Restaurant owner in Sudan. Source: Wikimedia Commons
The high unemployment rate across African countries has pushed people to think of other ways to provide for themselves and their families. This has given rise to small businesses, which have been referred to as the lifeblood of Africa’s economy.
According to the World Economic Forum, small businesses are responsible for more than 80% of the continent’s employment and 50% of the GDP.
What is a Small Business and How Important is its Role?
It is a privately owned corporation, partnership, or sole proprietorship that functions on a small scale level and involves less capital investment, fewer machines, fewer employees, and less annual revenue than a corporation or regular-sized business.
These industries play an important role in most economies, particularly in developing countries, where the unemployment rate is high. These businesses generate a large share of employment opportunities that would otherwise not be available, providing a source of income to those who may not otherwise have access to the big corporate firms. For example, a fashion designer in Nigeria has no fewer than 20 staff. They have the people designing the outfits, those involved in the production process, and others whose job is to deliver to clients, thereby, providing jobs in design, production, and distribution.
Small businesses play a crucial role in Africa’s economic growth and development. How do they achieve this? By contributing to local production and manufacturing, which is essential for import substitution and reducing dependency on foreign goods. Providing goods and services that serve the community increases local spending and supports the local economy.
When it comes to innovation and development, the importance of small businesses cannot be overlooked. They find new ventures as they often explore and implement new ideas and technologies that can lead to new products and services. They are also good at discovering new markets and exploiting them to their advantage. This impacts the economy positively, boosting productivity and creating a competitive business environment.
Challenges Small Businesses Face in Africa
It is not easy to run a small business in a continent like Africa where there are so many factors working against its success. The mortality rate of small businesses among African countries remains very high with many failing in their first year.
According to a 2022 Nigeria MSME report, 80% of businesses under the Micro, Small, and Medium Enterprises (MSME) in Africa fail within the first five years of their existence despite having the highest entrepreneurship rate in the world. Some of the hurdles small businesses have to go through to be successful include:
Limited Access to Funds: This is one of the biggest obstacles that small businesses face in Africa. Many of them struggle to get loans and other funding from formal financial services due to their lack of collateral. This often leaves them at the mercy of informal lenders who charge exorbitant interest rates.
Electricity Supply: Power supply is still one of the biggest challenges small businesses face. In a country like Nigeria where the power supply is so unstable, it is hard for these businesses to operate efficiently. They have to depend on generators that make use of fuel and this is not very cost-efficient, making the business very expensive to operate.
Poor Management: Some small business owners lack the needed managerial expertise. It is more like a “learn from experience” or “trial and error” operation style. Some went into the business by chance with little or no knowledge about how to run it. This is evident in how they just go with the flow, with no structure or adherence to industry best practices.
Corruption: You have probably heard the phrase: “Scratch my back and I will scratch yours”. This is a prevalent practice in some countries. You cannot get anything done without first “greasing the palm” of whoever is in charge. Some government officials expect you to give them money before they can render any service to you. This means spending more money, that is unbudgeted, to pay for “unnecessary” things.
Government Regulations and Policies: Procuring the necessary certificates, getting regulatory permits, licenses, registrations, and others needed to run a business can be a daunting task due to the bureaucracy in government. Small business owners also have to deal with different levies from different government agencies. These and other unfavorable government policies that change frequently make it hard for small businesses to thrive.
A produce stand in Tanzania. Source: Wikimedia Commons
Policies and Interventions that Can Foster Their Growth
Small businesses often struggle due to some of the challenges listed above, and this is where the government comes in. To reap the fruits of small businesses, effective strategies and policies are required.
Firstly, African governments need to create an enabling environment for the smooth running of these businesses. They can start with laws and regulations that favor SMEs. They should provide funding through grants, loans, and other financial incentives like tax relief to upcoming businesses.
The government should also deliver on infrastructure. Having good roads will aid with logistics, reducing operational costs and enhancing the market reach of small businesses. A steady power supply will save small businesses the cost of buying petrol and running a generator.
African governments should reduce the bureaucratic burden by simplifying the processes involved in registering a business, licensing requirements, and other procedures. Navigating the complex regulations and paperwork should be made easier.
At the end of the day, the government has a critical role to play in facilitating and supporting small businesses in Africa. They are responsible for creating a favorable environment for these businesses to do well and compete with others beyond the continent. When the government pays little or no attention to this sector, the businesses are prone to not surviving after a few years.
