Closing the Gap: Identifying Key Challenges for the Missing Middle SMEs in Francophone West Africa
When it comes to securing finance, small and medium-sized enterprises (SMEs) in developing countries tend to face many challenges. These enterprises which are considered too big for microfinance institutions, and too small and too risky for traditional financiers are often referred to as “the missing middle”.
To get a deeper understanding of the SME landscape in West Africa, we prioritized the study of entrepreneurial ecosystems of Benin, Guinea, Ivory Coast, Mali, Senegal and Togo with the intent to identify, elaborate on and strengthen existing and potential solutions to address key challenges and obstacles faced by missing middle entrepreneurs.
Although each country had its own particular challenges, all six countries shared a few commonalities:
1) Entrepreneurship is not generally promoted, and is not considered as successful as working in the government or for a large organization;
2) The informal sector is very large in these countries, and going formal is considered too costly and complex therefore many local entrepreneurs do not see the value in it;
3) SMEs don’t fully understand their specific financing needs and related purpose.
The study identified that although stakeholders are aware of debt products, their exposure to other instruments and products is extremely limited. Actually, the financial landscape is largely comprised of banks and microfinance institutions that provide collateralized debt. Without a track record, collateral or positive cashflow, SMEs are then limited in accessing possible financing options.
There are very few financial service providers that can offer external funding (not collateralized debt) in the range of $10.000 – 1M. In order to increase access to finance for an important part of the missing middle, the missing middle require more risky, flexible and long-term capital to grow. This is known as “mezzanine finance” which blends elements from traditional private equity and debt financing into a unique product, which seems relevant to local moderate growth enterprises in the region.
We see a positive trend of one-stop shops being set up to provide relevant information to local businesses (e.g. to register their business). However, finding full-fledged service providers that are affordable for local entrepreneurs is very difficult.
Therefore we, as Triple Jump, are supporting new initiatives in the region. We think it is critical to foster innovations, such as testing and launching new and different financial and non-financial products and models.
Knowledge Manager of Triple Jump