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June 12, 2007

The Missing Middle

Reading some of the popular press, you might think that Africa is awash in capital. After all, there are countless success stories about microfinance, the small loans that help individuals start businesses in their local communities. Charitable organizations continue to donate huge sums. And we’ve all read that China is pouring money into Africa in an attempt to line up natural resources for decades to come. But, as we learned in our third Global Innovation Outlook deep dive in Dakar, Senegal, there is something missing from these stories: the middle.

While there is money available to individuals and big businesses, there is very little money available to small- and medium-sized businesses. And this lack of financing for SMBs, the so-called “mesofinance gap,” is holding back the real engines of economic growth for Africa’s developing regions, and has been troubling a number of our deep dive participants.

In Dakar, our participants were in total agreement about the nature of the problem, if not the solution to it. We had participants from Nigeria, Cote d’Ivoire, Senegal, Uganda and South Africa, representing a diverse array of organizations, including Compagnie Sucriere Senegalese (Senegal Sugar Company), Telnet Nigeria (largest telecom in Nigeria), NEPAD (New Partnership for Africa’s Development), the Association of African Universities, Manobi (a mobile data services provider), and Gate7 New Media (mobile new media company in South Africa). We even had South Africa’s ambassador to Senegal, Thembi Majola-Embalo.

But perhaps no one was more suited to address the mesofinance problem than David Beguma, the executive director of the Association of Microfinance Institutions of Ugandua (AMFIU). David’s job is guide the burgeoning microfinance industry in Uganda, and AMFIU includes more than 80 full-time members. He recognizes that the problem stems from microfinance institutions not having enough money to loan to SMBs, and commercial banks not having the appetite to risk capital on small businesses without much collateral. And even if a bank takes a chance on an SMB, the laws of most countries make it nearly impossible for the lender to recoup its investment through legal means. One participant estimated that 12 of 13 cases where a lender takes someone to court because of defaulting, the claimant loses.

But David has a two-pronged approach to trying to close the mesofinance gap:


David feels strongly that microfinance institutions need to start looking at their investments as more long term, allowing their clients a chance to grow into the SMBs that African nations so desperately need to employ people. But there are other ways to close the mesofinance gap as well. One participant was very big on vendor financing, the practice of suppliers loaning money to customers so those customers can purchase needed equipment to jump start their business.

And Thembi recommended that governments use their buying power to force big companies to take on local subcontractors, bridging the gap between small and big, and transferring much needed skills in the mean time.

However it gets addressed, it’s clear the mesofinance gap needs to be bridged, and fast. Small and medium businesses do more than just grow wealth and provide jobs. They are engines of innovation. And Africa needs them.

June 12, 2007 in Africa | Permalink

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Comments

That is a great point about small and medium size businesses.

Posted by: Fred | Feb 19, 2008 8:57:23 AM

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