AFRICAN SME FUND

Background and Context 

SMEs are a critical component of the African economy, contributing more than a third of gross domestic product (GDP) and providing job opportunities to millions of workers in communities across the continent. Banking institutions are the main source of financing for SMEs, providing more than 90% of total financing. Provision of SME financing is also complemented by the development financial institutions (DFIs), NGOs and microfinance institutions, and government funds for SMEs.

Over the years, there have been various initiatives implemented to enhance SME financing ecosystem in Africa. Bank lending is the most common source of external finance for many SMEs and entrepreneurs, which are often heavily reliant on traditional debt to fulfill their start-up, cash flow and investment needs. While it is commonly used by small businesses, however, traditional bank finance poses challenges to SMEs, in particular to newer, innovative and fast growing companies, with a higher risk-return profile.

Capital gaps also exist for companies undertaking important transitions in their activities, such as ownership and control changes, as well as for SMEs seeking to de-leverage and improve their capital structures. The long-standing need to strengthen capital structures and to decrease dependence on borrowing has become more urgent, as many firms were obliged to increase leverage in order to survive the recent economic and financial crisis. 

Indeed, the problem of SME over-leveraging may have been exacerbated by policy responses to the crisis, which tended to focus on mechanisms that enabled firms to increase their debt (e.g. direct lending, loan guarantees). At the same time, banks in many African countries have been contracting their balance sheets in order to meet more rigorous prudential rules.

While bank financing will continue to be crucial for the SME sector, there is a broad concern that credit constraints will simply become “the new normal” for SMEs and entrepreneurs. It is therefore necessary to broaden the range of financing instruments available to SMEs and entrepreneurs, in order to enable them to continue to play their role in investment, growth, innovation and employment.

Profile of the African SME Fund

The African SME Fund is a grant matching initiative dedicated to SME growth in Africa. The Fund supports activities aimed at reducing the risks of SME financing, boosting SME growth and addressing the huge financing gap which hinders the development of MSMEs. It complements the significant contributions of SMEs in local communities by supporting innovative ideas and making opportunities possible in the African economy.

It provides capital to new and innovative business models across Africa through various financing instruments, which include grants, zero-interest loans, guarantees, and working capital facilities.

Objective of the African SME Fund

The objective of the fund is to provide access to financing at reasonable cost for SMEs in all economic sectors. It provides low interest funds to SMEs to:

• Enhance access by MSMEs to financial services
• Promote innovation, new ideas and expand opportunities
• Increase productivity and output of microenterprises
• Increase employment and create wealth
• Engender inclusive growth

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