Economic development in a downturn: will Africa survive?

31st July 2009

"African small businesses had poor access to credit before, they still have poor access to credit and they will have poor access to credit in the future," said Peter Hinton, CEO of the Summit Development Group, an investor in African small businesses.  "The credit crunch is less important that the history of under-development which has left a lot of small and medium sized businesses unbanked and access to credit impossible." 

According to the World Bank's Enterprise Survey in 2008, just 22% of sub-Saharan African companies had appropriate credit compared to 51% of those in South Asia.  65% of small and medium sized companies in the region say that access to credit is a major constraint on the growth of their businesses, yet some $11.7bn went into microfinance investments during 2008 according to The Economist.

According to Klaus Niederlaender of the Centre for the Development of Enterprise in Brussels, the situation for these micro-financed firms is the same as it was and may even be slightly better as international agencies are committing so much resource to microcredits.  However, for those companies who are either wanting to grow beyond the microcredit stage or who are heavily exposed to export markets, the recession is definitely taking its toll.  "There are no new credit lines opening up and those that exist have become more expensive.  Those with export markets are seeing their markets close off as multinationals move out of riskier operations or just downsize.  This disproportionately hits the small companies because they are so dependent on the international system."

There are two issues that are affecting the countries in Africa at the present time.  The first is the need for dedicated banks who provide normal banking services to embattled small and medium sized companies.  The market is relatively small but it is growing as China, Brazil and India become major export markets. The development of small, local banks is encouraging but this needs to be accelerated in order to ensure that a funding escalator between microfinance and development finance exists.

The second is the challenge of development itself.  The continent's history is one of conflict and poverty and this presents a greater danger potentially than the downturn as tighter economic conditions put renewed strain on social and political structures that are relatively young.  The potential for social unrest and political conflict is evident.

However, there is grounds for optimism according to Niederlaender.  Africa is a youthful continent and its young people are frustrated with under-development.  While youth can increase violence and volatility, he argues, there are real reasons to believe in the groundswell of young people who are connected through the internet to the world outside of their immediate experience.  They are motivated to train themselves, they are ambitious and they are entrepreneurial.  They are the future hope for Africa.