OPEC Fund woos SMEs in East Africa


Small and medium-sized enterprises (SMEs) have a difficult time accessing financial services.

This means that despite being a major catalyst of inclusive growth, they cannot easily access the funds which can help fuel that growth.

A vibrant and expanding small business sector could answer most of Africa’s economic growth questions but the sector has continually been side-lined leading to slow growth due to lack of financing.

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For instance, in Kenya, Tanzania and Uganda, agriculture contributes approximately 30 per cent of GDP while employment provides between 55 and 70 per cent of all jobs. Of these, as much as 77 per cent of all are female jobs.

Agriculture’s contribution to GDP in East Africa. [Source: Darlberg]
On a continent-wide scale, the SME financing gap is valued at USD 331 billion for formal SMEs in Sub-Saharan Africa. This includes US$ 49 billion for women entrepreneurs. Access to finance remains the biggest hindrance to SMEs flourishing and in some case even surviving.

To change this, the OPEC Fund for International Development (the OPEC Fund) has signed a US$20 million term loan to support small and medium-sized enterprises (SMEs) and infrastructure projects in East Africa.

The loans will be disbursed through the East African Development Bank (EADB) which enjoys a high level of commitment from member states Kenya, Uganda, Tanzania and Rwanda, as well a diverse shareholder base that includes multilateral and bilateral development institutions and international financial institutions.

SMEs account for more than half of EADB’s portfolio.

They play an important part in development, driving economic growth and employment opportunities in East Africa and in developing countries more generally. The bank is expanding its resource mobilization activities to meet the growing financing needs of SMEs.

“We are very pleased to support private sector development in East Africa, which goes to the core of our mandate,” said OPEC Fund Director-General Dr Abdulhamid Alkhalifa.

“We have partnered with EADB since 2001 and we appreciate the opportunity to strengthen our relationship. SMEs are critical to achieving progress toward Sustainable Development Goal (SDG) 8 on decent work and economic growth. Efficient infrastructure, as part of SDG 9, improves access to social services, reduces business and production costs, supports trade, and will ultimately provide East Africa with a more competitive business environment.”

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A 2018 report titled, “The Economics of Agri-SME Lending in East Africa” notes that despite employing 50-80 per cent of the workforce, less than half of the East African SMEs in most countries and size segments have access to formal bank finance.

The report adds that lenders often find it difficult to assess the bankability of SMEs, given their less-formal business practices and small size. As is the norm, local commercial banks serve larger enterprises, and microfinance models have emerged to address “micro” and small SMEs.

Noteworthy is that mainstream models to address the needs of the “missing middle” – which in various sectors and economies may be from US$20K or US$100K up to US$500K or US$1-2m in borrowing needs – have not yet emerged.

The report findings show that agri-SMEs in East Africa face an acute need for finance tailored to their specific requirements.

Agriculture receives only 2-7 per cent of total bank credit in East Africa, a situation which is the replicated across Africa.

In an earlier report, Dalberg-KfW report estimated that there is an annual US$180 billion agri-SME lending gap, of which US$65Bn is for medium-sized value chain businesses with revenues of US$200k – US$15m.

Lenders find financing agricultural SMEs especially difficult due to external risks (such as price volatility, climate change, and government regulations), business risks (such as management capacity and inadequate financial records), product misalignment (caused by the seasonal nature of cash flows and lack of favoured types of collateral), and the expense involved in serving businesses in rural locations.

With the OPEC Fund, the Director-General of EADB, Vivienne Yeda, said: “By financing SMEs, we expect to promote enterprises that generate employment opportunities, social-economic development and consequently promote regional integration. The SME sector is a critical pillar for sustainable economic growth as it is the backbone of the EADB member countries’ economies.”

This is the third loan the OPEC Fund has provided to EADB in support of SMEs. In 2001, the organization approved US$10 million, followed by a further US$15 million in 2013.

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