The architecture of African growth

In Africa, there exists a significant economic paradox: millions of people are actively working, yet much of their labor goes unnoticed. Entrepreneurs are thriving, serving customers, employing others, and generating value. Markets are bustling, shops are open, farms are producing, and manufacturers are making goods. Innovation is taking place.

However, many of these businesses face difficulties in accessing affordable financing due to their invisibility. This invisibility creates a barrier to accessing visible capital, which may be one of the greatest obstacles to Africa’s economic transformation.

Although the informal economy in Africa is often seen as a problem that needs to be solved, it is also a testament to the remarkable entrepreneurial spirit of its people. The challenge lies not in the fact that millions of Africans are building businesses, but rather in the fact that many of these businesses remain invisible to the systems that are designed to aid their growth.

Trust is the foundation upon which this economic architecture is built. However, trust does not always begin with belief alone; it begins with visibility. Before institutions can trust a business, they must be able to understand it. When conversations about Africa’s economy occur, one frequently hears about a financing gap. Yet, there is another gap that demands equal consideration.

Small and medium enterprises (SMEs) constitute over ninety percent of businesses across Africa, yet they continue to struggle with access to finance, which is a major hurdle to their growth.

A 2024 article by MIT Sloan highlighted an estimated $331 billion SME financing gap in sub-Saharan Africa alone. This figure represents businesses with customers, revenue, and ambitions, but without the necessary financing to expand. This issue is often referred to as a financing problem. However, the author believes that it is, in fact, a visibility problem.

Consider two entrepreneurs: one owns a growing manufacturing business in Nairobi, while the other owns a similar business in Munich. Both have loyal customers, generate revenue, pay suppliers, employ people, and demonstrate resilience. The distinction between them is not necessarily the quality of their businesses, but rather that one can easily demonstrate their financial health through audited accounts, digital transaction histories, registered assets, tax records, and established credit history.

The other, despite being equally successful, faces challenges in presenting its story through systems recognized by lenders and investors. This disparity highlights the need for a more comprehensive understanding of a business's financial standing.

A passport serves as proof of identity, while economic identity proves what a business can accomplish. In modern economies, what can be verified tends to hold more value than what can merely be claimed. Visibility is not bureaucracy; it is an opportunity. You cannot finance what you cannot see. The future of finance will rely less on collateral and more on credibility. Businesses that grow are often the ones that can be seen.

While formalization is sometimes perceived as something governments impose on businesses, it should be seen as an opportunity to open doors to finance, insurance, export markets, government procurement, larger customers, and investment. Businesses should choose to formalize because it enhances their ability to operate efficiently and effectively. Formalization should not be viewed as a regulatory burden; instead, it should be a pathway to greater opportunities.

This perspective was evident in the author's early career in Nigeria, where they worked with microfinance institutions to expand access to finance for informal businesses. However, the focus was not solely on providing capital. Instead, it involved building capacity, strengthening processes and governance, and establishing market linkages that enhanced businesses' visibility and access to opportunity.

Similarly, at SME Manager, investments in small businesses under Nigeria’s Small and Medium Industries Equity Investment Scheme were supported. While capital was part of the solution, businesses also needed robust structures, including sound processes, access to legal, accounting, and professional expertise, to absorb capital, demonstrate credibility, and grow.

The author emphasizes that the objective should not be to complicate compliance but to make opportunity more accessible. The key is to ensure that businesses can demonstrate their discipline and credibility. In Africa, the digital revolution has been impressive, with mobile money transforming financial inclusion across the continent.

The next step is to ensure that these digital footprints become recognized financial histories. A business that consistently pays suppliers, receives customer payments, and manages cash responsibly already demonstrates discipline. The financial system should learn to recognize this discipline.

Africa’s digital transformation is remarkable, but technology alone cannot transform economies. Digital identity, digital payments, electronic invoicing, credit histories, and business registries are crucial components that, when connected, create the pathway to a more productive economy. Technology should not merely digitize transactions; it should digitize evidence.

Evidence is what allows trust to scale. Making Africa’s invisible economy visible does not necessitate starting from scratch. Many of the necessary building blocks already exist. The remaining challenge is to connect them. Imagine an entrepreneur who can register a business online in a single day, obtain a digital identity, accept digital payments, and build a verified business. This is the vision for a more inclusive and transparent African economy.