THE COMPLEXITY IN ATTRACTING QUALITY INVESTMENT TO SMEs IN AFRICA

Photo Credit To Frederic Bastiat Institute Photo

Sometimes, it is hard to admit per guesses that the private sector definition of Africa is largely dominated by domestic small and medium scale enterprises. Its corporate Enterprises are largely non-profit making government agencies, its developing banks, and the multi-national companies. The above assertion is empirically proven by numerous literature that the SME sector estimated holds over 80% of the Africa domestic economy. Therefore we will all concur with the fact that when the health and the fate of this sector are questionable, so is the state and fate of the African economy. It is now a popularly known issue that in Africa the rich are all in the political class as in government office while the poor wallow in economic struggle or poverty in a sector, which may be defined in the context of this paper as the stagnant private sector. It only in exceptional cases that we have about 2-3% of indigenous people in Africa being rich out of the political sphere, rather in private sectors, like the business mogul Aliko Dangote and few others. This was the axiom of the argument posited in my 2016 academic paper and the second edition of my book Entreprenomics ISBN: 978-613-9-98876-1 by LAP LAMBERT Academic Publishing. It is evidenced per performance that in such an environment, most indigenous businesses are established not to solve market problems as expected of entrepreneurs but rather for self-serving interest and survival economic agenda, as a result, this kind of enterprise setups lack market-driven vision for a long term profit sustainability hence potentially become toxic projects to attract quality investment.

The World Bank Group report of 2019/2020 on easy to do business among the 190 countries of the world, starting from the bottom of such chart begins with an African country Somalia all the way to 90th position are still African countries comfortably leading. So it has not been surprised, why the elite on the continent of Africa find politics and government offices as lucrative enterprise and sees it as a ‘do- and-die’ affairs agenda unlike the European, American or the Asian market.

 However, the focus of this article is to critically analyze the difficulty in packaging the domestic SMEs to compete for corporate funding and how my institute over the years has strived to resolve this narrative. In this article, the quality of investment will be defined as “a fundamental criterion, which a funding package possesses as a benefit to an SME, taken into consideration the business category characteristics”. This implies the criteria package for a corporate enterprise funding will be a high-cost burden to a small and medium scale enterprise. Yet the profit-driven investment community focus with less interest at enterprise structure, but with much interest in ventures with the most profit rewarding to their investment commitment. This assertion above does not necessarily conclude we have no profitable SMEs than corporate enterprises in Africa. But the argument is how to empower the vulnerable SME market of Africa into a formidable Industry to inspire a vibrant economy of the continent of Africa.

  In the past two decades, all investment grants were donor-driven and non-profit engineered as a foreign direct investment to capitalized Africa domestic SMEs industry hence the condition of interest on those funds were very mild in terms of the cost of capital yet most were channel abused, meaning (government sector failed to implement the capital requirement). Today such donor funds are not easily accessible for start-ups and SMEs to tap into it as a large scale initiative.

This means SME owners have no special funding market in favour of them as against corporate enterprises in today’s Africa and this reality has to be very clear to the emerging entrepreneurs and the existing ones on the continent. If that is the situation, then it implies the fundamental conceptualization of every start-up business and its vision should be very grounding as a foundation to enable other business models to build on it. From the above-proposed instance, it is the only reason venture could attract quality investment and solve the first most important problem of Investment Bankers on SMEs related projects in Africa. It is easily observable that areas, where donor and grant funding are accessible as a credit-support, is no more mass scale through government but rather project-centric to gather talented youth experts in those areas as in the case-study of Information technology advancement.

The next burden to Investment Bankers in the SMEs sector of Africa is having idea-owners parroting how profitable they believe and think their ideas worth hence expecting investment and sympathetic support without appreciating the fact that the value of every idea is measured from it quantifiable risk excluded from it expected revenue generation, scientifically analyzed.  Which has to be presented in a cogent document, termed us, ‘Bankable Document’.The effort to develop such a document around your project should be viewed as a valid ‘visa’ in securing quality funding and a principle documentation compass of the venture. And its development process is a very cumbersome and complex design for SME project than corporate enterprise, especially measuring the accuracy of the risk content and mitigation approaches mutually beneficial to the project promoter and the investor. The worst scenario is businesses that have no exiting history of operational performance or poor audited accounting records to build investment analysis projections from yet has a strong profit potential per a survey market conditions towards demands, which the investment bankers may classify it as quality ‘off-taker’ deal. In such instances, it does not only need a technical expert who knows how to conduct risk analysis using models for investment quantification and viability but a practitioner who understand the dynamics and evolution of various markets of Africa to pose accurate assumptions governing project risk analysis and profitability, which is in perfect equilibrium to the realities of such market. In my experience, the most ignored risk study area in business plan conceptualization is the ‘agency cost’ which poses a threat to the output effect of production in developing and underdeveloped economies of this continent. Therefore the skill to model out the attitudinal effect in labour force contribution to optimum productive expectation is not just a formula work but involves hardcore thinking, comparative cross-check of data in contextual analysis within a speculative economic environment of Africa. And these are done with a precision of experience.

 It is therefore sad to realize most of the SME owners think the cost of investment in such documentation is very high as a result of placing no value to such document, forgetting that a potentially profitable business idea with a weak documentation will win you no investment instead promote an environment for smart minds to steal the idea and make profit out of it or attract investment support at a high collateral cost and Interest rate. Less take for instance a case of seeking for $10 million hard currency against any soft currency of Africa origin, which most have a very bad exchange rate status with the US dollar and in itself possess a high risk to the investment deal, yet you are required as an SME to search for a collateral double the credit facility with an Interest rate above 10% to work within such a developing or underdeveloped economy, meanwhile, the interest rate of the US economy is less than 5%, it concludes that the bankruptcy risk on the project is very high within its lifespan.

The conclusion is to admonish all Entrepreneurs or SMEs owners to place a special value to their ‘Bankable documentation’ for funding opportunities just as the visa is required as an entrance to any country of destination. That is the only means to attract quality investment very affordable and sometimes without rigid capital conditions in favour of the type of business you may be engaged to.

This means SME owners have no special funding market in favour of them as against corporate enterprises in today’s Africa financial market and this reality has to be very clear to the emerging entrepreneurs and the existing ones on the continent. If that is the situation, then it implies the fundamental conceptualization of every start-up business and its vision should be very grounding as a foundation to enable other business models to build on it. From the above-proposed instance, it is the only reason venture could attract quality investment and solve the first most important problem of Investment Bankers on SMEs related projects in Africa. It is easily observable that areas, where donor and grant funding are accessible as a credit-support, is no more mass scale through government but rather project-centric to gather talented youth experts in those areas as in the case-study of Information technology advancement.

The next burden to Investment Bankers in the SMEs sector of Africa is having idea-owners parroting how profitable they believe and think their ideas worth hence expecting investment and sympathetic support without appreciating the fact that the value of every idea is measured from it quantifiable risk excluded from it expected revenue generation, scientifically analyzed.  Which has to be presented in a cogent document, termed us, ‘Bankable Document’.

The effort to develop such a document around your project should be viewed as a valid ‘visa’ in securing quality funding and a principle documentation compass of the venture. And its development process is a very cumbersome and complex design for SME project than corporate enterprise, especially measuring the accuracy of the risk content and mitigation approaches mutually beneficial to the project promoter and the investor. The worst scenario is businesses that have no exiting history of operational performance or poor audited accounting records to build investment analysis projections, yet has a strong profit potential per a survey market conditions towards demands, which the investment bankers may classify it as quality ‘off-taker’ deal. In such instances, it does not only need a technical expert who knows how to conduct risk analysis using models for investment quantification and viability but a practitioner who understand the dynamics and evolution of various markets of Africa to pose accurate assumptions governing project risk analysis and profitability, which is in perfect equilibrium to the realities of such market. In my experience, the most ignored risk study area in business plan conceptualization is the ‘agency cost’ which poses a threat to the output effect of production in developing and underdeveloped economies of this continent. Therefore the skill to model out the attitudinal effect in labour force contribution to optimum productive expectation is not just a formula work but involves hardcore thinking, comparative cross-check of data in contextual analysis within a speculative economic environment of Africa. And these are done with a precision of experience.

 It is therefore sad to realize most of the SME owners think the cost of investment in such documentation is very high as a result of placing no value to such document, forgetting that a potentially profitable business idea with a weak documentation will win you no investment instead promote an environment for smart minds to steal the project idea and make profit out of it or attract investment support at a high collateral cost and Interest rate. Less take for instance a case of seeking for $10 million hard currency against any soft currency of Africa origin, which most have a very bad exchange rate status with the US dollar and in itself possess a high risk to the investment deal, yet you are required as an SME to search for a collateral double the credit facility with an Interest rate above 10% to work within such a developing or underdeveloped economy, meanwhile, the interest rate of the US economy is less than 5%, it concludes that the bankruptcy risk on the project is very high within its lifespan.

The conclusion is to admonish all Entrepreneurs or SMEs owners to place a special value to their ‘Bankable documentation’ for funding opportunities just as the visa is required as an entrance to any country of destination. That is the only means to attract quality investment very affordable and sometimes without rigid capital conditions in favour of the type of business you may be engaged to.

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Dr. Emmanuel TWENEBOAH SENZU, a research Professor of Economics and Investment Banking. Head of Research, Frederic Bastiat Institute Africa. www.fbiresearchedu.org | Fellow, IPAM University Sierra Leone. [Article slightly revised]

Post source : Frederic Bastiat Institute Africa Library

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  1. vurtil opmer

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