Infusing Life in Small Micro Enterprises

Published on 26th September 2006

The African economic fabric is made up of different sizes of enterprises, ranging from micro enterprises owned by cobblers, foodstuff traders, modest farmers, to large national electric, water and telephone corporations through multinational subsidiaries. Among the difficulties faced by small and medium scale enterprises in Africa is access to financial resources, which constitutes one of the crucial problems to be solved.

 

Consequently, microfinance enterprises can play a major role in the creation and development of SMEs in Africa. These organizations must therefore be encouraged and nurtured by the adapted legislations in order to enable them play their role in the economy of SMEs in Africa and especially the overall African economy. 

 

Definition, Role and Environment

 

In general, SMEs are defined by taking into account two essential elements; business turn-over and staff/personnel. In Côte d’Ivoire, for example, an enterprise having a turn over of less than 200 Million is considered to be a SME.

 

SMEs are an essential pillar and driving force in the economies of African countries. They significantly contribute to national wealth creation. In Côte d’Ivoire, for example, SMEs account for 30% of the GDP. They are the first reservoir of employment for the youth in African countries. They participate in the processing and export of local produce.

 

Socially, SMEs reduce unemployment, especially for the youth. They create services and products that  are adapted to the local context. Their “success stories” greatly motivate the youth, greatly curbing rural to urban migration, notably through the creation of small scale enterprises in rural areas.

 

The Environment of small and medium scale African enterprises

 

In Africa, most SMEs thrive in an unstable and uncertain political environment. There is very high pressure on entrepreneurs to dive into politics. Dissuasive administrative procedures, oppressive family and social parasitism, insufficiencies, incompetence, fiscal pressure, difficulty in importation or acquisition of modern production equipment and lack of support structures all endanger SMEs. The regulatory and fiscal environment has many barriers and is mainly geared at attracting foreign investment, multinationals and big companies.

 

Micro-Credit

 

Micro-finance must be considered as one of developmental pillars of Africa in the same manner as demands for democratization, training and education of the youth, health and putting up of infrastructures. Micro-finance is an essential tool in the fight against poverty and an efficient mechanism of access of African SMEs to financial resources.

 

Micro-credit is a factor in the creation of small and medium scale enterprises. It has allowed many women and young Africans to start income generation activities, in Côte d’Ivoire, Benin and Kenya among others. Generally, the creation of small scale African enterprises necessitates little capital. Administrative and technical conditions for access to micro-credit are less constraining and conditions of guarantee are generally accessible to SME promoters. The proximity and flexibility of micro-credit institutions make them easily accessible to developers of SMEs.

 

Micro-credit institutions can be good financial advisers to creators of SMEs leading to their expansion. The institutions can facilitate Micro-leasing: for facilitating acquisition of production equipment for SMEs; Micro-factoring: to support the SME treasury; Micro-insurance: to cover specific risks inherent to the size of the SMEs and acquisition of credit.

 

Legislation

 

Micro-credit can only be available with solid and reliable institutions. Legislative measures should be favorable to the enhancement of Micro-credit Institutions. The crucial role played by Micro-credit Institutions in the development of Africa should be recognized by law. Coherent frameworks and national strategy for the Micro-credit sector should be established alongside a follow-up policy in order to enhance the impact of the Micro-credit sector at the national or sub-regional level. Micro-credit Institutions should be allowed to promote the use of modern financial instruments such as debit cards, VISA cards, electronic money transfers and other modern instruments of payment current or yet to be put in place.

 

Taxation

 

Specific and attractive taxation measures favorable to the Micro-credit Institutions should be adopted. Tax exemption or reduction should apply on the interests and commissions applied by Micro-credit Institutions to their customers and particularly to African SMEs. 

 

Micro credit institutions on their part should have measurements for good governance. The external measures include: monitoring and effective surveillance; a continuous training center for executives and staff; putting up of a risk management center; supporting the computerization of the institution; tax exemption of IT equipment; and setting up a system of evaluation. Internal measures include a clear definition of short, average and long term strategies; recruitment, training and maintenance of qualified personnel; establishment of efficient management and administrative bodies; up to date internal procedures and  focusing  on the mandate; forming strong partnerships with  financial institutions to ensure efficient refinancing; flexibility and guarding against corruption.

 

What should central governments do?

 

They should recognize Micro-credit as an essential instrument for the attainment of MDGs; relate development policies of the SME sector to  a sector support policy to Micro-credit institutions; recognize by law the specificities and the special crucial role of Micro-credit institutions in the financing of African SMEs and the development of African economy; adopt laws that favor the creation and development of reliable, viable and strong Micro-credit institutions and put in place a national strategy in line with Micro-credit sector aimed at giving support to African SMEs. They should put in place a follow-up policy on the impact of Micro-credit institutions sector on African SMEs at national and sub-regional levels; tax in favour of African Micro-credit institutions so as promote their emergence and support to SMEs; exempt or reduce taxation on interests or commissions charged by Micro-credit institutions to their clients and in particular to SMEs; reduce taxation on refinancing of micro-credit institutions and expand the scope of Micro-credit institutions to innovative financial services.

 

What should Mayors, Councilors do?

 

They should put in place local programs reliable and credible Micro-credit institutions; promote setting up of Micro-credit institutions on their domains of competence that can support the formation and development of local small enterprises; facilitate women and young graduates in particular to access credit and put in place a follow-up policy on the impact of Micro-credit institutions sector on local development.


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