literate entrepreneurs.

In order to bring the unbanked into the banking sector, African policymakers are urged to:

• Formulate national micro-financing policies and encourage networks to share experience across national boundaries.
• Avoid competition and duplication between loan-providing and grant-giving development projects.
• Not simply target microcredit schemes at those with income-producing activities - helping the poor to avoid selling their assets to meet obligations and seasonal cash needs is important in itself.
• Require beneficiaries to save. This is essential to avoid the poor repayment and depletion of capital, which has bedevilled many schemes.
• Recognise the importance of venture capital in creating new jobs and offer legal and fiscal support to venture investment.

Source(s):
‘Microfinance, venture capital and the unbanked: Review of some key models and way forward in Africa’ paper presented at the 'Development and Business Finance: Policy and Experience in Developing Countries' conference, University of Manchester by Nicholas Biekpe, 5-6 April 2001

Funded by: The University of Stellenbosch, South Africa

id21 Research Highlight: 25 June 2001

Further Information:
Nicholas Biekpe
Africa Centre for Investment Analysis
Graduate School of Business
University of Stellenbosch
South Africa

Contact the contributor: nbiekpe@acia.sun.ac.za

Africa Centre for Investment Analysis. South Africa

Other related links:
See IDPM's Finance and Development Research Programme Working Paper Series

'Guaranteeing credit for SMEs: lessons from Malaysia'

Refer to the UNDP Special Unit for Microfinance

The Consultative Group to Assist the Poorest is also a Microfinance programme