Does Chinese investment support Africa’s SMEs?


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 US$50million and €50million, and additional co-financing of US$30million from the People’s Bank of China (PBOC), will expand 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 also channelling a chunk of the facility 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 US$2billion facility sponsored by PBOC and administered by AfDB to finance sovereign and non-sovereign guaranteed development projects, the PBOC will co-finance US$30million to support the AfDB’s efforts dedicated to fill West Africa’s SMEs finance gap exacerbated by the COVID-19 pandemic, which has immensely constrained SME revenue, especially for women-led SMEs in the region. The timely financial contribution from PBOC is one of the latest additions to the enormous Chinese investments channelled to support Africa’s SME growth and development over the last 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 and relevant organisations – 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, 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 to efforts dedicated 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 US$1billion – unlocking additional sources of capital and contributing significantly to filling the region’s SME finance gap, providing SMEs with the required finance to scale up productivity and innovation, and 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 dedicated to close Africa’s SME finance gap, over the last two decades, it is important to know that Chinese investments earmarked to support the growth and development of these enterprises across countries on the continent transcends bridging SME finance gap. 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 Export-Import Bank of China and CDB – invested US$23billion in infrastructure projects across countries in Africa. Investments made by the two Chinese banks over the 13-year-period is US$8billion more than the combined investments made by the other top eight lenders, which includes AfDB, the United States, European Development Banks, and the World Bank.

Over the last two decades, China, which is by far the continent’s largest infrastructure investor, has played the 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, and making significant progress toward closing the infrastructure deficit that impedes SME growth and development. By strongly 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 contributed immensely to unlock 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 increasingly integrate economic activities in urban and rural areas across African countries, unlocking new opportunities and promoting inclusive growth, and 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 characterised as highly risky, making it onerous to access credit from traditional financial institutions.

However, thanks to the massive Chinese infrastructure investments – China is Africa’s largest foreign ICT investor – in the continent’s ICT sector which passed US$1billion for the first time in 2015, these investments – together with the outstanding contributions of Chinese tech companies, such as Huawei, ZTE and China Telecom – largely underpin the region’s rapid adoption of ICT, including digital technologies, such as e-commerce and fintech, which enable 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 and strongly indicating that Chinese investment is vital to SME growth and development in Africa.

About the author

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.

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