Financing Private Enterprise Growth in Africa: How do we drive the real economy?

Abstract

Finance plays a critical role in private enterprise development in every country. While the financial sector can spur economic growth by mobilising savings for investments, it can also be a source of fragility (if not properly regulated) as observed during the global financial crisis, the Eurozone crisis and the banking crises in some emerging and developing countries. Financing growth in developing countries through domestic resource mobilisation and a suitable level of external capital inflows is the focus of development finance. Specifically, development finance deals with how financial systems (both domestic and external) can drive the process of development. It deals with the role of financial resources and the significance of financial systems in economic growth and development.

Africa’s financial systems are, however, said to be small, shallow and costly, with limited outreach and this tends to restrict enterprises’ access to formal finance. The situation is more severe for small and medium-sized enterprises (SMEs), which often lack the requisite qualification to access formal finance, thus hampering private enterprise growth and development on the continent.

In this lecture, I focus on how finance can drive growth in the real economy, drawing from existing literature, including my published and ongoing research, as well as recent developments in the field of finance. An important subject I consider is the mechanism through which funding can be transmitted to Africa’s private sector. Thislecture looks at these issues, with particular focus on financing private enterprises, which are considered as important contributors to economic growth in both developing and developed economies.

In particular, I examine the nature of African finance and enterprise development. I also address the issue of enterprise financing in the midst of ‘constrained’ financing choice. Enterprises’ limited access to the various financing sources is likely to influence their financing preference, which is explained by extant theories, conventional as well as heterodox factors. This eclectic approach provides a more comprehensive framework to understand private enterprise financing in Africa and how to improve access. I further examine the importance of corporate governance and its implications for enterprise financing in Africa. I then discuss the role of development finance, innovative financing, and appropriate public sector interventions, and demonstrate how private enterprise development in Africa can be well anchored using these models.