Pulane and her family have been poultry farmers in their village in Hlotse, Lesotho, since 2017. They employ ten people who, in turn, support their families in surrounding communities. When poultry feed prices rose, they resorted to giving their chickens less food, resulting in underweight birds and losses. Other farmers in the village tried increasing their prices, but customers turned to more affordable supermarket braai packs instead. In a single village, the number of poultry farmers dropped from five to only one.
Pulane couldn’t secure a loan or access credit to sustain her poultry business. Like millions of micro, small and medium enterprises (MSMEs), this smallholder farming business was locked out of the formal credit system – not because it lacked potential, but because the system wasn’t built with businesses like hers in mind.
Why credit matters: Growth, jobs and survival
Only 20%-30% of MSMEs in Sub-Saharan Africa access formal credit, stifling growth for businesses that drive 80% of employment. MSMEs are the backbone of low-income economies – they create jobs, drive innovation and contribute significantly to GDP; yet millions are blocked due to limited access to credit. Without access to affordable loans and the knowledge to use them effectively, these businesses stagnate. They cannot expand, hire or survive crises, which has a ripple effect on job creation, poverty reduction and the overall resilience of MSMEs.
What’s holding MSMEs back?
Qualifying for credit from traditional banks typically requires collateral or a strong credit history, criteria that many MSME owners, especially those in the informal sector, cannot meet. Small, informal businesses often do not keep formal records of their income and expenses, which leads lenders to perceive them as high-risk. This makes it difficult for them to secure loans. Even when MSMEs manage to secure formal credit, high interest rates and rigid repayment terms can strain their operations and discourage them from borrowing altogether. According to the FinScope MSME Survey Eswatini 2023, only 15% of MSMEs managed to access formal credit.
Loan amounts offered to small business owners are often too small to have any impact. Take Kenya’s Hustler Fund, for example – a government initiative that offers credit at a low, flat rate of 8%. While well-intentioned, it has faced criticism. One small business owner reported having received only a 500-shilling (approximately USD4) loan, barely enough to cover the cost of a meal. Small amounts like these fail to spark meaningful growth, leaving entrepreneurs, especially women and youth, trapped by systemic barriers.
Rethinking loans: Not a one-size-fits-all
The mismatch between what MSMEs need and the financial products available to them is a challenge. Segmenting the sector either by size, industry or operational context can help lenders design effective credit solutions that align with their realities. A one-size-fits-all approach overlooks the unique challenges MSMEs face. For instance, it is highly likely that a rural tailor’s credit needs will differ from those of an urban retail shop.
A study by FSD Uganda, in collaboration with a digital lender focused on improving lending opportunities for women small business owners in Uganda, found that many women business owners needed flexible repayment options. They expressed a preference for arrangements that do not require full payment by a specific due date, longer-term financing to support their growth, and automatic eligibility for subsequent loans once existing loans have been settled. Unfortunately, traditional loan offerings often come with short repayment periods, rigid due dates and higher costs, which may not fully accommodate the cash flow challenges that small businesses face.
Without adequate access to credit, MSMEs are forced to rely on informal sources of finance, such as moneylenders, family and friends. This can be unreliable and sometimes, more expensive. FinScope MSME Lesotho 2023 findings reveal that only 14% of individual entrepreneurs had access to formal credit, while 33% resorted to informal mechanisms and family or friends. This limited access to credit significantly limits their ability to expand or even survive tough economic periods. Even promising businesses may struggle to reach their full potential purely because they lack the working capital to benefit from growth opportunities. As a result, the MSME sector continues facing these challenges and remains largely stagnant, unable to fulfil its role as a key contributor to economic development.
Fear of debt. Lack of trust.
The challenge of credit access for MSMEs is complex. While financial service providers are often criticised for stringent lending criteria, demand-side factors also play a significant role. The recent FinScope MSME Eswatini 2023 analysis of barriers to credit shows that 19% of MSME owners cited fear due to slow business, and 10% expressed a general fear of debt. This indicates a risk-averse mindset; this fear may arise from cultural attitudes toward debt, limited financial literacy, and economic uncertainty. The hesitation to take up debt is compounded by supply-side challenges, such as high interest rates, and raises the question:
How can we address both the structural and behavioural factors limiting MSMEs’ access to credit?
Credit versus grants: A pathway to discipline
There has long been a debate over whether MSMEs should be financed through credit or grants. Credit helps build financial discipline, encourages financial planning and supports better decision-making. However, over-indebtedness remains a risk, especially in unstable economies where cash flows are unpredictable. Responsible lending practices, like offering flexible repayment terms, can support MSMEs without overburdening them.
While grant-based financing is valuable, it falls short of driving meaningful growth across the vast range of MSMEs. With over 322 million formal MSMEs worldwide in need of support, there is also a need for commercially viable solutions, like microfinance loans to support and develop the broad spectrum of MSMEs, from informal traders to women and youth entrepreneurs.
For instance, the Foundation for International Community Assistance (FINCA), a non-profit microfinance organisation that has empowered several small businesses in Uganda by offering working capital loans of up to UGX 340 million, along with flexible repayment terms ranging from three to 36 months. Their specially designed business and agriculture loans consider the cash flow realities of these businesses to promote financial discipline and growth. However, without the availability of such scalable solutions, many MSMEs risk stagnation, which leads to the perception that they are inherently unstable when, in reality, they lack a sustainable financial foundation to thrive.
What can unlock the potential of MSMEs?
Addressing these challenges requires a multi-faceted approach:
Microfinance and alternative credit models: Having alternative credit offerings for MSMEs, such as group lending, sales records, or mobile transaction data credit scoring, as seen with Kenya’s M-Shwari, can bypass traditional collateral demands.
Credit tailored to business lifecycle needs: Startups that have been operating for less than two years often have no collateral or credit history. These businesses need tailored, flexible microloans to get started. Growth-phase MSMEs require larger sums to scale operations, such as hiring staff or expanding facilities. Innovative tools, like mobile transaction-based credit scoring, can unlock financing for informal businesses with strong potential. While mature MSMEs, like Pulane’s farm, need working capital to manage cash flow and seize opportunities, including navigating feed price hikes. Longer-term loans with customised repayment terms ensure stability.
Financial literacy programmes: Training programmes on budgeting, cash flow and loan management, and good and bad credit can reduce the fear of debt and empower MSMEs to use credit strategically.
Government-backed loan guarantees: Governments can partner with banks to offer loan guarantees, similar to the Hustler’s Fund in Kenya, which reduces lender risk and encourages financing for MSMEs.
Culturally sensitive interventions: Addressing cultural stigmas around debt through community-based financial literacy can encourage responsible borrowing. Essentially, responding to these challenges takes recognising the real human challenges behind the data. Pulane’s poultry business didn’t fail because of a lack of determination or demand; rather, it failed because the financial system wasn’t designed for businesses like hers.
Addressing both supply-side constraints, such as rigid lending criteria and demand-side barriers, including the fear of debt and cultural attitudes, can help stakeholders create an inclusive ecosystem where MSMEs can thrive.
If Africa is to unlock the full potential of its MSME sector, it must prioritise access to credit, tailored financial products, and financial literacy as a means of financial support and as tools to ignite the entrepreneurial spirit. Because when businesses like Pulane’s succeed, the effect extends to families, communities and economies.