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Restricted Access to Finance

Written by: OECD Development Centre

Article Overview: Africa’s SMEs have little access to finance, which thus hampers their emergence and eventual growth. Their main sources of capital are their retained earnings and informal savings and loan associations (tontines), which are unpredictable, not very secure and have little scope for risk sharing because of their regional or sectoral focus.

Restricted Access to Finance

Africa’s SMEs have little access to finance, which thus
hampers their emergence and eventual growth. Their
main sources of capital are their retained earnings and
informal savings and loan associations (tontines), which
are unpredictable, not very secure and have little scope
for risk sharing because of their regional or sectoral
focus. Access to formal finance is poor because of the
high risk of default among SMEs and due to inadequate
financial facilities.

Small business in Africa can rarely meet the conditions set
by financial institutions, which see SMEs as a risk because
of poor guarantees and lack of information about their
ability to repay loans. The financial system in most of Africa
is under-developed however and so provides few financial
instruments. Capital markets are in their infancy,
shareholding is rare and no long-term financing is available
for SMEs. Non-bank financial intermediaries, such as microcredit
institutions, could be a big help in lending money to
the smallest SMEs but they do not have the resources to
follow up their customers when they expand.

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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Article Tags: african development bank, african economic outlook, c line, capital markets, emergence, financial institutions, financial instruments, guarantees, high risk, infancy, kauffmann, lending money, loan associations, non bank financial intermediaries, oecd development centre, policy insights, retained earnings, savings and loan, scope, shareholding



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