Does Chinese investment support Africa’s SMEs?

By Alexander Ayertey Odonkor

On January 30, the African Development Bank (AfDB) announced the approval of a dual-currency trade Finance Line of Credit for the ECOWAS Bank for Investment and Development (EBID). The three-and-a-half-year facility, which comprises of $50 million and €‎50 million – an additional co-financing of $30 million from the People’s Bank of China (PBOC), will expand the EBID’s financial toolkit to enhance access to trade finance for West-Africa’s small and medium-sized enterprises (SMEs) – focusing on, women-led SMEs, local enterprises cooperatives and farmers by lending directly to local corporates and channeling a large funding to select local banks for on-lending to enterprises engaged in key sectors such as agriculture, transport and infrastructure.

Through the Africa Growing Together Fund (AGTF), a $2 billion facility sponsored by the PBOC and administered by the AfDB to finance sovereign and non-sovereign guaranteed development projects, the PBOC will co-finance $30 million to support the AfDB’s efforts to fill West-Africa’s SMEs finance gap, exacerbated by the COVID-19 pandemic, which has curbed SMEs revenue, especially for women-led SMEs in the region.

The timely financial contribution from the PBOC is one of the latest additions to the enormous Chinese investments channeled to support Africa’s SME growth and development, over the past two decades.

Considering the indispensable role SMEs play in driving inclusive socio-economic growth and development in Africa – representing more than 90 percent of all businesses on the continent, accounting for 63 percent of employment in low-income countries and contributing over 50 percent of gross domestic product (GDP), China over the last two decades, has demonstrated unmatched commitment to foster SME growth and development – typically, collaborating with governments, relevant organizations, including financial institutions across countries on the African continent to provide viable solutions to major challenges that have impeded SME growth and development.

To highlight a few matters, in addressing the lack of finance to SMEs in Africa, identified as the most severe hindrance to the growth of these enterprises, China’s financial contribution over the years has been crucial in efforts to bridge the SME finance gap.

For example, in 2011, the China Development Bank (CDB) issued a special purpose loan to SMEs in Africa worth $1 billion – unlocking additional sources of capital and filling the region’s SME finance gap – providing SMEs with the required finance to scale up productivity and innovation – equipping these firms with the appropriate financial strength for diversification and new market entry.

In fact, while funds from Chinese banks have been crucial to concerted actions to close Africa’s SME finance gap, over the last two decades, it’s important to know that Chinese investments earmarked to support the development of these enterprises across countries on the continent, transcends the bridging of the SME finance gap.

（The Mombasa Railway constructed by China’s company connecting Kenya’s port city Mombasa and capital Nairobi was officially opened to traffic in Mombasa, Kenya, May 30, 2017. /CFP）

Faced with critical infrastructure deficit, which for decades has significantly constrained Africa’s SME growth and development, China has demonstrated unparalleled commitment to tackle this tremendous challenge.

Between 2007 and 2020, two Chinese development finance institutions (DFIs), the Exim Bank of China and China Development Bank (CDB) invested $23 billion in infrastructure projects across countries in Africa – investments made by the two Chinese banks over the 13-year-period, is $8 billion more than the combined investments made by the other top eight lenders, which includes AfDB, the United States and European Development Banks and World Bank.

Over the past two decades, China, which is the continent’s largest infrastructure investor, has played a major role in (providing the largest financial support and technical expertise for the construction of adequate infrastructure) committing resources to address the region’s infrastructure gap – making significant progress towards closing the infrastructure deficit, that impedes SME growth and development.

By leading efforts to build adequate infrastructure, including energy facilities, transport networks, water supply systems and information and communication technology (ICT) infrastructure, both in urban and rural areas in Africa, Chinese investments have unlocked new opportunities across various industries, including agriculture and agro-processing, financial services and creative industries – enabling SMEs to increase value addition, scale up productivity and access new and larger markets – fostering SME growth and development.

At present, SMEs in rural and urban areas are leveraging ICT to bolster productivity and trade. Widespread adoption of digital technologies, including e-commerce and fintech, is a game changer for SMEs in Africa – these digital tools integrate economic activity in urban and rural areas across African countries – unlocking new opportunities and promoting inclusive growth – enabling SMEs to overcome formidable challenges that have suppressed SME growth for ages.

Presently, e-commerce enables SMEs to overcome market barriers and access new and larger markets while, fintech enhances access to finance for SMEs, an invaluable resource especially for enterprises operating in the informal sector or rural areas (for years, these enterprises which are usually unbanked or underserved are characterized as highly risky, making it onerous to access credit from traditional financial institutions).

Meanwhile, thanks to the massive Chinese infrastructure investments (China is Africa’s largest foreign ICT investor) in the continent’s ICT sector, these investments, together with the outstanding contributions of Chinese tech companies, such as Huawei, ZTE and China Telecom, largely underpins the region’s rapid adoption of ICT, including digital technologies such as e-commerce and fintech, which enables Africa’s SMEs across various industries to increase productivity, accelerate value-addition and experience growing access to finance and new markets, driving inclusive growth and rural revitalization. Accordingly, Chinese investment is vital to SME growth in Africa.

Alexander Ayertey Odonkor is a global economist with keen interest in the social, environmental and economic landscape of both developing and developed countries, particularly in Asia, Africa and Europe.