3 Challenges African Entrepreneurs Face When Building Businesses in Africa
Africa is the world’s second largest continent and the second most populous continent on earth. With a population of 1.216 billion as of 2016 and more than half the world’s growth projected to come from Africa by 2050, it’s easy to see how these staggering statistics can point to massive trade opportunities. The reality, however, is different.
According to the Brookings Institute, intra-Africa exports accounted for just 18 percent of total exports. That is compared to Asia and Europe, which both have 59 and 69 percent of intra-continent exports. When it comes to funding, the numbers provide a clearer picture of what gaps exist in the commerce ecosystem in Africa. UNCTAD reports that in 2017, foreign direct investment or FDI to Africa fell by 21 percent. (These numbers generally refer to Sub-Saharan Africa.)
Africa is the world’s second largest continent and the second most populous continent on earth.
Looking at these numbers, they represent a macro look at the commerce landscape in Africa. Zooming in, there are issues that face entrepreneurs, the builders of micro economies, at a smaller but equally important scale. In this article, we look at three of these issues and how they affect entrepreneurship in Africa.
Access to Capital
Capital in Africa is expensive. That is a huge generalization, but the basis of the statement remains. In Kenya, for instance, a non-secured loan attracts an interest rate of 14%+. This makes it very difficult for those without collateral to raise capital for ventures. In addition, for those who may have collateral, the best interest rate they can get is in the region of 9%. This is still extremely high when compared to other markets like Europe and North America.
Also, the lack of a robust credit rating system means banks have no way of measuring risk when it comes to credit. As such, most banks require either a pay slip or collateral in order to provide credit. This difficult access to cheap capital is a key issue we address at Entrefund Africa with our grant initiatives. Using data from P2P lending company Kiva, we know that cheap credit and outright grants can have a massive impact on entrepreneurship in Africa.
Access to Markets
Consider the United States or Europe. Both have intra-continent trade treaties that allow for the smooth movement of goods and services across state and country borders. In Africa, the situation is different. For an entrepreneur to expand from Kenya to let’s say Ivory Coast, there are multiple hurdles she must jump.
Geographic distance and poor transport infrastructure, language barriers (also a challenge elsewhere), tariff barriers and others create massive friction when trying to scale across Africa. While a lot has been done to make intra-Africa trade possible, a lot still needs to be done to create the type of near-frictionless trade that occurs in Europe and North America.
Access to Technology
As the world experiences a digital transformation renaissance, the challenge in Africa remains access to leading edge technologies at an affordable rate. One shinning point in this narrative is mobile penetration, a key opportunity for entrepreneurs who are keen on leveraging this massive trend in the continent.
Another encouraging development is the inflow of highly skilled diaspora back to Africa to start and run businesses. Bringing with them capital to bootstrap startups also provides a key growth area that can have a transformative impact on the continent.
How Can African Entrepreneurs Surmount These Challenges?
Access to Capital: While seeking funding from traditional lenders may be a challenge, there are other areas that African entrepreneurs can and should explore. These include crowd funding, grants such as those provided by Entrefund Africa, micro loans by companies like Kiva and others. What may be essential is for entrepreneurs to utilize whatever existing capital may be available to get a product/market fit before chasing after venture capital.
Access to Markets: Market expansion is a matter of scaling and requires funding. African entrepreneurs must therefore focus on first proving their business model and that it works “at home” before scaling to other countries. Exploring regional trade blocks like the East African Community or the Southern African Development Community can provide a foot in the door for companies seeking to leverage regional expansion.
Access to Technology: Thanks to cloud technologies, today almost any digital technology is accessible via an internet connection. African entrepreneurs must therefore embrace modern technologies in their business ventures to create stronger competitive advantages and scaling capabilities.
Africa is the next great commerce frontier of the world. With other markets aging and opportunities becoming hard to find, looking to Africa may be the solution. What is of the essence, however, is that African entrepreneurs must be ready to take their place on the stage of global commerce. They must be bold enough to dream big and work towards building businesses that not only scale across Africa but across the globe.