Small Businesses in Sub Saharan Africa - Essay Example

Management Table of Contents Introduction 3 Small Businesses 3 Overview of Small Businesses in Sub Saharan Africa 4 Constraining Issues 5 Constraint 1- Inaccessibility to Credit 5 Constraint 2- Poor Management 5 Constraint 3- Weak Infrastructure 6 Constraint 4- Corruption 7 Recommendations 7 Conclusion 8 References 10 Introduction This purpose of this project is to bring forth the present state of small businesses in Sub Saharan Africa. The small businesses contribute significantly to the growth of the economy and employment generation. However they are faced with a number of constraints. These constraints have been discussed at length in the project. Firstly it gives an overview of the small businesses sector in Sub Saharan Africa. Having done this the project discusses about each problem and the ways they affect these enterprises. Finally, it suggests suitable recommendations for confronting the various issues. Small Businesses In South Africa, the private sector comprises of 2.7 million numbers of small enterprises. Majority of these employees are informal and micro enterprises. Only 12,000 of them are considered to be medium and large scale enterprises. 2.7 million enterprises in the country generate employment for 9.3 million people across the country. About three-fourth of these employees are engaged in the small and medium scale enterprises. These enterprises play a major role in uplifting the economic condition of the country, however their progress have remained substantially slow over the last few years. The employment generated according to the size of enterprises has been presented in the following diagram1. In fact the government of South Africa considers the development of small businesses as an important step towards strengthening the economy2. Figure 1: Total employment according to size of enterprises (Source: Brown, (2005), “The Scale of the small business sector”) Overview of Small Businesses in Sub Saharan Africa Small businesses are said to contribute significantly to the employment growth in Sub Saharan Africa. The small businesses have been able to absorb more than 40% of the labor force in the region. The most prominent improvements have been witnessed in the five countries, namely, Kenya, Malawi, Botswana, Zimbabwe and Swaziland. The increase in the number of start-ups specifically accounts for the improvement in the level of employment in the region. Only about 25% of these small businesses have grown substantially, but their contribution towards employment creation has is substantial. Only 1% of the start-ups has effectively transformed into the intermediate sized firms3. The small firms are said to the backbone of the sub Saharan economy. The size distribution among the firms existing in Africa is highly skewed with large number of small firms4. The small and medium enterprise sector in Nigeria comprises of 50% of the country’s employment and 50% of the country’s industrial output. The contribution of small economies to the economic growth of Africa is at par with the advanced nations of the world. The Nigerian economy comprises of the most popular place for the growth enterprises employing less than 250 employees. However at present it has been confronting a number of hardships and problems. The recession has taken a severe toll on the SMEs in Nigeria. Apart from the economic downturn there are also a number of other factors responsible for retarding the growth of these SMEs. Under capitalism plays a special role in this regard reducing the access of these SMEs to the bank credits and other sources of finance5. Constraining Issues Constraint 1- Inaccessibility to Credit The most prominent problem faced by small businesses in Sub Saharan Africa is accessing the finance that is required to buy new equipments and vehicles to continue their operations. The region is going through tough economic conditions. They are in need for finance to help them grow their business. Although the small businesses are responsible for creating jobs, they are not able to operate properly due to poor economic conditions. They are either considered too large for microfinance or too small for the conventional banks. Thus their conditions continue to remain poor6. Constraint 2- Poor Management Poor management is an equally big issue retarding the growth of small businesses in the region. Eddy Njoroge, the managing director in one of the power companies in Kenya has commented on the management of the small businesses. According to him, “Nearly three-quarters of African countries have experimented with privatizing management of their power infrastructure, and about two-thirds have formed independent corporations’7. Only 50% of them have been appointed as regulators for monitoring the workings of the sector. But very few reforms have been implemented effectively. The African Government continues to reward and award people for heading utilities using political and personal connections and not because of merits. The African Government is said to be refusing to lose control of the management of these forms to keep the appointed people under their control and monitor their functions. Constraint 3- Weak Infrastructure Inadequate and poor infrastructure has restricted the growth of small businesses in the region to a considerable extent. Infrastructural constraints in the form of transport, information and communication technology are widespread in the African economy. Having 800 million numbers of citizens, 48 countries in Sub Saharan Africa collectively as much power as that of Spain, which is a country having 1/18th of the region’s population. The lack of reliable and affordable power is claimed to be most important constraints faced by investors for doing business. Despite having resources like hydropower, wind, solar and geothermal, there has been a considerable inadequate investment which has created supply imbalances. There has also been inadequate investment in maintaining the infrastructure. This has left most of the Sub Saharan African countries with poor electricity services, roads, ports, railways and an inefficient information and communications technologies sector8. Constraint 4- Corruption Corruption is a phenomenon which is associated with most of the African countries. This acts as major barrier towards investment in small businesses in the region. Corruption prevails in the form of bribery and capture of policies, corporate fraud, cartels and corruption in transnational transactions and supply chains. Corruption also prevails in the management of the small businesses. The businesses remain in the hands of the government despite having their own management. The management merely remains puppets in the hands of the government9. Recommendations The troubles that the businesses have been encountering regarding accessing credit should be addressed at the earliest. The government should make arrangements towards providing finance for the small and medium enterprises. Assistance should also be provided in the form of equipments and tools and other requirements of the enterprise. An important step has also been taken in this regard. This has been cited as follows. “In Malawi, IFC’s Africa Micro Small and Medium Sized Enterprises (AMSME) Program is working with the country’s NBS Bank to support the growth of small businesses, a powerful engine of job creation and economic growth”10. The small businesses should be provided assistance through leasing to address the problem of financial crisis. The International Finance Corporation has incorporated the African Leasing Facility (ALF), and the Senegal Agency for providing training to the small and medium size enterprises in the Sub Saharan Africa11. Steps should also be taken to spread the awareness among people about the benefits of the different financial instruments. This would not only help them to access finance but also reduce the risk of frauds and manipulations. Campaigns should be arranged in order to reach the owners of small businesses, government official, administrators and other parties who would be interested. The idea is to spread the awareness among the small businesses owners about the frauds they were subjected to and the ways of handling the problems. The government should specially emphasize in building the infrastructure of the region. The country id blessed for having a lot of natural resources which can be applied to the benefit of the country. The infrastructural constraints are to be provided the maximum emphasis for overcoming barriers arising because of the crisis. The government also needs to look into the corruption issues in the system. Recently a number of organizations have implemented measurement tools on the governance to avoid corruption. This has been done for the better designing of policies and monitoring the progress of the organizations12. Conclusion It is seen that that the small businesses if Sub Saharan African have been seriously affected by the recession. However they have succeeded in getting very nominal assistance from the African Government. Inadequate infrastructure, corruption, and financial crisis have taken serious toll on the progress of the enterprises. The role played by the government is also not considered to be adequate in meeting the needs of the enterprises. It is felt a more aggressive policy needs to be taken on the part of the government for the survival of the enterprises. Government assistance in combating corruption and spreading awareness about the accessibility of credit among the small enterprises would play a significant role in uplifting the conditions for the same. References Mead, D. C. (March 25, 2002). Abstract. The contribution of small enterprises to employment growth in southern and eastern Africa. Michigan State University. U.S.A. Ariyo, D. (January 23, 2008). Small firms are the backbone of the Nigerian Economy. Africa Economic Analysis. Retrieved November 16, 2010 from http://www.africaeconomicanalysis.org/articles/gen/smallhtm.html. Brown, S. (2005). Conflict and governance. African Minds. Jesselyn, M. (2006). Introduction to Entrepreneurship and Small Businesses. Entrepreneurship: fresh perspectives. Pearson South Africa. JSBE. (2005). The Concept of Entrepreneurship. Canadian Council for Small Business & Entrepreneurship. Vol. 18, No. 1. IFC. (March 25, 2009). Faces of Small Business in Malawi. Retrieved November 17, 2010 from http://www.ifc.org/ifcext/africa.nsf/Content/Malawi_Small_Businesses. IFC. (March 30, 2010). Supporting Small Businesses through Leasing. Retrieved November 17, 2010 from http://www.ifc.org/ifcext/africa.nsf/Content/Leasing_Senegal. Kimami, M. (October 2008). Regional initiatives can help cover deficits. Powering up Africa’s economies. Retrieved November 17, 2010 from http://www.un.org/ecosocdev/geninfo/afrec/vol22no3/223-powering-up-africas-economies.html. USAID. (May 2009). Development Challenge. Overcoming Infrastructure Constraints. Retrieved November 17, 2010 from http://www.usaid.gov/locations/sub-saharan_africa/initiatives/infrastructure_constraints.pdf. UNDP. (December 2007). Growing demand for National Assessments on Corruption. Mapping of Corruption and Governance Measurement Tools in Sub-Saharan Africa. Transparency International. Policy and Research Department. Read More