Apart from the need to boost SME capacities, some financial instruments can help provide missing information or reduce the risk stemming from some SMEs’ lack of transparency.
Franchising, which is very popular in Southern and East Africa with the encouragement of South Africa, allows use of a brand name or know-how that reduces the risk of failure. Warehouse-receipt financing (in South Africa, Kenya and Zambia) guarantees loans with agricultural stocks.
Other financial instruments, such as leasing and factoring, can reduce risk effectively for credit institutions but are still little used in Africa.
Credit associations that reduce risk by sharing it are more common. They help financial institutions choose to whom to lend, by guaranteeing the technical viability of projects, and sometimes providing guarantees. But growth of these bodies is limited by the lack of organisation among SMEs in Africa and by their focus on certain sectors and geographical areas.
Governments and donor sources have thus preferred creation of guarantee funds to ensure repayment in case of default.
In several countries, especially in Central Africa, this has not worked since provision of a guarantee has meant less rigorous choice of investment projects and a lower rate of debt recovery. Elsewhere, notably in Mozambique, borrowers and financial institutions have worked together to maintain a good rate of recovery and to reduce interest rates.
Financing SMEs in Africa by Céline Kauffmann Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication of the African Development Bank and the OECD Development Centre
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