Entrepreneurs across Africa are often faced with the challenge of accessing finance
By Mayowa Kuyoro
Access to finance is often quoted as one of the biggest challenges entrepreneurs face today across Africa. In fact, some reports show that 85% of small businesses are largely underfunded with no access to finance. In 2014, a poll that was conducted by the U.S. State Department showed that 37% of the entrepreneurs surveyed, responded that funding was the biggest challenge they faced.
This challenge arises from an availability and an access issue. Availability, because historically, there hasn’t been a lot of money floating around to fund young entrepreneurs outside of the usual route of friends and family. Access for two reasons – some people are not aware of the offerings available, and sometimes the conditions required to get these funds are not easy to meet – the funds often come with a heavy price tag attached.
The landscape is, however, changing for entrepreneurs today, especially those in the early stage. Increasingly, governments, foundations and even the private sector are turning their focus on how to fund and incubate young entrepreneurs. In less than 15 years, Africa will have the largest working force population in the world who need to be gainfully employed. Thus, ensuring that our entrepreneurs today can flourish is critical.
As a young entrepreneur, there are a few sources of funding that are available. Firstly, you have the government and other public sector lenders who can provide concessional financing e.g. the Lagos State Employment Trust Fund which not only disburses loans at 5% interest but also provides training and business support to the awardees of its funds.
Another government entity trying to provide access to finance is the Bank of Industry which has schemes for entrepreneurs across various sectors from Adire, to Nollywood – and what got me excited – a graduate entrepreneurship fund which provides up to 2M to individuals on the NYSC program.
Increasingly in this space today, we are seeing philanthropic foundations step in to provide access to finance to young entrepreneurs. You have foundations such as the Tony Elumelu Foundation, the Dangote Foundation, and even some international donors who provide funding to entrepreneurs in Africa.
Other sources of finance include angel investors, venture capital groups and impact funds, where we are seeing increased activity. These have been around for a while and have helped to drive funding, especially for technology-enabled businesses. These, combined with the government sources of funding, have been able to only partially meet the need of seed/early stage businesses in Nigeria today.
One model of funding early-stage businesses that has slowly been gaining traction in Nigeria and across Africa is the Accelerator/incubator model. These programs provide business funding, access to mentors, collective knowledge and years of experience in nurturing startups.
While not a new concept as these have been around in other markets for a while, in Nigeria, we are seeing an emergence of these institutions backed by different types of players. Some examples are the Africa Fintech Foundry, Itanna, XL Africa (launched by the World Bank and other international companies) MEST incubator etc.
The question I have, however, is how to provide access to finance at scale in order to create jobs for the potentially 50 million Nigerians we will be adding to our labour force by 2030? The statistics don’t tell an encouraging story. On an individual level, at the end of 2016, Nigeria had a financial inclusion rate of 58% – the government is targeting 80%.
Although access to finance for entrepreneurs, and access to financial services to individuals, may at the first pass seem unconnected, these issues are intertwined. It is a virtuous ecosystem – not cycle as this is not a linear problem – that we must aim create.
An ecosystem with funding, businesses and sustainable businesses which help can create jobs for our youths. Some of these businesses in and of themselves could be solutions that help reduce our access to finance issues in Nigeria – but they themselves would need financing to scale.
The good news is that providing access to finance is on the agenda in the boardrooms of a range of players – public and private sector, and effort is being made to address the issue. Hopefully, with time, we see a change in the outcomes across both individuals and businesses and dare I say a source of innovation on the topic across the globe.
Editor’s Note: This article was originally published in The Spark Magazine. Find the magazine here to read other articles.
Mayowa Kuyoro is an Associate Partner in McKinsey’s Lagos office and one of the leaders of McKinsey Africa’s Financial institutions practice. Mayowa co-authored Roaring to life: Growth and innovation in African retail banking. She is passionate about the role that access to finance can play in Africa’s growth and development. Mayowa is a co-author of the newly published research report The power of parity: Advancing women’s equality in Africa, which is a collaboration between McKinsey Global Insights and McKinsey’s Africa offices and explores the “power of parity” in Africa, looking at the potential boost to economic growth that could come from accelerating progress towards gender equality. Mayowa has a MEng (First Class Hons) in Mechanical and Manufacturing Engineering from the University of Warwick and a Masters in Business Administration with Distinction from Harvard Business School.