Driving Resilient Economies Through the Digitization of Small and Medium Enterprises

By

Gerald Maithya

Startups Lead Microsoft Africa Transformation Office

Small and Medium Enterprises (SMEs) are a crucial part of contributing to Africa’s inclusive socio-economic growth. These businesses anchor the economies of countries and are contributing to inclusive socio-economic growth. In emerging economies, SMEs account for 40% of GDP,  and generate at least 90% of new jobs.

This is even more pronounced in Africa, where more than 60% of Africa’s population is under the age of 25. SMEs account for about 80% of jobs in Africa, while the African Union Development Agency notes that up to 90% of the population in African countries such as Uganda, Ethiopia, and Kenya are employed within SMEs.

In Nigeria, SMEs account for 96% of businesses, and 84% of employment in the country, and contribute 48% of the country’s GDP, according to a PricewaterhouseCoopers report. Of these SME’s, 55% are in wholesale or retail business.

SMEs employ people, supply products and services and act as an important link in the manufacturing value chain, generating economic activity along the way. The way that many manufactured products reach consumers is through SMEs, usually through a network of small independent retail stores such as dukas and kiosks in Kenya, ojas in Nigeria, hanouts in Morocco or spaza shops in South Africa. In doing so, SMEs are the cornerstone of most economies. By enabling SMEs to grow and compete in the value chain, countries’ economies can be strengthened.

SMEs face many obstacles on the path to success

Despite the important role SMEs play in African economies, there are several challenges standing in the way of their survival and success. In fact, research indicates that up to 80% of African SMEs fail within the first five years, despite having the highest entrepreneurship rate in the world. Infrastructure and connectivity, access to business enablement tools, access to finance and digital skills are all potential stumbling blocks for SMEs.

The biggest obstacle most SMEs face is accessing finance and affordable lending. These businesses frequently lack suitable information such as a credit history, financial statements and other prerequisite data points, while the traditional credit-scoring models that many financial institutions use prejudice SMEs. Without access to working capital, SMEs are unable to invest in their business and grow. There is a need to enable tools that SMEs can utilise to collect and manage transactional data that can be used to provide valuable business insights to guide decision-making for the SME, and that can be leveraged to create financial reports.

Digitising SMEs has benefits that support economic growth

Digitisation can help businesses build a financial and transactional history that helps them access loans. This information and well-organised data can enable access and diversification of financing for SMEs in Africa. This financing in turn helps them grow their business, employ more people and contribute to their country’s economy.

Microsoft engages with international organisations such as the IFC, and local financial services institutions, to create innovative financing mechanisms for SMEs on the African continent that enable them to build a credit record and differentiated data sets that tell the story of the business rather than a pure money-in-money-out overview. This allows for a wider range of borrowing opportunities, enabling SMEs to become part of the integrated value chain and participate in the formal economy.

Business tools are an important part of the journey

To successfully complete their digitisation journey, these small and medium businesses also need connectivity and devices that are suitable for business development. Challenges around connectivity and device affordability are certainly not new to Africa. Though the issue of internet access varies considerably depending on the country in question, high cost of data is still a major hurdle for many nations across the continent. Research from the Alliance for Affordable Internet shows that just 14 out of 48 countries in Africa have access to affordable internet, with affordability defined as 1GB of mobile prepaid broadband costing two percent or less of the average monthly income.

Microsoft is working to address Africa’s connectivity issues through the Airband Initiative, which provides investment into infrastructure that drives connectivity. The initiative partners with African startups that are overcoming barriers to affordable internet access in unconnected communities by using TV white space (TVWS) and other innovative last-mile access technologies. Accelerated internet adoption is the precursor to digital enablement. Recently, Microsoft announced that it is expanding the Airband Initiative through new partnerships with local and global providers to bring internet access to 100 million Africans by the end of 2025, and working with partner Viasat, Microsoft is extending satellite connectivity to 5 million Africans.

Another sticking point is access to business hardware. The vast majority of SME owners and entrepreneurs in Africa rely on smartphones to run their businesses. However, being able to access devices such as laptops with preloaded software could help business owners to manage their business processes and reap the rewards of access to best-in-class Software as a Solution (SaaS) products more easily.

As a company, Microsoft has recognised that different SMEs have entirely different solution requirements. Microsoft differentiates itself by working with Independent Software Vendors (ISVs) and startups who build software solutions that can be used with Microsoft technologies. This allows businesses of all sizes to these solutions from the marketplace, with the benefit that when curating a business bundle, an SME can look at their specific needs and match to the software that’s in the Microsoft Marketplace.

The digitisation journey must include skills development

SME owners often have little access to business skills development opportunities. Through platforms such as the Africa Transformation Office’s SME Skilling package, Microsoft Learn, the Cloud Academy and LinkedIn Learning, SME owners can increase their business understanding to help their day-to-day business operations, build their business literacy and develop the technical understanding necessary to support their digitisation journey.

Digitisation can significantly enhance financial inclusion, most particularly for unserved and underserved enterprises such as SMEs. Creating an enabling environment for these important economically active businesses that helps them thrive and participate actively in the continent’s economies is essential for sustainable and inclusive economic growth.