Think and act for entrepreneurship in Africa

Why the creation of the African Medicines Agency is an urgent and compelling requirement for Africa?

With 17% of the world’s population, Africa (55 countries, 1.3 billion people) bears a disproportionate burden of disease: it accounts for a quarter of the world’s disease burden, 60% of…

With 17% of the world’s population, Africa (55 countries, 1.3 billion people) bears a disproportionate burden of disease: it accounts for a quarter of the world’s disease burden, 60% of people living with HIV/AIDS, and more than 90% of the world’s annual malaria cases, but only 6% of the world’s health care spending and less than 1% of the world’s pharmaceutical market.

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Supporting private firms in Africa: Why and how?

Beyond the declarations of intent regularly renewed at international summits, we must finally scale up to massively finance SMEs in Africa, to spur private sector development and thus meet the…

Beyond the declarations of intent regularly renewed at international summits, we must finally scale up to massively finance SMEs in Africa, to spur private sector development and thus meet the challenge of better development of the continent.

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The case for informal bonds

This article argues for the implementation of an alternative financing mechanism for informal small and very small businesses in Africa that would allow them to benefit from other formal financing…

This article argues for the implementation of an alternative financing mechanism for informal small and very small businesses in Africa that would allow them to benefit from other formal financing opportunities under better conditions than those offered to them today.

 

A review of current funding mechanisms

African economies today are still predominantly financed by the banking sector, which carries the disadvantage of elevating the banker to the status of a sort of multi-sector specialist who groups entrepreneurs in various sectors such as the agri-food, energy, consulting, and even new technology sectors, into the same single portfolio.

Private equity investors focus almost exclusively on large deals in order to ensure the monitoring of their investments (although fortunately some of them have oriented their investment strategies towards small and medium-sized businesses).

Microfinance institutions, whose success is due to a financing model adapted to small-size loans and small companies, but unfortunately carries some significant drawbacks, including the application of high interest rates.

We could also mention meso-finance, which is quite new and essentially functions as an intermediary between traditional banking and micro-bank financing. Nano-credits, which are generally below 100,000 FCFA, are offered by some Fintechs but are still quite rare.

Finally, an informal and parallel financing system has been created which is a sort of “street financing”
system that applies predatory interest rates and abusive loan terms and requires, among other things, the borrower’s debit card as a guarantee.

This overview of existing financing mechanisms makes one thing clear: the informal sector, which according to the International Labor Organization represents more than 85% of jobs on the African continent, has been completely left behind. It is therefore necessary to develop an alternative financing mechanism to cater to this vital segment of our economy.

The overview of existing financing mechanisms makes one thing clear: the informal sector, which represents more than 85% of jobs on the African continent, has been completely left behind.

 

The informal sector as a life raft

The informal economy constitutes a veritable life raft for the vast majority of Africans. In the case of Europe, this life raft is characterized by each state’s social welfare model, and each country has defined a minimum wage that allows every worker to provide for the basic needs of his or her family.

In Africa, this life raft is characterized by one’s informal activities. The public administration employee who earns 65,000 CFA francs per month (100 €) and who has 6 children to support, will need to develop an additional activity in the informal sector in order to make ends meet and feed his or her family.

Financing our informal sector, therefore, amounts to financing our social welfare network. The informal sector simply cannot remain the forgotten or poorly equipped part of our economy that it is today.

Today, the African financial market should represent hope, an option, through the inclusion of informal entrepreneurship. Each player in our economic network should be able to access an opportunity through this financial market.

This is why we are calling for the implementation of a new product, which we could refer to as “informal bonds”.

Each player in our economic network should be able to access an opportunity through this financial market.

 

What are informal bonds?

According to the International Monetary Fund (2017), the informal sector represents between 20% (South Africa) and 65% (Benin, Nigeria) of the GDP of African countries. Contrary to popular belief, informal does not necessarily mean poorly organized.  In fact, some informal businesses such as planting or motorbike taxi driving, for example, organize as Cooperatives or Groups.

The idea of the informal bond is simply to allow business groups that have historically demonstrated good organization and governance to seek financing for their members through the financial market by issuing what would be called an “informal bond”, a bond dedicated to financing informal business activities.

A group’s leadership would select, thanks to their knowledge of the sector and of their members, the beneficiaries as well as the loan amounts granted to them.

Assuming that the group has previously demonstrated moral probity, it would be possible for all or part of the bond to be guaranteed by a bank or a state guarantee fund.

For security and transparency reasons, loans and repayments would be made directly via “mobile money” transfer between the custodian bank of the operation and the informal entrepreneurs.

 

This concept could encourage the progressive structuring and formalization of informal actors, who would have specific guidelines to follow in order to qualify for this financing mechanism (group membership, record keeping, opening of a mobile money account, etc.) For their part, the States would benefit from an increase in tax revenues.

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Improving financial inclusion: adopting a pragmatic approach

According to the World Bank’s definition, financial inclusion is the ability for individuals and businesses typically excluded from traditional financial services to enjoy affordable access to financial products and services…

According to the World Bank’s definition, financial inclusion is the ability for individuals and businesses typically excluded from traditional financial services to enjoy affordable access to financial products and services that meet their needs.

Every year, numerous conferences are held by the Bretton Woods Institutions to explore strategies on how to improve financial inclusion and develop financial literacy in Africa. Two years ago, the Central Bank of West African States (BCEAO) initiated a program to promote financial education and even set up a central department dedicated to financial inclusion issues. In addition, several countries such as Cameroon, Senegal, and Togo are working on their own inclusive finance strategies.

All of this suggests that there is a real lack of financial inclusion in most Sub-Saharan African countries, largely due to a lack of financial education. This could be resolved by encouraging African individuals and businesses to save through the formal channels of our respective local economies.

 

What we have learned from recent financial scandals

Many of us today would argue that it is difficult to get ahold of savings from African households. How then are we to understand the success of financiers who have obtained large sums of money through Ponsi schemes in recent financial scandals such as the MonHévéa case in Côte d’Ivoire or the MIDA phenomenon in Cameroon (as well as of other scandals that are probably yet to be exposed)?

These are organizations that guarantee 300%-400% profits in a number of months and that have continued to grow over the years in plain view of the authorities (sometimes even thanks to ads broadcast on national channels.)

There are at least two things we can learn from these financial scams.

First of all, in light of the large number of victims and the monetary amounts involved, we can see that savings do exist in African households. These savings consist principally of small sums (also called household savings) of all segments of the population.

It is also clear that these scammers possess persuasion techniques that enable them to obtain the savings that are so highly coveted by our numerous international development programs and that continue to escape local and legal financial institutions today.

 

Leveraging traditional administration

Financial education is clearly necessary for our African leaders and officials, who in some countries have been involved in the bad practices mentioned above, often due to a lack of knowledge on these subjects. To educate also means to raise awareness, and this could be done by explaining that savings rates of 20% or 30% do not exist (to say less of rates of 200%, unless we’re projecting savings for our great, great grandchildren!). We can only hope, then, that well-thought-out financial education strategies aim to educate officials and politicians as well as their constituents…

Financial education should not only be done at the civic level (sub-prefects, mayors, etc.), but also at the level of traditional administrators (e.g., traditional chiefs, neighborhood chiefs) who are the most effective agents for raising awareness in their communities.

African nation states could go even further by creating postal bank agencies within certain large chiefdoms in order to exploit close relationships of trust and respect that persist today between villagers and their traditional authorities

 

Integrating pragmatic solutions

The goal is not to point the finger at these voluntary initiatives designed to improve the social conditions of our populations, but rather to emphasize the need to incorporate the socio-economic and cultural fundamentals that guide/dictate our societies.

Grand plans are not necessarily effective agents of change. The approaches on this matter should be as pragmatic as possible. While a National Financial Inclusion Program sets a 5-, 10-, or 15-year goal for improvement, a pragmatic approach must set a goal for the near future, while working to immediately improve financial literacy, so that:

  • When the next harmful initiative emerges, it will not have anywhere near the same impact.
  • Civil society, especially the informal sector, can let go of the inferiority complex they nurture vis-a-vis the banks, for various reasons: low income, language barrier (for the illiterate…)

How can we understand that these same people had no trouble giving their savings over to illegal practices. The main reason was these scam artists’ promises to multiply their money.

African banks should communicate more with all these small savers, in a language that is relevant to them, promising them growth on their savings based on an interest rate.

This communication could also be led by the States, through the technological means of communication that 90% of Africans are now using. Mobile technology can be used to offer financial services, as is the case today (mobile banking), and as a means of increasing education and awareness on banking and financial concepts. This education could be transmitted not only through written text messages, for those who can read, but also through voice messages spoken in the local dialect, thus enabling illiterate or less-educated people to access this knowledge.

 

Financial education and, above all, greater financial inclusion, could only strengthen the development capacities and profitability of local entrepreneurship, which overwhelmingly operates in the informal sector, and whose members face numerous financial and organizational management challenges.

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A survey of African education institutions: coping with the Covid-19 crisis

The Covid-19 health crisis has hit the education sector hard, from early childhood to vocational training, with school closures and distance learning. We surveyed some thirty African educational institutions to…

The Covid-19 health crisis has hit the education sector hard, from early childhood to vocational training, with school closures and distance learning. We surveyed some thirty African educational institutions to understand the impacts of the crisis and the coping strategies put in place by those most affected.

 

A brief methodological overview

This article is based on a survey conducted among 36 African educational institutions.

Respondents are mostly based in West Africa (Côte d’Ivoire, Senegal, Mali, Burkina Faso, Benin), but also from Cameroon and Madagascar. Respondents operate in a wide variety of business segments: vocational training, higher education, early childhood, primary education, secondary education, Ed-tech (educational technology), and ancillary activities (publishing, printing, etc.).

 

Financing is a key issue

It comes as no surprise that the health crisis presents a significant challenge to the educational institutions surveyed. 53% of them report a negative impact, and 13% have even experienced a shutdown of their activities. The early childhood sector is the most affected by the crisis (See also our article: “Covid-19: what impacts on the early childhood sector?’’)

The main challenge for these institutions is financial, because of the difficulty of recovering school fees during school closures, in addition to the constant cost of school personnel and operations. The cash flow challenge is the one most often mentioned by respondents, ahead of human resources and production challenges, for example [see graph 1]. Nearly 60% of educational institutions have experienced a drop in revenue due to the health crisis.

What are your main challenges today?

The current situation, and in particular the sudden closure of schools, has highlighted the lack of infrastructure adapted to connectivity, at national level but also within educational institutions themselves (lack of equipment, adapted classrooms, etc.).

 

The adaptation to the crisis and the growing role of digital

The sudden closure of schools has forced the vast majority of educational institutions to adapt and rethink their offer and operating methods. Some have even developed a new offer. This is the case of KËR Imagination, which has developed tools for parents to help them accompany their children at home. These changes were undertaken urgently in the context of an unprecedented situation, but could become permanent for 47% of the institutions surveyed.

The most obvious of these changes is the use of digital technology and the development of online learning. 60% of respondents used a digital platform as a response to the challenges of the Covid-19 crisis and the abrupt closure of schools.

We also note that these platforms had to be set up urgently for many educational institutions, which did not have any specific digital tools before the crisis. Multiple challenges had to be overcome: adapting educational content, maintaining student motivation, adapting academic deadlines… [See graph n°2]. It was also necessary to propose innovative solutions to students with connectivity problems and those who could not work from home.

The main challenges in setting up a digital platform

The transition to digital has proven to be very difficult, if not impossible, to implement for some institutions, particularly in early childhood or vocational training, for which distance learning was not an option. Most of these institutions have implemented small groups to ensure social distancing. This answer was efficient but implied a lot of logistics: reorganization of the space, purchase of masks and hydroalcoholic gel, disinfection between each group…

 

What will remain of this emergency adaptation in the medium and long term?

47% of respondents consider that digitalization had a positive impact on the content provided:

  • Digitalization has urged some structures to develop new offers, and thus propose more diversified contents
  • The move to digital technology has made it possible to reach a wider audience, in particular by introducing continuing education offerings that are accessible to professionals (who need great flexibility) and by expanding the geographic scope
  • Digitalization has increased the capacity of training institutions, with less pressure on the physical infrastructure

 

On the other hand, no educational institution plans to use only e-learning in the near future. However, a blended learning model, combining e-learning and in-class learning, could become widespread in a large number of educational institutions [see graph 3].

How do you envisage the future organization of your company?

 

To conclude

⇒ The education sector is strongly affected by the Covid-19 crisis. This is particularly the case for the early childhood sub-sector.

The main challenge for these institutions is financial, because of the difficulty of recovering school fees during school closures, in addition to the constant cost of school personnel and operations, resulting in a real working capital problem and significant cash flow pressures.

The current situation, and in particular the sudden closure of schools, has highlighted the lack of infrastructure adapted to connectivity (lack of equipment, adapted classrooms, etc.).

While digital has been represented several times as a response to the Covid-19 crisis, it should be noted that it does not represent a long-term learning option for these institutions. It is rather blended learning that could become widespread.

⇒ The actors interviewed seem optimistic that the current situation will return to “normal”. Nevertheless, the sector is still mixed on the permanence of the changes made.

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Are mobile phone operators overtaxed in Africa?

A tax on internet voice calls such as WhatsApp, Skype, and Viber triggered massive protests in Lebanon, which brought down the government a few months later. Several other countries, especially…

A tax on internet voice calls such as WhatsApp, Skype, and Viber triggered massive protests in Lebanon, which brought down the government a few months later. Several other countries, especially in Sub-Saharan Africa (Uganda, Zambia, Kenya), have raised or tried to raise (Benin)[1] similar taxes. These experiences reflect the difficult choice of States torn between their desire to take advantage of new opportunities for tax revenue while preserving the dynamism of activity and the level of acceptability of telecoms taxes.

In fact, the telecoms sector is one of the most dynamic economic sectors in Africa and still displays significant growth potential. In 2017 subscriber penetration remained low, at around 45% on average in Africa, compared to more than 60% in other developing countries (GSMA intelligence, 2018). These figures suggest that the catch-up is continuing and there is still significant growth (Cariolle J, 2021).

Telecommunication participates in the economic development of countries by reducing transaction costs and improving market efficiency (Aker and Mbiti, 2010).

Where should we place the cursor between promoting economic activity through fiscal measures and collecting tax revenue for public funding purposes? What design should be implemented for this taxation, which today often takes the form of specific taxes[2], like those usually used for alcohol and tobacco?

What should be the level of taxation on mobile phone operators?

In the economic literature, two approaches exist. For some, the limited number of telecommunications operators would allow them to benefit from their operations[3]. Following this logic the tax regime applied to telecommunication should follow the same schema as applied to the extractive industries, thus including, in addition to taxes under the ordinary law regime, special taxes such as mining royalties, surface royalties, or even rent tax, which would enable States to capture a share of the rent.

For others, telecommunications operators participate in the bridging of the digital divide and thus the development of many other sectors of activity, thus justifying potential tax incentives.

With the app https://data.cerdi.uca.fr/telecom/, we were able to estimate the tax burden on the mobile tele­communication sector in 25 African countries.[4] This tax burden encompasses not only standard and special taxes under the control of the Ministry of Finance (MoF) but also fees raised by the national telecommunication Regulatory Agency (RA). We compute the Average Effective Tax Rate (AETR) for a representative mobile network operator, which we call TELCO, using the GSMA Intelligence database.[5] The Average Effective Tax Rate (AETR) represents the share of taxes paid by TELCO in what it produces as cash flow during its operating licence.[6]

The AETR ranges significantly across the 25 countries from 33% in Ethiopia, 35% in Morocco, 97% in DRC, to 118% in Niger with an average of 64%. Ethiopia is an outlier of our sample since the liberalization of its telecommunication sector has not yet been done. Special taxes and fees represent a large share of the AETR illustrating some taxation by regulation and a potential tax competition (a race to the top) between the MoF and the RA.

Telecommunication is generally more taxed than the mining sector.

We compare the AETR of TELCO to that of a representative gold mining firm and a standard firm with similar gross re­turn over the period. The tax burden of the tele­communication sector is higher than that of the mining sector in 15 countries out of the 19 countries for which we have data on the gold mining sector.

The Average Effective Tax Rates of a mobile phone operator, a gold mining project and a standard firm:

Source: Authors.

 

The AETR in the gold mining sector ranges from 31% in Nigeria to 72% in Chad. The average value of AETR is around 46% for the gold mining sector versus 68% for the mobile phone sector. In several countries, the special taxation on telecommunications alone is higher than the total tax burden applied to the mining sector. However the mining sector remains more taxed than a standard economic sector, except in Nigeria.

Higher AETR is associated with lower market penetration and lower Gross National Income (GNI) per capita.

These results are mainly driven by special taxes and fees (Rota Graziosi, Sawadogo, 2020).

AETR and market penetration:

Source: Authors.

 

As well as the level of taxation measured through AETR the form of taxation matters in terms of revenue and telecommunication development. Telecommunication RAs can raise distortionary taxes or fees, as Hausman (1998) emphasized in the case of the US Telecommunication Act of 1996. Alternatively, these correlations may also illustrate that countries with more mobile phone penetration rely less on special taxation. This relationship could result from the more powerful lobbying of MNOs in these countries.

Thus, in most countries on the African continent, the tax burden on the telecommunications sector is much heavier than that on the gold mining sector and on the standard sectors of activity without special taxation. This is a counter-productive practice that must be stopped.

To go further: https://data.cerdi.uca.fr/telecom/

 

[1] The Lebanese government’s Decree 218-34 of July 25, 2018 introduced a tax on the use of social media at a rate of 5 FCFA or equivalently US$ 0.009 per megabyte. Online and street protests pushed the government to cancel this tax a few month later.

[2] The tax is specific when its base is a quantity (e.g. minutes, megabyte…).

[3] However, a limited number of competitors does not systematically lead to an income, as shown by the classic case of Bertrand’s duopoly. This would imply that there is a tacit collusion between telecommunications operators and a failure in the processes of regulation of the sector.

[4] We study 25 African countries: Algeria, Angola, Benin, Burkina Faso, Cameroon, Chad, Cote d’Ivoire, DRC, Egypt, Ethiopia, Kenya, Gabon, Ghana, Guinea, Madagascar, Mali, Morocco, Niger, Nigeria, Senegal, Sierra Leone, South Africa, Tanzania, Tunisia, and Zambia.

[5] Our approach is close to Djankov et al. (2010) and the Doing Business Report of the World Bank for standard economic activity and the Fiscal Analysis of Resource Industries of the International Monetary Fund for mining and petroleum project.

[6] The cash flow considered here is the pre-tax cash flow corresponding to the difference between turnover and operating and investment expenses.

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SOAFIARY: the case of a socially responsible company in Madagascar

A company can be much more than just an economic player. It can play a significant societal role, as demonstrated by the Malagasy company Soafiary. Since its creation in 2006,…

A company can be much more than just an economic player. It can play a significant societal role, as demonstrated by the Malagasy company Soafiary. Since its creation in 2006, this agrobusiness company has integrated its social commitment at the heart of its business model.

 

Founded in 2006 by the Malagasy promoter Malala Rabenoro, SOAFIARY is specialized in the sourcing, processing and commercialization of cereals and leguminous plants on local and international markets. The company begins to diversify its activities in 2017. The company sets up a feed mill unit and launches the SOADIO project, a contract farming project run in collaboration with the diocese of the Vakinankaratra region, located in the highlands of Madagascar. The company’s operating site is located in this rural area, known as “the farmer” of Madagascar.

The Vakinankaratra region is not spared by the precarious situation that prevails in the country, with an extremely low literacy rate, an infrastructure deficit and a high poverty rate. As an actor committed to the development of its region and its country, Soafiary aim to address these social and economic challenges.

 

Promoting employment among an underprivileged and undereducated population

The local population lives mainly from subsistence agriculture or livestock farming. They often find it difficult to produce enough to ensure self-sufficiency, let alone to develop their activity. Due to a lack of education, they are not eligible for qualified positions in the business world.

Soafiary is committed to facilitating the professional integration of this population. The company employs nearly 200 people, most of whom are locals. They are engaged in field work, manual sorting of legumes and packaging of products. The company has made the choice to do the sorting and packaging activities manually, even if automation is possible. This choice makes it possible to create more jobs.

Soafiary’s contribution also takes the form of financial assistance in the form of loans granted to employees, to help them develop another income-generating activity. Doing so, Soafiary provides the surrounding community with the opportunity to improve their economic condition through access to dual employment.

Soafiary is committed to facilitating the professional integration of a local population that lives mainly from subsistence agriculture or livestock farming.

Accompanying employees on literacy and hygiene issues

Soafiary’s employees include 21% who are illiterate, 46% who have completed primary school and 25% who have completed lower secondary education. Hiring poorly educated people from the rural world is a real commitment on the part of the company, which has put in place extensive support to enable them to assimilate key production techniques, learn hygiene measures and basic skills such as reading and writing.

Soafiary regularly conducts awareness sessions on hygiene issues for its employees, including the correct use of the sanitary block and water hygiene. Regarding literacy, the company focuses on teaching employees to read and write so that they can check their pay slips, by identifying and validating information concerning them, in particular their first and last names, and then signing it if the slip is satisfactory to them. This has created a climate of trust and exchange within the company.

These measures may seem basic but their implementation is not easy and can be time consuming. The production director, Ms. Agnès Randrianampizafy, plays a key role in their implementation thanks to her background as a teacher. As she explains, “It takes good teaching skills, patience, and discipline”.

 

Supporting and training small producers trough the Soadio project

The agribusiness sector is at the crossroads of several serious issues: the integration of small producers, environmental protection, product quality and price competitiveness, all this in a highly competitive international market.

Soafiary is trying to respond to these challenges through its Soadio project, a model of responsible contract farming that consists of training small producers and providing them with the agricultural equipment and inputs needed to farm the 4,100 Ha of land belonging to the Diocese of the Vakinankaratra region. Since the project launch in 2017, 380 Ha have been exploited and the entire production is purchased by Soafiary.

The project represents an important socio-economic driving force for the region. It aims at improving the living conditions of small producers in Morarano, a rural commune located 200 km from the Soafiary exploitation site, where the Diocese’s lands are located. It also allows for the inclusion of small producers in Soafiary’s value chain, who now ensure the company’s supply.

This inclusive partnership between Soafiary and the Diocese is a step towards greater social and humanitarian cohesion. This is a prerequisite for launching various projects: setting up an irrigation system, strengthening the fields to combat erosion, strengthening the basic health center by providing medical equipment, improving the village’s only school by extending classrooms, supporting agricultural training centers, to name but a few.

 

Soafiary demonstrates that integrating social commitments at the heart of its business model can be beneficial for the company. This approach has generated greater commitment from its employees, but also enabled the company to build a sustainable model of contract farming that secures its supply volume while meeting the challenges of product quality and traceability.

 

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Digitalization: a solution for sustainable development?

Digitalization can contribute to the economic growth of developing countries, particularly by promoting private sector development and financial inclusion.

Digitalization can contribute to the economic growth of developing countries, particularly by promoting private sector development and financial inclusion.

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