EMRC WORKSHOP Empowering the Private Sector toBoost Productivity & Growth in Africa 14 - 17 June, Lord Charles Hotel, Somerset West Cape Town * South Africa Patrick Oketa Chief Investment officer African Agricultural Capital (AAC)
Content• Definition• Importance of SMEs• Case for SMEs• Challenges Facing SMEs• Financial Solution for SMEs• Challenges to African Governments• Conclusion
DefinitionsEnterprises are entities that provide existing ornew products or services, in the same way asthe others or with more efficiency andeffectiveness through the use of improvedprocesses and or technologies.
DefinitionAccording to the World Bank Group, Small and MediumEnterprises (SMEs) are classified as follows:- Micro-enterprise: - up to 10 employees and total assets and turnover of $ 100K Small enterprise: - up to 50 employees and total assets and turnover of $ 3M Medium Enterprise: - up to 300 employees and total assets and turnover base of $ 15M
Definition Manufacturing Service Agriculture Less than 5Micro Less than 5 employees Less than 5 employees employees Between 5 and 50 Between 5 and 19 Between 5 and 19Small employees employees employees Between 51 and 150 Between 20 and 50 Between 20 andMedium employees employees 50 employeesSource: Normah Mohd. Aris (2007) SMEs: Building Blocks for Economic Development
Importance of SMEsSMEs contribute to economic growth by virtue of their sheernumbersSMEs are the engines of growth through: Production of goods and services Job creation Accommodates retrenched workers Contributes to national tax revenues Provides technical skills to the employed workforce It generates income and creates assets
Importance of SMEsTo large enterprises:They act as suppliers of inputs and auxiliary parts,They act as direct customersThey carry out innovations for new products, processes, business models and new markets.SMES are leveraged upon by larger enterprises and the service sector to create further investment.“For SMEs to grow, network contacts and relationship with other SMEs and larger enterprises for knowledge sharing, technology transfer and division of labour is crucial. “
CaseEconomic growth in developed countries such as Japan, Korea,Taiwan and many others, was significantly generated by SMEactivities. The % contribution of SMEs to GDP)/Total value addedranges from 60.0% in China, 57.0 % in Germany, 55.3 % in Japanand 50.0 % in Korea;About that 95% of companies in Australia are from the SME sector;America has the largest number of SMEs in the world;In S. Africa it is estimated that 91% of the formal business entitiesare SMMEs and they contribute between 52 to 57% to GDP andprovide about 61% of employment;
Case (Malaysia)In a recent study (2007), SMEs in Malaysia account for 99.2 % thethree key economic sectors, namely manufacturing, services andagriculture. Large establishments accounted for the remaining0.8 percent.Employment generated by SMEs was approximately 65.1percentof the total employment of 4.6 million engaged in the threemain sectors.In terms of share contribution, SMEs accounted for 43.5 percentof total output and 47.3 percent of value added.
Challenges faced by SMEsMajor challenges faced by SMEs include:Access to financeLow R&D investmentLack of access to technologyLack of product innovationLack of access to new marketsPoor regulationLack of appropriate managerial skills.Why SMEs generally face difficulties in obtaining financing:Lack of collateralLow equityInsufficient documents to support loan applicationLack of financial track record and viability of businessesProcessing time for loan applications.
Financial Solution for SMEsTherefore, risk capital investment is urgentlyneeded to enhance the rapid development ofSMEs.For financial institutions to develop appetite forand to better manage SME risk, the sector mustaddress the following credit analysis issues: Viable business model in a profitable and growing industry. Sound and focused management Clear succession plan Demonstrable financial management capabilities Focused cost structure and financing plan
Challenge to African GovernmentsDevelopment of a system to capture and profile SMEsand their activities in an interactive database ofinformation capturing: Status of SME development in the country Contribution of SME to the economy Financial management challenges faced by SMEs Available sources of appropriate financing Production and operational management Access to technology and technological advancement Human resource management Marketing, market development and promotion Access to government and donor assisted programmes
Challenge to African GovernmentsFor SMEs to move up the value chain in order to remaincompetitive, governments should take a more comprehensiveapproach towards SME development to improve their operationsand productive capabilities through: Increasing their access to financing through loan guarantee schemes, Create an enabling business infrastructure; Enhance human capital development; Expose more SMEs and encourage them to be adapt ICT; SMEs financing through grants, which are not repayable must be reviewed because it undermines their ability to achieve self sufficiency; SMEs should be encouraged to form cooperative societies, SACCOS, investments clubs and merry go round schemes for them to develop the critical mass to leverage group capacity building opportunities and financial resources from members, MFI, banks and DFI.
ConclusionSMEs, as engine of growth and the primarycatalyst of innovation and social transformation,are important assets which must be nurtured andharnessed by African economies to enable themto quickly and effectively adapt to the challengesof globalization and to reap its benefits.