Inequity in Funding: Africa’s Agripreneurs Pay a High Price for Start Up Finance
Africa has pinned its hopes on agriculture for the creation of jobs and the resulting reduction of poverty. But its role is being stymied by the high cost of financing.
Limited investment, high interest rates and restricted support means African businesses are losing out to foreign competitors.
If we want to transform the continent’s food security and fortunes, then African Governments must help create an economic environment conducive to local investment by, for example, amortizing loan rates and driving billion dollar investments into the sector.
And all stakeholders—including government, donors, and the private sector— must work towards a more equitable and inclusive approach to build local investment for sustainable agricultural growth.
Agriculture in Africa is the sector that offers the greatest potential for poverty reduction and job creation, particularly among vulnerable rural populations and urban dwellers with limited job opportunities.
Agriculture today accounts for 23% of GDP in Sub Saharan Africa, and growth generated by agriculture in sub-Saharan Africa is estimated to be 11 times more effective in reducing poverty than GDP growth in other sectors—a vital multiplier given that 65% of the continent’s labor force is engaged in agriculture.
While an absolute increase in investment is essential, Africa has been the land of opportunity for foreign investors. African entrepreneurs are facing some of the world’s most challenging business conditions. The resources necessary to grow a business—such as finance, human and social capital, and infrastructure are less accessible in Africa. Finance, in particular, is costlier in Africa than in other parts of the world.
The most obvious of all the challenges, most African-led start-ups have difficulties in raising capital. Entrepreneurs and small business owners cannot easily access finance to expand business. They are usually faced with problems of collateral, high interest rates, extra bank charges, inability to evaluate financial proposals, limited financial knowledge, making it difficult for small businesses to access finance.
On the other hand, American venture capital and private equity is dominating Africa, but it’s mostly funding other foreign founders as native entrepreneurs struggle to raise financing. Some attribute the funding inequity to a mix of issues, including lack of experience with and understanding of the African market, general mistrust, and the tendency to fund companies based in the West that are operating in Africa.
For example, in Ghana, foreign businesses who borrow from their home countries assess 3-5% loans to do business in Ghana whereas the locals have to borrow at 23% to compete with these companies. Even with continental free trade these foreign businesses have about 20% advantage over local companies and startups who borrow from within. Even with efforts from the