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Access to finance for African SMEs is a key challenge. Through this article, the Alliance for Financial Inclusion (AFI) aims to share the experiences and practices of member countries that have implemented various policy initiatives to increase access to financing for MSMEs. This article derives from an AFI Guideline Notedeveloped by the AFI SME Finance Working Group (SMEFWG).

This article is an excerpt from Issue 32 : SME finance in Africa

A sound, progressive MSME sector is critical to balanced, inclusive economic growth. According to the International Labour Organization (ILO), MSMEs create 67% of global employment, yet MSMEs have the potential to assume an even greater role in economies.

Access to financing is crucial for MSMEs to attain their potential. With sufficient funds, they can expand and impact economies by paying more tax and providing more employment. The unanimous adoption of the Maputo Accord by AFI members at the 2015 Global Policy Forum reinforced the importance of access to finance for MSMEs “in driving employment, economic development and innovation.”

The role of financial regulators in SME finance

The role of financial regulators is to ensure the stability of the financial sector. To accomplish this, policymakers need to ensure that smart policies and supervision are in place

The role of financial regulators is to ensure the stability of the financial sector. To accomplish this, policymakers need to ensure that smart policies and supervision are in place, including rules and frameworks for intermediation.

In 2016, the AFI SMEFWG (SME Finance Working Group) conducted a survey among member countries, five of which were in sub-Saharan Africa. While government funding for subsidised loans to MSMEs was regarded by members as being insufficient, responses indicated that governments have established various measures, programs and schemes aimed at providing MSMEs with better access to financing.

These measures and interventions include direct monetary intervention, legal and regulatory frameworks for SMEs, and policy and market development initiatives.

Direct monetary intervention

provide lending at below market rates to targeted MSMEs. It allows micro, small and medium enterprises to lower their cost of doing business; for governments, it offers a strategy for spurring entrepreneurship, reducing poverty, lowering income inequality and stimulating economic growth. The SMEFWG survey found that while DMI is a trend in South Asia, in sub-Saharan Africa only eSwatini and Kenya had subsidized credit or refinancing schemes implemented by financial regulators. In eSwatini this comprised a loan guarantee scheme, a regional development fund, a youth enterprise fund, and a community poverty reduction fund. In Kenya, SACCOS (Savings and Credit Cooperative Societies) received credit from commercial banks, governments and donors for onward lending to its members.

Legal and regulatory framework for MSMEs

Legal and regulatory frameworks for MSMEs are aimed at promoting their growth and development. The survey found that in sub-Saharan African only Eswatini and Kenya had legislation specific to MSMEs.

Classifying MSMEs as micro, small and medium enterprises (MSMEs) enables policy makers to target specific sectors, facilitate technical assistance and channel financial benefits and other policy incentives. It also supports collecting data on MSMEs.

Financial regulators may enact prudential regulations and lending guidelines to directly or indirectly encourage banks and financial institutions to lend to MSMEs. SMEFWG survey respondents reported that the two most common prudential regulations implemented were lower risk weights and liquidity requirements for MSME loans. Other types of regulation used to spur lending to MSMEs included improving credit processes and imposing a quota/lending requirement on financial institutions, specifying a percentage of their total lending for MSMEs. In sub-Saharan Africa, only Eswatini had a prudential regulation, in the form of its Money-Lending and Credit Financing Act 1991, designed to protect MSME borrowers.

Many MSMEs do not possess valuable fixed assets to pledge as security for loans. Often, though, they do have ‘movable’ collateral, such as equipment and machinery, livestock, accounts receivables and inventories. Having a secured transactions framework that provides adequate protection to lenders allows MSMEs to leverage these types of assets and secure loans. These frameworks are less common in Africa than they are in East Asia and Southeast Asia, Latin America and the Caribbean countries.

Policy and market development initiatives

The banking sector plays an important role in providing information to MSMEs, and capacity building and training are important aspects of enabling this. The SMEFWG survey found that only Eswatini, Tanzania and Kenya provided regular workshops, seminars and training to enhance the sector’s capacity. In Kenya, SACCOS advises members on the best options for deposits. They also conduct surveys to establish financing satisfaction and ICT challenges. In Eswatini, the Micro Finance Unit collaborates with several stakeholders in building capacity and providing training for MSMEs.

Public financial education and awareness programmes enhance access to finance for MSMEs. The SMEFWG survey found that regulators in Eswatini, Tanzania, and Madagascar provided public financial education on the various services and schemes available.

The banking sector plays an important role in providing information to MSMEs, and capacity building and training are important aspects of enabling this

Countries in East, South and Southeast Asia have long been expanding their financial education and awareness outreach, and over the past decade, this has become evident in sub-Saharan Africa as well. Eswatini provides mentoring and coaching, a financial services guide, a radio program, and a toll-free number for MSMEs. Madagascar conducts partnerships with donor agencies and other partners, such as the Microfinance Association Network, to raise awareness and educate.

Readily available credit information assists lenders to evaluate applicants’ creditworthiness. Yet, often with MSMEs, a great deal of information is either not readily available or is opaque. A credit information mechanism facilitates access to finance, by providing information on MSMEs. The SMEFWG survey found that Madagascar, Kenya, Tanzania and Eswatini had dedicated credit bureaus, providing MSME-specific information.

Credit rating and scoring is a value-adding extension of the services of credit bureaus that provide information on MSMEs. Many countries, however, have not introduced credit scoring guidelines or regulations for credit-rating MSMEs. While credit rating is not common in Africa, in Kenya MSMEs are given a rating by a private credit reference bureau.

Traditionally, banks conduct their own credit analyses, making it unviable to assess many individuals and MSMEs. Instead, they use collateral, which is often not available in sub-Saharan Africa. In response, credit bureaus have arisen; by aggregating credit data, they have reduced costs. And the disintermediation continues: providers with the most accurate, detailed and extensive information on customers are best positioned to analyse that information and price credit (and other financial services)2 . Examples of this type of entity are operating in all countries with a high level of tech penetration, including Kenya (Safaricom/M-Pesa).

For start-ups without access to capital markets or formal banking, venture capital is an essential source of financial assistance. The SMEFWG survey found that Kenya and Madagascar had venture capital funds. While developed in Asia and Eastern Europe, they are not widely available in sub-Saharan Africa.

By sharing the risks with lenders, credit guarantee schemes provide access to financing for MSMEs with insufficient collateral and credit track records. They are provided by institutions established by the government/financial regulator or directly by government. Different mechanisms are used to set up guarantee schemes. The Principles for Public Credit Guarantee Schemes (CGSs) for SMEs, published by the World Bank, is available to countries for reference and implementation.

MSMEs may at some point have difficulty repaying their loans for a variety of reasons. In the countries surveyed by SMEFWG, there was an absence of debt resolution mechanisms; instead, debt resolution was market-driven and involved rescheduling or restructuring loans.

The majority of countries surveyed had consumer protection mechanisms. The financial regulators in many of these had a dedicated consumer protection division, while some had dedicated entities, or ombudsmen.


1 : AFI Guideline Note No.23 “The Role or Financial Regulators in Promoting Access to Financing for MSMEs – Lessons from the AFI Network”, August 2016.
2 : AFI Special Report, ‘Fintech for Financial Inclusion, A framework for digital financial transformation’ September 2018.