Opportunities And Challenges Of Operating A Small Business In Africa

In today’s diverse global economy, we’re starting to see new business opportunities arise from emerging markets. Africa is experiencing a boom as SMEs are growing exponentially across the continent. This should come as no surprise. After all, there are 54 countries across Africa, with a population of 1.4 billion people.

According to the World Economic Forum, “the vast majority of venture capital in Africa is scooped up by just four countries: Nigeria, Egypt, South Africa, and Kenya, Africa’s “big four.” 

Tech start-ups, in particular, are undertaking a significant boost, with 564 companies securing over US$2 billion in investment in 2021 (source: African Tech Startups Funding Report 2021, as reported by Disrupt Africa.

But while the big four are receiving economic investment, the WE Forum highlights the lack of investment in countries such as Tanzania, Ethiopia and the Democratic Republic of the Congo.

With this in mind, we want to understand the opportunities and challenges of operating a small business in Africa.

Five Key Challenges for SMEs in Africa

Five distinct challenges could prevent small- and medium-sized enterprises from succeeding in Africa.

Let’s look at each one in more depth.

Difficulties Raising Capital

While investors are keen to invest in African start-ups, there is an uneven balance of financial support amongst African nations. As we’ve briefly mentioned, the so-called Big Four nations are receiving significant financial support, while start-ups in smaller countries lag far behind.

Access to financing remains a significant constraint for African start-ups. Part of this could be due to the lack of access to mobile financing. While the number of adults with access to a basic transaction account with a financial institution or mobile wallet is rising, there are still discrepancies between countries. For example, Kenya’s percentage of adults with access to mobile money stands at 73%. In contrast, the percentage of adults in the Congo Republic, Mauritius and Nigeria is just 6% (source: MFWFA). This low access to necessary funds means it’s incredibly difficult to have access to the cash needed to start a new company.

There is also a lack of engagement from commercial banks. As a result, high-income countries can rely on the international markets much more easily than developing nations, which continues to impact the discrepancies in funding opportunities across Africa.

Lack of Access to Talent Causing a Skills Gap

A huge issue for African start-ups is the lack of digital skills. This isn’t just about skills for those working in tech start-ups; it’s also for those needing digital skills to help them streamline and improve efficiencies across a wide range of sectors.

It is believed that “Some 230 million jobs across the continent will require some level of digital skills by 2030” (reported by WE Forum), and the infrastructure needs to be available to allow development of these skills. So, it’s not just about creating new training workshops and upskilling individuals; it’s about learning how to develop courses that will create the digital skills needed now and for the future.

International Finance Corporation and World Bank research have examined Côte d’Ivoire, Kenya, Mozambique, Nigeria and Rwanda markets.

“According to the preliminary findings, by 2030, some level of digital skills will be required for 50–55% of jobs in Kenya, 35–45% in Cote d’Ivoire, Nigeria, and Rwanda, and 20–25% in Mozambique.”

Source: WE Forum

But the lack of infrastructure across different nations could significantly hamper progress. For example, while Kenya has access to broadband services across 70% of its population, only 35% of schools in Nigeria have access to a power supply, making it much harder to incorporate digital skills into basic education.

Without this issue being addressed, the skills gap will continue to grow into a chasm.

Africa Is a Tough Regulatory Landscape

Launching a business can be hard when government policies and regulations hamper the process. For example, the Intra-African Trade is notoriously slow and difficult to manage. Added to the complexities are the different regulations from domestic banking systems and the lack of a universally accepted regulatory framework that can make it tricky to find ways to work with other suppliers and third parties.

Without simplification, the regulatory landscape could be preventing business success in Africa.

Thankfully, many national governments are working to create streamlined solutions to enhance intra-African trade.

Poor Infrastructure

While Africa has an enormous entrepreneurial spirit, this is often hampered by the poor infrastructure that hinders business progress. For example, we’ve already mentioned how Nigerian schools struggle to access basic power supplies. But suppose African nations are keen to be perceived as economic powerhouses. In that case, they need to invest heavily in infrastructures such as:

  • Roads
  • Power connectivity
  • Internet supplies
  • An efficient transport system

Failure to invest in these areas will always prevent productivity and progress.

But plans are in place to improve the infrastructure.

For example, “Africa’s annual investment in infrastructure has doubled to around $80 billion a year since the beginning of this century.” (Source: Brookings.edu)

Just recently, the ambitious Lekki Deep Sea Port in Nigeria was completed, giving the country significantly more opportunities to process imports and exports. This port alone will create 170,000 jobs and could contribute up to $360 billion to the economy over the next 45 years.

It’s a Competitive World

As with any start-up in any country in the world, competition is always a challenge. But in Africa, firms are often reluctant to take a chance on new players. Instead, people and companies prefer to work with existing businesses with strong reputations who know how to navigate the challenges of poor infrastructure and complex regulations.

But the entrepreneurial insights from African start-ups show the progression and ambition from across the continent. As the infrastructure improves and governments create hubs where entrepreneurs can find all the paperwork they need in one place, it will naturally become easier for SMEs to turn their opportunities into progress.

The Five Opportunities for Small Businesses in Africa

It’s not all an uphill struggle. There are also wide-ranging opportunities available. From increasing urbanization to a thirst for innovation, African start-ups have a unique opportunity to break down barriers and work toward sustained economic growth.

Fast Urbanization

The population of Africa is continuing to grow, mainly in urban areas. Growth markets in these areas create new opportunities for sectors such as:

  • Food and drink
  • Pharmaceuticals
  • Healthcare
  • Education
  • Financial services

There are also opportunities to push cities as tourist destinations, allowing SMEs to highlight local products or services to new global audiences.

Increasing Digitization

Earlier on, we discussed the impact of access to mobile technology. There is a rapid demand for mobile usage across Africa, and as infrastructure starts to change and adapt, start-ups and SMEs have a huge opportunity to respond to this.

Internet access is becoming more accessible. African entrepreneurs are finding ways to make internet connectivity portable, allowing those living in rural areas or harsh environments to benefit from technological advances. If accessible and affordable technology can be taken to rural areas, there’s a better chance for business progress in new places.

A clear example of this is BRCK, a telecoms company that originated in Kenya. Its portable router was designed specifically for places with limited electricity or internet connectivity.

As these types of products thrive, they can be taken into schools where young people can have the opportunity to get a better education and learn these essential new digital skills.

Population Growth Can Be an Opportunity

African businesses should see the increasing population as an advantage because it offers a potential pool of talent to tap into. These people are growing up in this new digital world and learning new skills to turn into progress.

From an employment perspective, the stronger educational opportunities across Africa mean employers can work with local people. By working as teams, they can upskill entire communities and transform areas into economic hubs.

As small businesses are more adaptable than larger firms, the additional benefit is that any training needs can be flexible and agile, allowing quicker and more responsive ways to create new products or services. From a long-term perspective, this could be essential to reducing emerging talent gaps.

A Thirst for Innovation

The rapid pace at which new infrastructure is being laid across Africa means a real passion and thirst for innovation. Younger generations feel empowered and passionate, and thanks to better levels of education, they have the skills they need to get a business off the ground.

These younger generations are also actively working towards education and attainment levels, understanding that poor education will always hold African countries back. As a result, new academies have been launched in countries such as Kenya and Ghana. In addition, innovative tech-based organizations such as Andela have been finding people with potential and giving them the skills to become software developers.

With stronger education, African entrepreneurs and SMEs realize the untapped potential in the retail and real-estate sectors. Even traditional sectors, such as agriculture, are experiencing significant evolution, primarily driven by the accessibility and ease of technology. For example, many small businesses have realized that the sub-Saharan African landscape has the potential to become a global exporter of food products, and they are finding ways to streamline and innovate the production processes.

Growing Interest in African Businesses

The biggest opportunity for small businesses is the growing global interest in African brands.

International financing corporations have spotted the untapped potential in Africa and have realized that they need to invest in new areas to stimulate a stronger global economy.

Recently, the IFC announced a $1bn investment in African SMEs, with a further $1bn allocated to support imports and exports across Africa. The African Development Bank has also created a unique toolkit to help small businesses make the most of green business opportunities. These schemes have been designed to help small African businesses be more sustainable and unleash their potential.

These days, there is much better awareness of small and medium-sized businesses’ role in national economies. The proliferation of smaller firms means they can scale up and react to changing demand quicker than large firms and contribute significant financial support to local areas. This has a knock-on effect in improving communities and regions, and is important in strengthening Africa’s reputation as a global economy.

With the increase in profile, now is a good time for smaller businesses in Africa to look at their business models and see how they can create strong business plans that attract investment. In addition, the boom in certain sectors (such as mobile technology, retail, real estate and financial services) shows that the traditional image of African businesses is changing.

Final Thoughts

There’s no denying the huge challenges for businesses in Africa, but the continent is undergoing a significant change. New investments are being made, and rapid development is transforming opportunities across African nations.

The challenges that may once have been deemed insurmountable are evolving. The poor infrastructure was once a clear barrier to employment, but now, new entrepreneurs are finding ways to overcome this. As education continues to improve, and new schools and colleges emerge, the talent gap will continue to close, and entire communities will benefit from thriving economic environments full of prosperity and innovation.

It’s a truly exciting time for African businesses.

Author Info:

Amy Dawson is a freelance copywriter specialising in content creation and PR strategies. With a background in recruitment, Amy has spent years writing about how to make the most of your job hunt, from finding out where to search for your dream job, to preparing for your interview and understanding what to expect from your employer.

Image via WEF