According to the Central Bank of Nigeria, 96% of Nigerian businesses are SMEs (US = 53%, EU = 65%). Inclusive growth can be achieved by positioning these SMEs to take advantage of the opportunities in the economy.

Financial services is crucial to SMEs

According to the Small Business Administration of the USA, two of the top 10 reasons why SMEs fail are lack of capital, and poor credit management. It is no different in Nigeria and the rest of Africa. While there are several aggregators/sources of capital including Private Equity (PE) funds, development finance institutions (DFIs) and insurance companies in Africa, the key players in the financial services industry that are optimally positioned to serve SMEs and therefore drive inclusive growth are banks and micro-lenders.

Government macro-economic policies impact SME financing

Lenders operate within the wider macro-economic environment, and government policies regarding inflation and infrastructure are crucial to keeping the cost of funding down. When inflation drives up the cost of funding and ultimately lending costs, it in turn drives up the cost of production, making SMEs less competitive.

Standardisation of physical address systems is another area where African governments can make a meaningful contribution to SME growth. Inconsistent address systems make it difficult for SMEs to establish formal relationships and credit histories with suppliers, customers and transient clients.

What can banks do?

At the credit application and processing stage, banks need to invest in systems that allow more efficient and tailored risk profiling. Such a system rewards diligent entrepreneurs with lower lending rates and greater access to capital.

Post-disbursement, the establishment of dedicated advisory/support teams can help minimise credit risk and improve credit management by educating and advising SMEs on day-to-day financial management, record-keeping and corporate governance. The incremental cost of this will be easily offset by increased patronage and lower default rates.

Banks also need to create systems for long-term funding by innovating longer tenured liability products. In Nigeria this sort of long-term funding would help the growth of the manufacturing and agriculture sectors, which are better positioned to create more jobs.

Tapping into private equity

SMEs can now look to a wider range of funding sources including private equity, DFIs and diaspora remittances.

PE is critical to developing SMEs. PE institutions are a source of capital that remains largely untapped in Nigeria. They offer a number of secondary benefits that cannot be easily quantified.

PE institutions provide a diversified mix of capital, debt, equity, preferential shares, etc. They also provide capital over every stage of an SME’s growth: from start up to expansion.

PE institutions are good at spotting investment opportunities – risk capital goes where it will work best. They help individual companies fulfil their potential, and the macro effect is to drive efficiency and growth across the entire economy. Their high level of commitment means they offer significant operational support to SMEs (in order to protect their investment).

Furthermore, PE institutions help instil an accounting discipline, something that is often absent from a one-person start up, or even an established family firm. They help to spot talent within an organisation and can provide access to a bigger human capital pool and to training opportunities. They are also able to attract talent, a function that SMEs find challenging as they simply don’t have the resources or skills to find suitable staff.

On an operational level, PE institutions provide the discipline for SMEs to base their operations on the best environmental, social and governance principles. They also use their networks to help SMEs grow and expand outside of their local environment: via acquisitions or via additional capital for expansion. PE institutions are instrumental in launching SMEs into a higher orbit of operations. PE institutions are normally not involved longer than seven years, and at the end of their involvement will help the SME with its IPO, when it becomes a listed company.

DFIs

Development finance institutions (DFIs) are another category of investor that can help power SMEs. Examples of DFIs include organisations such as the International Finance Corporation, the CDC (UK’s Development Finance Institution), and the FMO (the Dutch development bank). Traditionally DFIs will fund SMEs indirectly, by lending to PE institutions, who do the investing.

But there is a trend starting whereby DFIs invest directly in SMEs. At present DFIs limit their loans to between 3 and 5 years, but African economies will greatly benefit from more long-term arrangements.

Diaspora remittances and unclaimed dividends

It is estimated that expatriate Nigerians remit approximately US$21 billion per annum. This is more than three-quarters of the national budget. This inflow can be aggregated to SMEs with the right framework such as through the active promotion of the Nigerian ASeM – the specialised board of the Nigeria Stock Exchange (NSE) for emerging business with high growth potential. There could be tax breaks on dividend income earned on diaspora remittances that are directly invested in certain SME categories.

Further, there is an estimated 45 billion naira worth of dividends in unclaimed trust accounts. The government can come up with creative ways of freeing this up to support the growth and development of SMEs.

Breaking barriers to growth

Finally, an African finds it much more challenging to obtain visas and to travel across Africa than an American. Transportation within the continent can be more difficult than trans-Atlantic trips and, according to the United Nations, though intra-Africa trade has enormous potential to create employment and catalyse growth, intra-Africa trade is only about 10% of total trade compared to 50% for Asia and 70% for Europe.

Governments need to allow the free flow of capital across borders into neighbouring countries and this can be achieved through trade. SMEs need to be incentivised to do business within the larger economic region, for example the ECOWAS common external tariff system that seeks to eliminate duties on trade between West Africa countries.

Already the mobile phone revolution is allowing contact beyond national borders. We must go further: the use and development of special banking applications/services to transact across borders must be actively encouraged. Africa has leapfrogged the rest of the world in freeing up its banking platforms and providing financial services to the rural poor.

Moving forward

Compared with large corporates and multinationals, most African SMEs operate, for the most part, at unsophisticated levels. They have a high cost-base, limited product range, and do not benefit from economies of scale. This must change.

For SMEs to compete and benefit from the economic growth sweeping across Nigeria, and other African countries, they need: better infrastructure, macro-economic stability, operational support, longer-term financing at single-digit interest rates, and better financial management principles.

SMEs are the spark that will ignite and launch the economic rocket that is Africa. The untapped capital is there. PE institutions and DFIs are eager to provide long-term capital. Governments are also making progress in getting systems in place. Stand by for lift-off!

by Dapo Okubadejo

It was a great pleasure for the CEO of Alliance 54, Ernest Okwudike to engage with her in a discussion recently to gain some insight and learn her views on the trends and development in the industry in Africa.

Impact investments are investments made into companies with the intention to generate social and environmental impact along with a financial return.

The research conducted in partnership with Dalberg, with support from the UK’s The Impact Programme also revealed that the recurring mischaracterization of Impact Investing with [venture] philanthropy has led to difficulty in raising capital because a fair amount of local investors are convinced ‘impact investing’ implies a compromise on financial returns.

Here are 6 more facts about the Nigerian impact investing landscape:

1: Nigeria leads the way in impact investing in West Africa

Twenty eight impact investors are active in the country, including 20 non-DFI and 8 DFI investors.

2: Impact investment deals in Nigerian amount to $ 1.9 billion in last decade

Identified impact investments (which include deals made by all DFIs – Development Financial Institutions –  and 12 non-DFIs) amount to USD 1.9 billion in deployed capital across 181 direct  investments since 2005

3:  Impact investing is still playing small in Nigeria

Although the impact investing sector in Nigeria outpaces other countries in the region, the community of investors is small relative to the size of the market. Ethiopia, for example, is less than a quarter the size of Nigeria in terms of GDP, but has almost triple (58) the number of non-DFI impact investors.

4: Investors are not local

Only seven of the 28 identified impact investors have a local presence as at December 2015. This is because of the high cost of living and operating businesses in the country. Nigeria ranks 170 out of 189 countries on the 2014 World Bank Doing Business index.

5:  The TEF is the only identified truly local impact investment fund

The Tony Elumelu Foundation—funded through the personal wealth of a Nigerian national, Tony Elumelu—is the only identified impact investor that relies significantly on local sources of capital

6: Most impact investments are in the $1-5 million range

Non-DFI capital is concentrated in the USD 1-5 million range, which accounts for almost half of capital deployed. The majority of deals, however, are less than USD 1 million.

By Gbenga Onalaja

Learn about the Impact Investing in Africa Forum supported by Google – CLICK HERE

Affiong is a leading example of Impact entrepreneurs building businesses that create jobs, increase access to opportunity, and enhance quality of life for their employees, customers, partners, and community.

Africa truly need more of such entrepreneurs that would help in creating the opportunities and enable millions of youths and women to be gainfully employed and sustain the current growth.

“Young companies all over Africa face a scarcity of funds to fuel their growth,” said Neku Atawodi, Founder of Malaik. “Apart from banks and occasional angel investors, there is often nowhere to turn. Malaik is turning this crisis into an opportunity for startups and investors alike by offering stakes in young African companies to the crowd. Our unique impact tracker means that investors can track their investments impact on the platform.”

Malaik is targetted at sophisticated investors, who understand the risks of investing in start ups. The platform uses a unique system of first identifying a lead investor before putting a company on the platform. The lead investor sets the terms and valuations of the deal, and personally invests a minimum of 25% of the companies’ asking round. The lead investor negotiates a fair valuation and is required to conduct their own due diligence before putting their money in. A lead investor may be an individual investing alone, or a representative for an investing group or institution. The crowd receives the same class of share, and the same price per share, as the lead investor, except indicated otherwise. Companies listed on Malaik decide how much money they want to raise in exchange for a certain percentage of equity, and each investor’s equity interest is proportionate to the size of their investment.

Malaik will focus on high-impact companies that provide jobs and solve social and infrastructural issues in African nations while maintaining profitability. The global portal will fund seed stage businesses requiring funding between $200,000 to $2,000,000. Malaik has identified local partners in key regions around Africa that will source for high impact start ups locally, entrepreneurs can also apply to be listed on www.malaik.com.

“We believe that business with an impact should be profitable,” added Atawodi, “and that innovative entrepreneurs are the key to developing a more prosperous and equitable Africa. Malaik’s unique job index will allow investors to view how many jobs are created by investing in the startups’ scale up plans.”

Malaik is the first platform in the world to track impact as well as financial reports. Malaik tracks a company’s impact using its unique impact tracker that tracks the company’s progress using measurable Sustainable Development Goals and reports it in an easy to understand dial system.

“The needs of our age are building a more sustainable world, fighting global poverty, global health issues and climate change, among others. The innovation in finance that responds to this need in Africa is Malaik: democratising impact investing into impact-driven African startups,” said Issam Chleuh, Malaik Impact Advisor and CEO Africa Impact Group.

Malaik charges no upfront or ongoing charges to investors, and receives nothing if a company does not make a profitable return. Malaik is showcasing its first fully funded company, I-drop water, a data powered innovative vending water machine that addresses the challenges of clean drinkable water in Africa. Press may request invites to private events in Lagos and Ghana this December.

Alot has changed from an ecosystem point of view but there is still alot that need to change .

Our year in review :

At the beginning of 2015 I shared our plans with DisruptAfrica and subsequently kicked off the “MeetInvestor series” for the publication and I am very happy to see the wonderful job that Tom and Gabriel have done with that platform .

We started a series of investment dinners called #FrontierInvestorsDinner in London and it was an excellent opportunity to curate great conversations and meet some people that are shaping our world today . Please see some of the photos from the July’s dinner with the Rwanda High Commissioner to the UKhere and we are looking forward to expanding this series to 5 cities around the world in 2016 .

AngelfairAfrica that took place in Accra, Ghana was the highlight of our events calendar because we were able to directly participate as investment partners and add value . Please find the full report and pictures here

NewGenFund was also established with the aim of investing in up to 10 over the next 18 months . The objective here is to give retail investors an opportunity to witness professional angel investing in practice. Our goal is to activate 1000 angels by 2020 .

In other news :

Africa Business Angel Network came alive in 2015 and run a number of workshops across the continent ,find out more about them here

Crowdfunding adoption is still low .

Infodev reports on lessons learned through East African startups, and it makes a very interesting reading , find the full report here

Predictions for state of Angel investing in 2016.

This is a long term play so hold tight because we are just getting started as an ecosystem so this is not the time for us to start cracking champagne .Having said that we expect the following things to happen :

• More deals will be done and they will be unprecedented in size. There are a few seed funds and micro funds have been raised capital in 2015 that will need to be deployed.
• More local investors will start doing some interesting deals , as more stories emerge.
• More corporate venture capital will be made available to more startups ,Safaricom and Interswitch have led the way but more corporates will be getting involved in 2016. You can read more about Safaricom’s CVC fund known as Spark here
• More impact investors will come out and stand up to be counted , our colleagues at RenewLLC have had a fantastic year and recently announced their 7th investment in Ethiopia .
• More small size acquisitions will be done in 2016 , looking at these top 5 acquisitions done in 2015 ( mind you that there were others that were completed but not publicly announced) . I can predict that more sub $20M deals will be done throughout the year across sub-Saharan Africa and North Africa .
• The three funds that I am really excited about are:
• 1)VentureGardenGroup -Nigeria
• 2)CRE Venture Capital -Pan-African
• 3)Chanzo_Capital -Ghana
• Last but not the least ,more governments will need to take a leaf out of Rwanda’s book and put together policies that are friendly to startups and investors .

If you Want a ticket to startup heavens, Here are 4+1 reasons to become an angel investor in Africa today .

How we made it in Africa also did a great feature on NewGenAngels and our progress so far ,please find it here

Wishing you a profitable #2016 !

By Sean Obedih, Founder, Diverse Code

This year marks the 20th year since Sub-Saharan Africa (SSA) embarked on a path of faster economic growth. Over this period, growth has averaged at 5,2% per annum, whereas the number of people on the continent reportedly living under US$1,25 a day has continued to creep up from 358 million in 1996 to 415 million in 2011; the year 2011 being the most recent year for which official estimates are available.

Can these divergent trends be explained?

The most obvious reason would be that all the benefits of growth were captured by the rich, resulting in ever-increasing inequality in each country — the rich are simply getting richer.

The data, however, doesn’t show much evidence of that. Distribution trends within African countries vary dramatically. The distribution is widening in as many countries as it is narrowing and in most countries it is not changing much at all.

It is possible that the very rich people, the top 1%, are benefiting from the share of the spoils of growth, by more than their fair share, but this is missing from the data as this rarified class tends not to participate in household surveys from which statistics and distributions are derived.

There are five other factors that can account for SSA’s alarming poverty numbers.

The first is the region’s rapid population growth of 2,6% a year. Incidentally, this correlates almost exactly to the average percentage increase of those living with less than US$1,25 per day from 1996 to 2011. While African economies are generating more income, that income has to be shared among an ever-increasing number of people.

Since the region’s income is growing faster than its population, average incomes are rising and the share of Africans living in extreme poverty is falling — from 60% in 1996 to 47% in 2011. But the rate at which poverty is falling is less than the rate at which the population is rising resulting in the number of people living in poverty continuing to grow.

In more general terms, SSA’s record of economic growth looks much less impressive in per capita terms. The World Bank has just released a revised growth forecast for the region in 2015 of 4%.

When you lop off 2,6% in population growth, you’re left with per capita income growth of only 1,4%, which in comparison to the world average where projected economic growth of 2,9% combined with population growth of 1,1% results in per capita income growth of 1,8% in 2015, is low. Africa’s growth this year, in per capita terms, is expected to be almost as much as 29% below the global average.

The second factor is the depth of Africa’s poverty compared to poverty elsewhere. In other words, poor people in Africa start further behind the poverty datum line than the rest of the world.

Therefore, even if their income is growing, it is rarely enough to push them over the US$1,25 threshold. In 2011, the average person living in extreme poverty in Africa lived on US$0,74 a day, whereas for the rest of the developing world it was 98 US cents.

The third factor is that even though inequality isn’t rising in most African countries, inequality is already at an unusually high level, making economic growth unable to deliver more poverty reduction, since the absolute increases in income associated with rising average incomes will be that much smaller for the have-nots versus the haves. Furthermore, the degree of inequality that exists on the continent is worse than it appears. The fact that Africa is divided into so many countries masks the big differences in incomes among them.

If Africa were a single country, its inequality would look much worse — worse even than Latin America. Since incomes across African people vary so widely, only a fraction of people are likely to cross the poverty line at any one time. That contrasts with India where a concentration of people immediately below the US$1,25 mark means that even a small increase in incomes can result in a sudden flood of people moving above the poverty line.

The above three factors explain why you would expect relatively little poverty reduction for a given amount of growth in Africa compared to elsewhere. These factors, nevertheless, cannot explain why the number of poor people in Africa has actually increased since the start of the century. For this, we consider the two final factors.

The fourth factor is that there is a degree of mismatch between where growth is occurring and where the poor are on the continent. Undoubtedly, the region’s growth acceleration has benefited some of its poorest countries, including Ethiopia, Mozambique and Rwanda, whereas, others such as the Democratic Republic of the Congo and Madagascar have recorded little or no growth over the past 20 years and the number of poor people in these countries has risen accordingly. As long as a handful of the region’s fragile states struggle to build and sustain economic momentum, the number of poor people in Africa will not decline.

The fifth and final factor concerns data quality. Poverty estimates are drawn from household surveys, which in most African countries are conducted infrequently. Those that do take place often suffer from operational glitches that affect the credibility of the results. In Nigeria, for example, which accounts for a quarter of the people on the continent living in poverty, there are some well-documented flaws within its most recent national survey of living standards (not to be confused with the issues concerning the country’s national accounts, which were recently rebased). When new data becomes available, one may discover that Nigeria’s poverty rate is considerably lower and has been falling at a faster pace than previously thought.

As a general rule, aggregate poverty numbers for Africa should be handled with care, and small increases or decreases should not be taken seriously.

The dissonance between Africa’s growth performance and its poverty numbers is a striking phenomenon that demands an explanation. While intuition may lead us to call into question the region’s growth — it only seems to benefit the rich, the quality of growth is deficient and growth numbers are exaggerated — the above five factors suggest that the answer can instead be found by analysing Africa’s poverty data more closely.

The same five factors can explain why this difference is unlikely to go away any time soon. The World Bank anticipates much of the same for the next few years: the number of poor people in Africa is expected to remain close to 400 million until 2020, despite a forecast of ongoing robust economic growth.

By Ritesh Anand