Why are SMEs important to Oikocredit?

Written by Hans Perk of Oikocredit


©IFAD/Panos Pictures/Andrew Esiebo

Hans Perk, Oikocredit’s Regional Director Africa and Global Agricultural Sector Specialist, talks here about the importance of small and medium enterprises (SMEs) and how Oikocredit supports them.

Small and medium enterprises (SMEs) are often called the engine of the economy. More than any other, the SME sector creates jobs and contributes to economic development around the world. According to the World Bank, SMEs contribute up to 40% to the national GDP in emerging economies. These numbers are higher when if the informal SME sector is included.


The definition of an SME differs from country to country, but we all have our own understanding of a bakery, a local garage or small manufacturing company. These are the businesses that provide the services and employment for people in our local communities. SMEs are mainly focussed on local markets and have a crucial role in the development of the local economy, with the potential to boost demand for local goods and services.


The development of the SME sector is becoming more important in Africa where the population is relatively young and increasingly better educated. SMEs can play an important role in providing jobs and a decent livelihood for young people, and as such contribute to stability in the region. According to research done by the International Labour Organisation and the German Agency for International Cooperation (GIZ), around two-thirds of all formal jobs in Africa are created by SMEs.


Lack of access to credit in Africa


The list of constraints facing SMEs in Africa is long. The lack of access to credit is the most important one, as I’ve often heard from African entrepreneurs. Access to credit is necessary to achieve the full potential of SMEs. More than 40% of businesses in Africa rate the availability and cost of finance as their biggest obstacle, almost twice as many as outside Africa, according to World Bank enterprise surveys.


It is estimated that in sub-Saharan Africa more than 60% of micro, small and medium enterprises (MSME) need a loan and can’t access one through formal channels. For this reason, most of them depend on informal credit from family and friends. In some countries in Africa where Oikocredit is present, we have seen that only few SMEs can get a formal loan.


©Oikocredit

Jean Koffi uses loans from CAC, an Oikocredit MFI partner, to fund his SME. His electrical installation business specialises in low-energy public lightning works.


SMEs stuck in the middle


To access formal funding, business owners face many obstacles and often are not able to fully utilise their potential. Businesses led by women are particularly affected, with few having access to the financial services to develop their businesses, due to not having the collateral required by banks. It is not uncommon that longstanding successful women-led businesses, for example in Kenya, don’t have the legal title to the land where their business operates.


Investors generally perceive SMEs in Africa as high risk, weak in financial management and fragile. As a result of lack of regulations or enforcement of laws, providing credit to an SME is difficult and costly. In many cases the finance need, e.g. the loan amount, is just too large and too complicated for microfinance institutions, but too small for commercial banks to consider. The SMEs are stuck in the middle.


Supporting SMEs who make a difference


Several years ago, Oikocredit started providing financial support to financial insti