Jan de Kock
By Jan de Kock, Head: CFM: Origination at Absa CIB
The mining sector in Africa holds immense potential for economic growth and development. As the continent's working-age population continues to grow at an unprecedented rate, the need for sustainable job creation and economic opportunities becomes increasingly crucial. In this context, supporting high growth small and medium enterprises (SMEs) in the natural resources sector is of utmost importance. However, access to finance remains a significant challenge for these promising businesses, hindering their potential to contribute to Africa's growth story.
SMEs, which make up about 90% of businesses in sub-Saharan Africa and contribute to around 80% of employment in the region, play a critical role in meeting the needs of Africa's rapidly growing population. With the urban population expected to double over the next 25 years, these enterprises can drive economic growth, create new jobs, and act as catalysts for import replacements. There are various funding sources available such as, banks, micro-lenders, and development finance institutions (DFIs). However, despite this availability, the World Bank estimates that the financing gap for SMEs in developing countries still amounts to around $5.2 trillion annually, including those in the natural resources sector. This staggering figure emphasises the urgent need for innovative solutions to improve access to finance for SMEs, especially in sub-Saharan Africa’s rich natural resources sector.
Identifying the missing middle
In South Africa, the mining sector currently contributes to around 8.2% of the country's GDP, with the potential to increase this to 12% through strategic investments. Similar growth is forecasted in other resource-rich countries in Africa.
While corporate suppliers in the natural resources sector may have access to finance from banks, certain high growth SMEs (Turnover above ZAR 50 million) face unique challenges. Due to their size, they may not qualify for corporate ESD programs with beneficial lending terms when they most need financing. Despite having a good track record, experience and sufficient offtake to grow their businesses; these SMEs lack the necessary balance sheets required for traditional lending. There is currently very little support for these SMEs and an alternative model is required to fund and develop these businesses.
Supporting the missing middle
To address these challenges, industry collaboration is paramount. High growth SMEs in the natural resources sector need access to multiple corporate off-takers, rather than being overly dependent on a single large client. This diversification reduces risk and increases stability.
Additionally, securing long-term off-take agreements is crucial as they enable asset-based financing, which helps SMEs increase their capacity and unlock future growth potential.
Providing specialised industry-specific technical support and equipping key business functions of the SME to deliver on contracts is also essential in reducing risks associated with overtrading.
Financiers and investors have a vital role to play in supporting high growth SMEs. A lending approach that goes beyond traditional balance sheet lending and takes future cash flows into consideration is necessary.
Co-lending, where multiple debt funders share the risk, reduces the burden on a single source of financing. Encouraging collaboration between DFIs and banks can improve pricing and lending terms to make financing more accessible for SMEs.
Furthermore, loan assessment and disbursement should be expedited to ensure that SMEs do not suffer from delayed lending decisions.
Risk management within the corporate ecosystem and the harnessing of technology are crucial in supporting high growth SMEs in the natural resources sector. Leveraging technology can streamline operations, enhance efficiency and reduce costs.
Importantly, equity investors with a developmental mindset, not solely focused on immediate returns, can offer invaluable support to SMEs during their growth journey. Such investors understand the challenges that come with scaling and offer guidance and resources to navigate these hurdles.
Transforming the ecosystem
Across Africa mining houses are transforming and becoming more representative of the communities and countries that they operate in.
Mining houses also play a key role in transforming their supply and distribution chains and developing SMEs.
Original Equipment Manufacturers (OEMs) also have a key role to play in transforming the mining sector – they will benefit from the provision of equipment that will improve the capacity of high potential SMEs + provide technical support that allows SME to deliver on corporate offtake.
More programs that allow OEMs to drive transformation through equity or equity equivalent transactions should be created. That includes support for:
Suppliers from the community around the mine specialising in mining equipment hire and contract mining.
Suppliers with a large contract from the mine but cannot access traditional lending to secure working capital and asset finance.
Key to Absa’s decision to approve such transactions was a firm offtake agreement from the mining house and specialised industry specific business development support.
For corporates, supporting high growth SMEs creates a more competitive and innovative industry landscape. It fosters collaboration, encourages the exchange of ideas and improves the overall competitiveness of the sector. Financiers and investors benefit from broadening access to finance and equity, enabling a more inclusive financial ecosystem. Their stewardship in supporting promising SMEs can yield attractive returns while contributing to sustainable economic development.
As one of the leading Pan-African banking groups supporting the mining and resource sector, we are passionate about unlocking the potential of high growth SMEs for Africa's future economic prosperity. By improving access to finance and fostering industry collaboration, we can harness the talents and innovation of these enterprises. Ultimately, supporting high growth SMEs creates a win-win situation for all stakeholders, driving sustainable economic growth and promoting a more inclusive and prosperous Africa.