By Rashida Abdulai
Small and medium-sized enterprises – known as SMEs in popular terminology – make up the vast majority of private sector companies across Africa and, indeed, most of the world.
They are the engine of the economy, providing more than 80 percent of jobs in Africa and are key contributors to the GDP of the countries they operate in.
It is, therefore, no secret that private-sector expansion through the scaling up of SMEs is critical to job creation and economic growth that Africa needs over the next few decades.
Africa’s future prosperity hinges on the growth and success of African businesses and, through them, the creation of secure livelihoods for the continent’s growing population of bright young people.
And with a market of more than 1.2 billion people, an abundance of nascent industries and ever-expanding trade links as the African Continental Free Trade Area (AfCFTA) progresses, the scale of opportunities for businesses in Africa is great.
But for the tens of thousands of SMEs across Africa, the business climate is incredibly tough, especially for those seeking to scale up.
Opportunities in fintech
Operating costs are high due to infrastructure deficiencies reflecting a long history of underinvestment, such as insufficient transportation networks and limited access to electricity.
And there is a shortage of experienced management staff to help grow the business. Capital is needed to overcome these challenges and make investments for growth.
But the majority of SMEs require more finance than they can access to grow their businesses and bank loans can be prohibitively expensive, with double-digit interest rates.
The key to closing the finance gap for many of these businesses is private investment, including from private investors, venture capital funds, development finance institutions, private equity and through joint venture arrangements and partnerships with larger companies.
The rise in Fintech has also opened up new opportunities to receive capital through crowdfunding and peer-to-peer (P2P) platforms, with companies such as Auspicious Blockchain connecting individual investors in the African Diaspora with SMEs on the continent.
The problem?
All too often, there is a “legal gap” between the investors on one hand and the African SMEs on the other.
Through our work at Strand Sahara, we have identified three critical legal challenges that African SMEs face:
They are undervalued
Too few SMEs are in a position to pass the ‘due diligence’ tests that are required to access private investment, mainly because of inadequate legal and financial record-keeping and failure to adopt appropriate legal business structures.
These failures reduce the value of the business, as potential investors or lenders will not have the reassurance they need that their investment in the business will be protected.
They are underinformed
SME business owners are often not aware of corporate governance requirements, such as choosing the right legal structure for the business and entering into appropriate agreements with shareholders, directors and key employees.
This also extends to other legal business protections, such as adequate trading contracts, employment agreements and intellectual property protections. This not only hinders potential investment but is also a key cause of business failure in the long term.
They are underserved
Commercial legal services are often perceived by African SME owners as inconvenient to access, poor value for money and slow, with the result that legal assistance is not sought until the 11th hour, if at all.
They complain that it takes too long to get the answers they need or to have their problem solved, and they have to keep chasing for their work.
They are often unsure how much it will cost them to have their issue entirely resolved, and it is usually more than expected.
The solution? There is no doubt that SMEs need commercial legal services to help them get ‘fit for finance’ and prepare themselves for growth.
There is a need for lawyers to educate SME business owners on the importance of these services, which will require a more proactive rather than reactive approach.
Lawyers should consider creating products and services designed to help businesses diagnose the legal health of their business before any problems occur, show them the existing gaps, and then provide the products and services they need to plug those gaps.
Finally, lawyers must find ways to make legal services more easily accessible, transparent and affordable for SMEs.
One solution is for lawyers to leverage technology to create systems and tools that can provide legal solutions and support across the internet, allowing SMEs to tap into our legal insight and services in a more convenient, transparent and less costly manner so that they can successfully scale up and achieve the job creation and economic growth that is so desperately required across Africa.
The author, Rashida Abdulai, is an award-wining lawyer and the CEO of Strand Sahara, an online legal service provider for businesses.
Disclaimer: The viewpoints expressed by the author do not necessarily reflect the opinions, viewpoints and editorial policies of TRT Afrika.
