Driving Business in Africa - Rwanda Dinner
October 27, 2020
Kigali – Rwanda
Kigali – Rwanda
10 Fast Facts about the Africa Continental Free Trade Area (AfCFTA)
By: Shira Aliza Petrack
Increasing Women's Access to Finance in Africa is Good for Business
By: Elenah Kimaru
There is an estimated USD 42 billion financing gap for women in Africa today. As a result, many female-owned businesses do not actualize their potential; and many investors miss profitable investment opportunities.
Empowering women and girls also helps economic growth and development. Gender equality is one of the UN’s seventeen Sustainable Economic Goals (SDGs) that establish a blueprint to achieve a better and more sustainable future for all. Gender equality, SDG goal no. 5 is
Although Africa has made significant progress in increasing gender equality over the past decade, progress has stalled in recent years – although some countries fare better than others. According to McKinsey, South Africa has the highest gender parity score in the region; Mauritius, Niger, and Mali have the lowest.
Increasing gender equality in the region would require a multi-pronged approach supported by all key stakeholders since discrimination against women takes on multiple shapes and forms. One significant way the private sector can get involved is by increasing women’s access to capital and credit.
Women in Africa today lack access to capital compared to men. This gap adversely affects women, their families, and their communities. It also means that investors overlook many potentially lucrative ventures.
Sub-saharan Africa is the only region in the world where more women than men become entrepreneurs. But when it comes to access to capital, the situation looks less rosy. On average, women in Africa own fewer assets than men, often due to discriminations encoded in property laws, and so they lack the collateral necessary to secure larger loans. And women are sometimes required to present more significant collateral for the same size loan, further inhibiting their access to capital.
The higher-than-average interest rates throughout the continent also discourage women from applying for credit to grow their business. Since female decision-makers tend to be more risk-averse than their male counterparts, women are less likely to take a high-interest loan. A study conducted by the AfDB found that 13.1% of women compared with just 8.2% of men cited high interest rates as the reason they did not apply for a loan.
The high collateral requirements and high interest rates hamper the women’s profit-making capacity since they cannot make the investments required to grow their business. But institutional obstacles are not the only issue. According to a survey conducted by the African Development Bank (AFDB) in 47 African countries, African women often self-select out of the credit market. This means that women perceive their credit-worthiness as lower than it is, so they do not even bother to apply. As a result, women turn to their informal networks for finance rather than rely on institutional investors.
Increasing women’s financial literacy on the continent could help close part of the financing gap. Roughly 35 million women in Africa today are not signed up for any financial service (such as a bank or mobile money account.) Banks and digital financial services can establish programs teaching basic financial literacy to their clients. Through these programs, financial service providers can grow their client base, create greater customer loyalty, and ensure more reliable returns.
Another way to encourage female entrepreneurship is for investors and credit institutions to proactively seek out women entrepreneurs. The AfDB has set up a “Gender Equality Trust Fund” that will finance women-owned SMEs throughout the continent. The Bank has also established a risk-sharing mechanism that will de-risk investment in women-owned businesses to encourage more private-sector investment in women.
Women form Africa’s economic backbone. Their full economic empowerment is “crucial to increase productivity levels, enhance economic efficiency, and improve overall development outcomes to achieve inclusive growth.” Supporting female entrepreneurs on the continent is not just good for women and investors: it is also crucial to Africa’s sustainable economic development.
Invest in Manufacturing to Meet Africa's Booming Consumer Demand
By: Leah Ngari
Africa’s manufacturing sector is slowly but surely growing. Thanks to increasing urbanization and access to electricity, the continent is gradually embracing manufacturing. Agriculture professionals are not alone in developing their processing operations. From car assembly to ceramics, textiles, and mattresses, industrial production is taking off.
Manufacturing is not only limited to the larger nations in Africa, like South Africa and Nigeria. Your Levi’s jeans and Reebok shoes, for example, might come from Lesotho!
It might seem that businesses setting up manufacturing facilities on the continent want to cut labor costs on products intended for consumers outside the region. But international companies building factories on the continent are often trying to meet the demand of Africa’s rapidly growing consumer market. Many African manufacturers got their start as trading companies that imported goods, before realizing it was more lucrative to build operations to manufacture those goods locally.
Many businesspeople share the misconception that manufacturing in Africa is only profitable if they sell the manufactured products outside the continent. Those who understand the opportunity can thrive while contributing to Africa’s sustainable economic development. After visiting Nigeria to explore cheaper relocation alternatives for his Chinese manufacturing operations, one Chinese manufacturer recognized the local market’s potential. Despite his higher electricity costs, the ceramics manufacturing plant he established in Nigeria now enjoys a 2% increase in profit margins compared to what its Chinese counterpart.
Volkswagen is another international company that has been setting up shops in strategic locations all over the continent. With vehicle assembly facilities in Ghana, Nigeria, Ethiopia, and Rwanda, Volkswagen is targeting areas where the local market for vehicles is growing steadily. And as locals’ purchasing power increases, local demand for products will continue to rise.
Intra-African trade has been growing and is expected to increase further thanks to the passage of the African Continental Free Trade Agreement, which went into force last year. The AfCTA will give African manufacturers access to a sizable, readily available market. Although trading under the AfCTA was slated to begin July 1st, the date was postponed due to the COVID-19 pandemic. Nevertheless, once implemented, the agreement is expected to increase the market size for companies based in Africa and will propel the continent’s industrialization forward.
While some manufacturing companies embrace the significant commercial opportunities created by the rising local demand, other manufacturing entrepreneurs focus on creating products for global consumers. International manufacturers have often favored Asian countries, where labor is cheap. Recently, however, the rising costs in China and India and social issues surrounding factory work in Bangladesh has made Africa look increasingly attractive.
Ethiopia looks particularly promising as the next major manufacturing destination. The country has the closest labor costs to Bangladesh, and a stable government that has fostered a suitable environment for manufacturing, including tax breaks for specific industries. The country also boasts a growing road and rail transport system. Establishing production lines in the country creates employment and enables capacity building among the locals. Volkswagen has set up an entire transportation facilitation ecosystem in the country, with an assembly plant, training centers, and automated transport solutions, including car-sharing and app-based taxi services.
Ethiopia’s flagship Hawassa’s Industrial Park has attracted some of the largest fashion brands in the world and makes use of renewable hydroelectric electricity and ecological waste management practices. While some of the business practices – most notably, the meager wages – have been criticized, the project has created tens of thousands of jobs. The World Bank is currently evaluating the social impact of the Hawassa Industrial Park on its workers and community. The findings will help companies and the government continue to industrialize Ethiopia in a socially responsible manner.
The Ethiopian manufacturing sector has taken a hit in the wake of the Coronavirus epidemic that has made it difficult to import raw materials and other components into the country. Companies that will manage to pivot their operations to source raw materials regionally and sell their goods to local consumers may thrive.
Despite the recent manufacturing growth, several challenges may still hold manufacturers back from venturing into Africa. Most African countries do not yet have the infrastructure capable of sustaining large scale manufacturing and relatively high labor and capital costs. As a result, manufacturing on the continent is concentrated in only a small number of countries.
The increasing automation of many low-skilled processes may make Africa less attractive as a manufacturing destination: Automation-heavy factories require an abundance of electricity. And with robots replacing human workers, companies might stop outsourcing production abroad.
Automation also creates opportunities. Manufacturing companies can strategically involve themselves in developing infrastructure on the continent and use the latest tools and techniques to build functioning roads and ports. Private investment in African infrastructure can yield profits while contributing to the continent’s economic success. The trend away from production outsourcing should not affect manufacturing companies that focus on meeting the increasing demand for consumer products on the continent. Governments can choose to nurture specific sub-sectors, as Nigeria did with cement, to grow their competitive advantage. Entrepreneurs can draw on their creativity and innovation to face the infrastructure challenge and leapfrog over outdated production and distribution processes. Companies that enter the market now may well enjoy a first-mover advantage as they contribute to building Africa’s long term production capacities.