MY HUSTLE

Why small businesses in Africa stay small

Shortages in skilled labour, demand and capital are among the challenges hindering growth

In Summary

• Regulations and tax collection are enforced in an unfriendly manner

Image: SHUTTERSTOCK

The question keeps getting asked of why Africa rarely produces outstanding entrepreneurs in the league of Bill Gates, Warren Buffet, Oprah Winfrey, Mark Zuckerberg and Jack Ma of China.

There's no shortage of upstarts in Africa, from farmers to matatu owners, hoteliers, restaurant owners, small manufacturers, mechanics, market women and hairdressers. Some 84 per cent of Kenyans are either self-employed or working in small and medium enterprises. Small-scale businesses are clearly of great importance to the economy.

Why don't we see a Kenyan software firm growing to compete with Microsoft and Google? Why isn't there an African motor vehicle manufacturer challenging Toyota's dominance? Why does Africa import almost every piece of machinery it needs? There are good reasons and it comes down to the business environment. A report published by the World Economic Forum says entrepreneurs in Africa face the world's toughest business conditions.

The top five constraints to business in Africa are the informal nature of most enterprises, corruption, political instability, lack of electricity and lack of access to finance. For instance, the cost of taking loans in Africa is higher than elsewhere in the world. These problems are worsened by shortages in skilled labour.

A report prepared by the United States Agency for International Development describes the unfriendly manner in which regulations and tax collection are enforced. Many businesses fail to expand because import duties make it too expensive to acquire the necessary equipment. Large companies often part of a portfolio of businesses owned by already successful entrepreneurs have an advantage over small businesses because they lobby governments for investment promotions, special subsidies and protection from competition.

Low income among the population is another factor holding back African entrepreneurs. The village tailor may have the skills and the equipment to make a dozen dresses a week, but she makes two a week because of low demand. Poverty makes it impossible to save money for future investments.

Loans and financing are not easily accessible because most small-scale ventures are not formally registered. Business registration is a tedious, bureaucratic process that requires payment for licences and permits. The Centre for Strategic and International Studies estimates that only a quarter of SMEs in Africa have a bank loan or line of credit. Without low-interest loans, businesses cannot grow. This is why the Government of Kenya has launched various loan programmes for small businesses. These include the Youth and Uwezo Funds.

With this gloomy outlook, what options exist for an African aspiring to become a billionaire? Can Africa produce a Bill Gates, a Steve Jobs or a Jack Ma? The good news is that there are several billionaires across Africa from whom we can draw lessons. If you wish to join that class, take one of the following paths:

1. Join government and make friends among the political class.

2. Get into a joint venture with foreign partners.

As cynical as it sounds, being close to politicians or partnering with foreigners is good for your business. Politicians will help you navigate difficult government processes. Foreign partners are likely to bring funding and technology to help your business grow to greater levels. They might also open up new markets in their country of origin.

WATCH: The latest videos from the Star