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African Development Bank approves $125 million funding programme for small and medium enterprises in five low income African countries

|  By Maureen Chigbo  |  Aug. 5, 2013 @ 01:00 GMT

FINANCIAL institutions in low-income countries in five African countries would be the beneficiaries of an African Development Bank, AfDB, line of credit targeting small and medium scale enterprises. The board of directors of AfDB, on July 22, approved a four-year, $125-million funding programme for African Small and Medium Enterprises, SME, programme. The approval will be combined with a $3.98-million technical assistance package granted by the Fund for African Private Sector Assistance, FAPA, also aimed at supporting micro, small and medium enterprises, MSMEs, in Africa.

The programme will provide standardised lines of credit, LoCs, mostly in local currency, and technical assistance to the targeted financial institutions. The SME programme will avail important longer-term resources to thousands of SMEs including women and youth, thus contributing to job creation, poverty reduction and inclusive growth on the continent.

The SME sector is crucial to Africa’s growth, contributing more than 45 percent to employment and 33 percent to GDP. But the SMEs continue to face significant challenges. Studies indicate that more than 70 percent of the SMEs lack access to medium-longer-term finance, creating an SME funding gap of more than $140 billion in Africa alone. Well performing local SME-focused financial institutions lack access to longer-term resources from depositors, capital markets or other potential funders hindering the provision of medium- and long-term SME finance. Of the loans available, almost 60 percent is for less than one year. Financial institutions also often lack adequate knowledge and systems to assess and monitor SME projects and compensate this by relying on excessive – but mostly unavailable – collateral.

In response to these challenges, the AfDB, through the SME programme, will provide the necessary longer-term finance and a technical assistance package to address a number of the constraints faced by around 25 target financial institutions and their SME clients across Africa. Thus, the program will benefit from the Fund for African Private Sector Assistance, FAPA, support that will grant $3.98 million to provide technical support to building capacities of the 25 participating financial institutions to improve their operational efficiencies, in areas such as credit assessment and risk management, thereby contributing to better access to finance for African MSMEs sustainable growth.

FAPA is a multi-donor thematic trust fund, financed by the government of Japan, the AfDB, the Austrian Development Bank and the government of Austria. It provides grant funding for technical assistance and capacity building to support implementation of the AfDB’s Private Sector Development Strategy. The technical assistance grant for the AfDB Africa SME programme is the highest amount approved in the history of FAPA.

Improved access to financing amongst members of the majority of urban and rural dwellers who depend on smaller-scale business activities will allow further support to their living and that of their families and communities. Women are likely to benefit from the expanded outreach because they tend to operate more often in rural-based smaller enterprises. The social effects of the Africa SME programme will be significant given the particular support to microfinance institutions in low-income countries and fragile states, thus deepening access to finance for micro and small enterprises in severely underfinanced communities in the longer term, resulting in poverty reduction and social inclusion. In addition, the Program will also contribute significantly to capital market, private sector development and government revenue.

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