Small businesses in Africa are taking on more loans

AFRICAN BUSINESS AND ECONOMYOctober 12, 2023 at 12:18 AM UTC

Contrary to global trends, small and medium enterprises (SMEs) in Africa have witnessed an increase in loans over the past year. The International Monetary Fund (IMF) has reported that in 2022, while outstanding SME loans generally decreased in regions like Europe, the Middle East, Central Asia, and Western countries, African SMEs experienced an upward trajectory in borrowing.

The IMF's latest Financial Access Survey, released this week, indicates that following an initial surge at the outset of the COVID-19 pandemic, the outstanding amount of SME loans as a share of GDP has continued to decline throughout 2022 in several regions, except for Africa.

In Kenya, for instance, the number of small businesses with outstanding loans increased by 1.3%, reaching 56.3 percent in June 2023. This figure represents a notable uptick from the 55% reported in October of the previous year, according to data sourced from the Central Bank of Kenya's latest Financial Access MSE Tracker Survey.

Key Takeaways

The decline in loan uptake, as indicated by IMF research, can be attributed to multiple factors. One contributing factor is the cessation of support measures implemented during the height of the pandemic, such as debt guarantees, which were designed to assist businesses in staying afloat during challenging economic times. Additionally, the tightening of financial conditions, driven by recent increases in central bank interest rates worldwide, has likely played a role in reducing loan demand, as the cost of borrowing becomes less favorable. However, the situation in Africa is noteworthy. Despite the phasing out of support programs and monetary tightening, similar to the global trend, the amount of loans owed by businesses in Africa continued to rise in 2022. This phenomenon suggests that economic conditions for small enterprises on the continent might be deteriorating, potentially highlighting the unique challenges and dynamics faced by businesses in the African context.