Africa’s SMEs: Investing in the Continent’s Growth Engine

A resilient growth story

Africa entered 2026 as one of the world’s fastest-growing regions. Real GDP growth accelerated to an estimated 4.4% in 2025, up from 3.5% the previous year, placing the continent alongside Asia and ahead of Europe and Latin America and the Caribbean (AfDB, 2026). 

There is a broad-based recovery in growth: 36 of the continent’s 54 economies grew faster than in 2024, and 22 of them by more than five percentage points. The African Development Bank projects growth of 4.2% in 2026 before a return to 4.4% in 2027, with at least 19 economies expected to exceed 5% next year.

This resilience is notable against a fragmented global backdrop of trade tensions, declining development assistance and volatile capital flows. Yet it masks a persistent structural challenge: a development financing gap estimated at more than $1.3 trillion a year.

Economies and demographics

Much of Africa’s promise is found in demographics. A young, rapidly expanding working-age population, deepening digital adoption and continuing regional integration underpin the growth momentum. The continent of 1.5 billion people has an average age of 19 years.

The continent is also the world’s fastest-urbanising region, with the urban share of the population projected to reach 60–65% by 2050.

Its economies remain uneven, however. Africa is still the least industrialised major region, and growth has not yet translated into the structural transformation required to create enough decent jobs. The informal sector accounts for close to 40% of GDP on average, and up to 50–60% in some countries, leaving a large share of activity outside the formal financial system.

Growth drivers and industries

The 2025 rebound drew on improved agricultural output, firmer mineral and metal prices, and supportive macroeconomic policy. 

Looking ahead, the drivers look set to broaden and accelerate. The African Continental Free Trade Area (AfCFTA) is expected to lift intra-continental trade; demand for critical minerals and green energy is rising; and prime real estate, with average yields of 8–12%, higher than in most other parts of the world, is emerging as an institutional asset class (AfDB, 2026). Data centres and renewable energy have been highlighted as sectors well placed to attract global investment.

SMEs as the growth engine

Small and mid-sized enterprises sit at the centre of Africa’s growth story and are important catalysts for regional trade, employment and innovation. 

Providing them with growth capital supports job creation, widens the supply of goods and services, and broadens the tax base through greater formalisation. The scale of that formalisation dividend is considerable: the AfDB estimates that a 10-percentage-point reduction in the size of the informal sector could raise annual GDP growth by 1–2% and generate up to $125 billion in additional revenue each year.

South Africa offers the continent’s most thoroughly measured illustration of what this segment actually does. The 2024 FinScope MSME survey counted 3.03 million micro, small and medium enterprise owners running 3.91 million businesses, up 15.7% and 21% respectively on 2020, with combined estimated turnover of R5.29 trillion, against R3.1 trillion four years earlier (FinMark Trust, 2024). Those firms employ some 13.4 million people on a full-time, part-time or seasonal basis, and account for roughly 80% of the country’s workforce (OECD, 2026).

Micro-enterprises of ten employees or fewer make up 84% of businesses, small firms 14% and medium-sized firms just 2%. More than a quarter have no employees at all, and 82% of that group operates informally. Overall, 28% of South African MSMEs are formally registered with the companies office and the revenue service, 16% hold some other registration, and 56% are wholly informal. Yet informal businesses still generated an estimated R2.3 trillion in turnover, against R3 trillion from their formal counterparts, while the township economy alone contributed R2.4 trillion and rural enterprises R256 billion.

Services account for the largest number of businesses (1.6 million) and jobs (5.1 million), but industry punches hardest: roughly half a million industrial MSMEs support 4.8 million jobs, a ratio of about one business to nearly ten roles. Agriculture and trade sit in between. That gradient is a useful guide for investors: capital directed at the manufacturing and agro-processing end of the SME spectrum buys disproportionate employment impact, the same sectors the AfDB identifies as priorities for deeper investment pipelines.

These businesses are also more interconnected than their scale suggests. Fifty-seven per cent trade with other MSMEs and 34% with larger corporates, making them embedded links in domestic supply chains rather than isolated micro-traders. Public procurement, by contrast, remains largely closed: only a quarter are registered on the Central Supplier Database and one in five has ever submitted a tender.

Why SMEs need funding

Africa’s SMEs are chronically underfunded. The financing gap Africa’s SEMs is estimated at $331 billion. Commercial banks retrenching after the pandemic and under mounting regulatory pressure frequently cannot meet demand. They tend to lend against collateral rather than cash flow, rarely offer tenors beyond three years, and, in some markets, provide only limited access to hard currency. The constraint runs up the size spectrum. Mid-cap firms are similarly restricted, often relying on debt with inflexible terms or forgoing growth opportunities altogether, while even large firms encounter limits on long-term, tailored capital.

Where, then, does the money currently come from? Overwhelmingly, from the entrepreneur’s own pocket and social network. In South Africa, 37% of businesses were started with personal savings and a further 14% from salary; 41% drew on social capital such as family, friends, inheritance or stokvel payouts. Only 7% used a business loan from a formal financial services provider to get going, while 5% used a personal loan and 3% refinanced a home. The latter two dependent on the owner’s personal bankability rather than the merits of the business (OECD, 2026). With 56% of firms unregistered, that reliance on the individual rather than the enterprise is structural, not incidental.

The financing shortfall in South Africa alone is put at ZAR 350 billion and, notably, it does not stem from an absence of capital. The problem is intermediation: matching available capital to businesses that can be assessed, priced and monitored. 

Formal bank lending to SMEs highlights the problems Africa Bitcoin Corporation is fixing. SME outstanding business loans reached ZAR 786.5 billion in 2024, growing 9.6% year on year, but total business lending grew faster at 12.8%. The SME share of outstanding business loans has fallen steadily, from 29.4% in 2008 to 19.2% in 2024. Non-performing loans among SMEs stood at 5.09% against 1.96% across all business loans.

Development finance fills part of the gap. Sedfa advanced close to ZAR 2 billion in direct loans between 2022 and 2024, 22% of it to women-owned businesses, alongside ZAR 195 million in grants. Its Khula Credit Guarantee expanded from about ZAR 449 million in 2022/23 to roughly ZAR 1.39 billion in 2024/25, unlocking private-sector finance for more than 2,900 MSMEs. The Development Bank of Southern Africa provided a further ZAR 2.3 billion to MSMEs and sub-contractors over the same period.

The demand-side constraints are equally instructive. Sourcing money is the single most cited start-up challenge, named by 50% of owners, just ahead of cash flow at 46%. Once trading, the cost of finance (19%) is a more commonly reported obstacle to growth than access to it (14%). 

Digital adoption is uneven in a way that directly affects creditworthiness around 80% use digital financial services and 90% a mobile phone, yet only half have internet access, a third a website, and 28% a card-payment device, leaving much transaction history invisible to lenders.

Challenges in securing finance

The barriers are well documented: a lack of collateral, short or non-existent credit histories, and high levels of perceived risk (Kearse, 2025). Structural weaknesses compound them. Africa’s financial system remains shallow, bank-based and fragmented, with thin capital markets and divergent regulation. Domestic credit to the private sector averaged around 34.6% of GDP in 2020–24, well below the 52% recorded in Latin America and the Caribbean (AfDB, 2026). Institutional capital exists but is under-deployed: Africa’s banks, pension funds and sovereign wealth funds manage asset pools of up to $4 trillion, yet less than 3% is invested in infrastructure and other productive projects.

Financing innovation: private credit and venture capital

Into this gap steps private credit. This is non-bank lending, typically through closed-ended funds, such as the ones operated by Africa Bitcoin Corporation and Altvest. 

Globally the asset class has swelled beyond $3 trillion, having exceeded $1.7 trillion as recently as 2023, yet only around 0.3% has been deployed in Africa, where private credit accounts for roughly 7% of financing.

The concentration of the global market is stark: the United States stood at $1.1 trillion and Europe at $505 billion in 2024.

Momentum is nonetheless building from a low base. British International Investment recorded more than 700% growth in private credit transactions between 2021 and 2022, and a cohort of specialist managers has emerged. Ninety One has deployed over $1.2 billion across more than 20 countries, alongside BluePeak Private Capital, AfricInvest Private Credit and Ghana’s Growth Investment Partners. 

Their backers include the AfDB, BII, FMO, the IFC, Swedfund and the Swiss Investment Fund for Emerging Markets. Private credit’s flexibility, higher risk tolerance and speed of execution suit markets where standardised bank lending often fails — though borrowers should weigh higher costs, illiquidity premiums and, where funds are lent in foreign currency, exchange-rate risk.

What makes Africa different

A recurring theme is the gap between the perceived risk of doing business in Africa and the real risk. Fund managers with genuine local knowledge can source strong businesses, price risk appropriately and structure loans that reflect borrowers’ cash-flow profiles. The fundamental features of private credit: downside protection, better visibility on cash flow and limited reliance on event-driven exits all suit investors seeking diversification and returns with low correlation to public markets. 

Themes such as a young population, relative political stability in key markets and the integrating effect of the AfCFTA are frequently absent from the standard “Africa narrative”, yet they are central to the investment case.

Why now

Several long-running trends have begun to converge, creating an attractive entry into Africa.

The macroeconomic backdrop has improved on almost every measure that matters to a lender. Average inflation is projected to fall from 13.7% in 2025 to 8.9% in 2027, with 26 countries below 5% next year. 

Central banks cut policy rates by an average of 1.33 percentage points between January 2025 and March 2026, and the debt-to-GDP ratio is edging down toward 61.4% (AfDB, 2026). The Middle East conflict is driving an uptick in inflation and interest rates, but this may prove to be transitory should a resolution be found in the coming months. 

South Africa shows how quickly this transmits: as the repo rate fell from 8.25% to 7.0%, corporate lending rebounded by roughly ZAR 75 billion in a single quarter. 

Investors must always have Africa’s favourable demographics at the front of their minds as this underpins the long-term investment case.

The institutional funding scaffolding is being rebuilt alongside the inherent opportunity in Africa and promises to unleash a wave of growth. The African Credit Rating Agency, launched in January 2026, targets the information bias inflating sovereign risk premia. The New African Financial Architecture for Development aims to mobilise the $4 trillion already held within Africa’s own financing ecosystems. AfCFTA continues to widen the addressable market. Together they mark a deliberate shift toward domestic capital formation the environment in which local-currency lending to mid-sized firms becomes viable at scale.

Warren quote:

“Africa’s demographics are the foundation of Africa’s investment case. A population of 1.5 billion with an average age of 19, urbanising faster than any other region, gives the continent a structural advantage that will play out over decades. Growth of 4.4% in 2025, ahead of Europe and Latin America, reflects the strength and growth opportunity in Africa’s economy.

However, the SMEs that power Africa’s economy face financing challenges, which if resolved, will unleash a wave of growth across the continent. Africa’s small and mid-sized enterprises face a financing gap of $331 billion. In South Africa, 3.9 million of them employ 13.4 million people, close to 80% of the workforce, yet 56% operate outside the formal financial system. Banks generally lend against collateral rather than cash flow and rarely offer tenors beyond three years, which leaves exciting businesses unfunded and unable to achieve their potential.

I believe Private credit is the answer to Africa’s funding gap. The asset class has grown beyond $3 trillion globally, but only around 0.3% has been deployed in Africa. Africa Bitcoin Corporation was established to address that imbalance: assessing borrowers on cash-flow performance, structuring facilities to match how these businesses trade, and applying local knowledge to price risk accurately.”

Sources

• AfDB (African Development Bank Group) (2026) African Economic Outlook 2026 — Highlights: Mobilizing Africa’s Development Financing at Scale in a Fragmented World. Abidjan: African Development Bank Group. 
• FinMark Trust (2024) FinScope MSME Survey South Africa 2024. Johannesburg: FinMark Trust, 10 September. 
• Kearse, N. (2025) ‘Filling the Gap: The Emerging Role of Private Credit in Africa’s Financing Landscape’. African Legal Support Facility, 12 December. 
• Mate, J. (c. 2022) ‘Private Credit Funds — the opportunity for Africa’. British International Investment. 
• OECD (2026) Financing SMEs and Entrepreneurs 2026: An OECD Scoreboard (South Africa chapter). Paris: OECD Publishing.